Organization and Performance of Cotton Sectors in Africa ... - infoDev

Box 7.1 Why Is Quality Management So Hard withinCompetitive Sectors?It is estimated that the efforts made by the two main companies in the Zambiancotton sector to control contamination in seed cotton cost about 1.0¢/lbof lint produced, whereas the benefit has been an increase in the premiumof around 5.0¢/lb of lint since the mid-1990s. In this case, quality pays. InTanzania and Zimbabwe, one can argue that small, independent ginnersmay not be rewarded by exporters for delivering higher quality lint. However,in both countries’ sectors, ginners that are part of vertically integratedcompanies would benefit from being able to sell higher quality lint. Butexperience in both countries indicates that quality-conscious cotton buyersare unable to unilaterally insist on grading and associated price differentialsat primary marketing in highly competitive markets because they areundercut by competitors that put quantity before quality. The question,therefore, arises: why would higher prices achieved on the world lint marketnot allow these quality-conscious firms to pay higher prices for good qualityseed cotton?One answer is that competitors may achieve higher capacity utilization attheir ginneries by being less selective in their seed cotton purchases, thusboosting the prices that they can pay. Interviews with the manager of the mostquality-conscious cotton company in Tanzania indicated that (at least, beforethe bumper harvest in 2004) their insistence on quality control had causedthem to forgo seed cotton volume. This explanation then focuses attention onthe size of the premium obtained by selling a higher quality product in relationto the cost savings from achieving higher capacity utilization. Althoughcotton lint quality is important, the price differentials for lint of different qualitiesare not of the magnitude of those witnessed in, say, coffee.Furthermore, there may be other reasons—generally but not always of atransitory nature—that distort competition between quality-conscious buyersand others. For example, widespread evasion of the high taxes and leviesimposed on cotton buying and ginning in Tanzania is alleged. However, companieswith an international brand reputation (which tend to be among themore quality conscious) perceive it as too risky to their wider brand reputationto be caught in flagrant tax or levy avoidance. They may, therefore, endup paying more in levies and taxes than some of their less quality-consciouscompetitors. Similarly, in Zimbabwe in recent years, the cotton company ofZimbabwe (COTTCO), the main company, argued that it was unable to matchthe prices offered by new entrants, even though it had a long-established reputationfor quality on international markets, because it was much more visibleto government agencies that were seeking to stamp out “abuse” of therampant parallel foreign exchange market that developed in the country after2001. In a similar vein, Tollens and Gilbert (2003) argue that shortages of foreignexchange in Nigeria in 1986/87 caused traders to scramble for cocoa in the(continued)94 ESTUR, POULTON, AND TSCHIRLEY