The Future of Smallholder Farming in Eastern Africa - Uganda ...

educed marketing costs related to policy restrictions, there may be substantial scope to
improve the technical efficiency of marketing activities by strengthening market institutions.
This implies a positive role for government improving road, rail, port, and communication
infrastructure; removing taxes on grain at regional road checkpoints; improving public
market information systems; nurturing the political and legal foundations of marketing
systems; and investing in local analytical capacity.
The 1998 GMRP study (Dessalegn, Jayne, and Shaffer 1998) is the most comprehensive
research on the grain market to date. It covered a random sample survey of 4,000 rural farm
households and 220 wholesale grain traders, drawn from all over the country. One of the
main findings of the research is that the grain wholesale trade is dominated by a small
percentage of merchants; the largest 10 percent command about 43 percent of the volume
traded at wholesale level. Small merchants are subjected to low capital turnover. This
situation has negatively affected the competitiveness of the market. Moreover, the price
spread between Addis Ababa and many regional markets can be considered adequate only
after attributing nonmonetary transaction costs of about 30 percent over and above the
monetary costs. Similarly, there seems to be substantial seasonal variation, which reflects
storage costs only after including a fairly high implicit risk premium for temporal arbitrage.
The study also showed that the grain-buying price at the local markets is mostly determined
by deducting miscellaneous costs and a net traders’ profit margin from the prevailing
wholesale price in Addis Ababa. Intermarket grain flow is coordinated mainly by the brokers
in Addis Ababa, who specialize by route and coordinate grain buying, selling, transporting,
and pricing activities. Among the major constraints identified by traders are checkpoint taxes,
lack of financial credit, absence of control on unlicensed traders, unavailability of transport
services and high transport tariff, lack of adequate storage facilities at appropriate locations,
and lack of market information.
Gabre-Madhin (1998) examined the consequences of transaction costs of searching for a
trading partner on the emergence of the institution of brokerage in the Ethiopian grain
market. Brokers facilitate long-distance trade by enabling traders to minimize the risk of
commitment failure in a market with little public information, nonstandardized grain, no
official inspection, and limited legal enforcement. While 85 percent of grain traders regularly
use brokers, who handle 38 percent of the marketed surplus countrywide, the degree of
traders’ dependence on brokers varies by region and type of transaction. Agency relations
between traders and brokers are not based on ethnic ties but appear to be sustained by
established norms that limit cheating by brokers despite the difficulty that traders have in
monitoring brokers. The results of the empirical analysis revealed that traders with high costs
use more brokerage whereas traders with high social capital search on their own, showing
that traders rationally use brokerage to minimize their individual transaction costs. The study
recommended grain standardization and inspection, bulk handling of grain, grain contract
standardization, commercial arbitration, and grain exchange in the long term.
Amha (1999a), using the same database as that used by Dessalegn, Jayne, and Shaffer (1998)
and wholesale price data of Ethiopian Grain Trade Enterprise (EGTE), reported that the
reform improved the efficiency and flow of maize into markets. The results of the cointegration
test showed that there was short-run and long-run integration between Addis
Ababa and some of the major markets in the country. The study called for selective
government intervention aimed at developing market centers, disseminating price and
production information, implementing quality and grade standards, improving the legal
system and infrastructure, and supporting the development of private grain trade. Amha