MARKETING CONSTRAINTS FACED BY COMMUNAL FARMERS IN KW AZULU-NA TAL, SOUTH AFRICA: A CASE STUDY OF TRANSACTION COSTS By MALIEM PIERRE MA TUNGUL SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY (AGRICULTURAL ECONOMICS) IN THE SCHOOL OF AGRICULTURAL SCIENCES AND AGRIBUSINESS F ACUL TY OF SCIENCE AND AGRICULTURE UNIVERSITY OF NATAL PIETERMARITZBURG 2002 The financial assistance received from the NRF Agricultural Policy Research U nit and TOTAL South Africa towards this research is hereby acknowledged. Opinions expressed and conclusions arrived at, are those of the author and not necessarily to be attributed to the sponsors. I hereby certify that, unless specifically indicated to the contrary in the text, this dissertation is the result of my own original work. Maliem Pierre Matungul A Mamie Ursule et Jesse Tavun, je dedie ce travail. ABSTRACT Farmers engaged in small-scale agriculture in Africa generally have limited access to factors of production, credit and information. Empirical studies throughout the African continent have shown the extent to which high transaction costs constrain or prevent access to information and markets, especially for small-scale farmers. Despite these constraints, farmers in two communal areas of KwaZulu-Natal (Impendle and Swayimana) have managed to produce food for both own consumption and marketing. This study draws heavily on the New Institutional Economics, and particularly Transaction Cost Economics, which have demonstrated the important role of transaction costs in constraining economic activity, and of institutions developed to lower these costs. Transaction costs are the costs of exchange, including costs of information, negotiation, monitoring, coordination and enforcement of contracts. These costs can be implicit or explicit. The main objective of the study is to assess marketing constraints faced by communal farmers in the Impendle and Swayimana regions ofKwaZulu-Natal, South Africa. Data were drawn from random sample of 120 household heads in each of the regions. In Swayimana, data were collected in January and February 1999 whereas the survey in Impendle was undertaken in April and May 1999. The empirical analysis attempts to identify factors determining the quality and number of marketing channels used (i .e. depth in marketing methods), which in turn affect the level of income generated from crop sales by small-scale farmers in the two study areas. The identification of such factors might support initiatives to create a more viable small-scale farming sector in the communal areas of KwaZulu-Natal. A block-recursive model was formulated and estimated using ordinary least squares II (OLS) and two-stage least squares (2SLS). Empirical analysis of the OLS equation suggested that transaction cost variables are important in explaining the choice of, and depth in, marketing methods. Results of the combined samples indicate that cooperation with neighbouring commercial farmers, and the interaction of distance and ownership of a vehicle were the most important factors in the choice of marketing methods. Other factors such as the age of household head, having a formal bank account and the area of allocated arable land, also significantly and positively influenced the depth of marketing methods. At a regional level, the same equation revealed that while COOP was the most important factor in Swayimana, DISTRA and ACC were the main determinants in Impendle. The 2SLS regression analysis indicated that greater depth in marketing methods, which reflects lower transaction costs faced by growers, has a strong and positive impact on the level of crop income generated; i.e. the lower the transaction costs faced, the greater is the depth in marketing methods, and the higher the level of crop income. The results imply that formal marketing channels are associated with low transaction costs and higher levels of crop income. The area of cultivated arable land and income from non-agricultural activities were the other two important determinants of crop mcome. It is concluded that accessibility to formal market outlets is limited by considerable farm-to-market distance, poor infrastructure (roads, telecommunications), and inadequate transportation. Recommendations give due consideration to the development of a better physical and institutional infrastructure which would effectively link these production areas to market centres and improve market knowledge by providing relevant market information and farming skills. III ACKNOWLEDGMENTS Many people contributed to the production of this dissertation through advice and encouragement. I am deeply grateful for their assistance. I would like above all to thank the Almighty, the Merciful and the Magnificent Lord for making this possible. Prof G.F. Ortmann supervised my work and I would like to thank him from the bottom of my heart for his guidance and patience throughout this study. Words are not enough to express my gratitude to Prof M.C.Lyne, who co-supervised this study and whose valuable inputs I greatly appreciate. The NRF Agricultural Policy Research Unit provided me with financial assistance during my studies at the Department of Agricultural Economics. I am grateful for this once in a lifetime opportunity and would like to thank, particularly Prof W.L. Nieuwoudt, Director of the Unit. TOTAL SOUTH AFRICA assisted with travel and data collection expenses, which was greatly appreciated. I thank also Mr Khoza and Mr Madlala, Umvoti and Hlanganani district officers, respectively, for organising my stay in the two study areas. Dr F. Kars, Director of the South West Agricultural Region, Department of Agriculture, KwaZulu-Natal, and Deputy Director, Mr Buthelezi, also provided assistance for this research. I am indebted to the people of both Impend Ie and Swayimana, particularly participant farmers, for their friendly co-operation and hospitality for making my month 's journey in each respective area a memorable experience Special thanks go to Mr P H Dladla, Mr Musa Mdengu in Swayimana and IV Mr Mendu in lmpendle, who were willing to share their very limited space with me. It is my hope that this report contributes to improving marketing conditions within the two study areas. Thembi Bohlela., Lindiwe Ngubane and Slindile Zondi were responsible for the translation during the collection of data used in Swayimana. Philisiwe Mendu, Zanele Madonda, Khulile Cele and Nosisa Zuma helped collect data in Impendle. I would like to thank them for their hard work and diligence. My colleagues at the Discipline of Agricultural Economics provided me with assistance in their own capacity and I would like to thank them. They are: Stephan Gay, Manfred Kuhn, Andrew Graham, Stewart Ferrer, Shaun McGuigan, Claude Bizimana, John Abdu-Issa, John Lishman, Paul Hardman, and Tim Crookes. Lastly but not least, I would Itke also to thank Mrs Marsha Manjoo for her assistance during my stay at the Discipline. During the course of my study, I also sought the advice of a number of academics and researchers. I would like to thank particularly Mr Mark Darroch of the Agricultural Economics Discipline for his insights. v TABLE OF CONTENTS Page ABSTRACT ACKNOWLEDGMENTS III TABLE OF CONTENTS v LIST OF TABLES x LIST OF FIGURES Xli INTRODUCTION CHAPTER 1 INSTITUTIONS AND ECONOMIC DEVELOPMENT 9 1.1 NEW INSTITUTIONAL ECONOMICS: CONCEPT AND THEORIES 9 1.2 INSTITUTIONAL SETTINGS AND EVOLUTION 13 1.3 ECONOMIC GROWTH AND EFFICIENT INSTITUTIONS 16 1.4 STATE VERSUS PRIVATE SECTOR 17 1.4. 1 The role of the state in reducing transaction costs 17 1.4.2 Private sector role in marketing 20 1.5 INFRASTRUCTURAL DEVELOPMENT AND MARKET ACCESS 22 1.5.1 Infrastructural development 22 1.5.1. 1 User cost saving approach 22 1.5.1.2 Impact of infrastructure 24 1.5.2 Market access 26 1.5.2. 1 Farmers' markets (market places) 28 VI 1.5 .2.2 Public markets 29 1.5 .2.3 Marketing associations 29 CHAPTER 2 SMALL-SCALE FARMERS' MARKET PARTICIPATION UNDER TRANSACTION COSTS 34 2.1 THE THEORY OF TRANSACTION COSTS 36 2.2 THE TRANSACTION COST ECONOMICS APPROACH 37 2.3 NATURE OF TRANSACTION COSTS 40 ·2.4 HISTORICAL DEVELOPMENT OF THE RURAL KWAZULU-NATAL'S INSTITUTIONAL ENVIRONMENT. 47 2.5 MODELS OF HOUSEHOLD MARKET PARTICIPATION UNDER TRANSACTION COSTS 49 2.6 REVIEW OF RELATED EMPIRICAL STUDIES 56 CHAPTER 3 RESEARCH SITES AND DATA COLLECTION 71 3.1 DESCRIPTION OF THE STUDY AREAS 71 3. 1. 1 lmpendle 71 3.1.2 Swayimana 73 3.2 SAMPLING TECHNIQUES AND SURVEY INSTRUMENTS 74 3.2.1 The multi-stage concept 74 3.2.l.1 Impendle 75 3.2.1.2 Swayimana 76 3.3 QUESTIONNAIRE 77 3.4 FIELD OPERATIONS 79 VII CHAPTER 4 SOCIO-ECONOMIC CHARACTERISTICS OF THE SAMPLE HOUSEHOLDS 80 4.1 HOUSEHOLD CHARACTERlSTICS 80 4.2 LAND TENURE AND RlGHTS 82 4.3 INPUT PURCHASES 84 4.4 MARKETING AND CROP INCOME 85 4.4.1 Marketing channels and marketed crops 85 4.4.2 Expenditures and crop income 87 4.5 CREDIT USE AND SOURCES 88 4.6 MARKETING CONSTRAINTS 89 4.7 EXTENSION SERVICES AND FARMERS' TRAINING NEEDS 90 4.7. 1 Extension services 90 4.7.2 Major training needs 93 4.8 BUYING PATTERNS FOR STAPLE FOODS 94 CHAPTER 5 EMPIRICAL ANALYSIS AND RESULTS 97 5.1 DIMENSIONS OF TRANSACTION COSTS IN IMPENDLE AND SWAYIMANA. 97 5.1. 1 Principal component analysis 98 5.2 DETERMINANTS OF MARKETING METHODS AND CROP INCOME. 103 5.2.1. Specification of the block-recursive model. 104 5.2.2. Transaction cost factors influencing marketing methods. 105 5.2.3. Determinants of crop income. 111 VIII CHAPTER 6 CONCLUSIONS AND POLICY RECOMMENDATIONS 119 CHAPTER 7 SUMMARY 127 REFERENCES 132 APPENDIX 143 IX LIST OF TABLES Page Table 1.1 Important factors in increasing small farmers' market participation in Sub-Saharan Africa and their organizational requirements. 27 Table 3.1 Estimated size of primary-stage units in Impendle, KwaZulu-Natal, 1999.