Market Participation by Rural Households in a Low-Income Country: An Asset-Based Approach Applied to Mozambique Duncan Boughton, David Mather, Christopher B. Barrett, Rui Benfica, Danilo Abdula, David Tschirley and Benedito Cunguara published in Faith and Economics Vol 50, Fall 2007: 64-101 Author Affiliations: Duncan Boughton is Associate Professor of International Development, Department of Agricultural Economics, Michigan State University; David Mather is an Agricultural Economist and private consultant; Christopher B. Barrett is International Professor, Department of Applied Economics and Management, Cornell University; David Tschirley is Professor of International Development, Department of Agricultural Economics, Michigan State University; Rui Benfica is Poverty Economist, World Bank Country Mission in Mozambique; Danilo Abdula is a Policy Advisor with the Ministry of Agriculture, Mozambique; Benedito Cunguara is a Graduate Research Assistant, Department of Agricultural Economics, Michigan State University. Acknowledgments: The authors gratefully acknowledge the financial support of the United States Agency for International Development through the Food Security III Cooperative Agreement, the Calvin College Seminars in Christian Scholarship Program, and the valuable comments of two anonymous referees.1Market Participation by Rural Households in a Low-Income Country: An Asset-Based Approach Applied to Mozambique 1. Introduction Market participation is both a cause and a consequence of economic development. Markets offer households the opportunity to specialize according to comparative advantage and thereby enjoy welfare gains from trade. Recognition of the potential of markets as engines of economic development and structural transformation gave rise to a market-led paradigm of agricultural development during the 1980s (Reardon and Timmer, 2006) that was accompanied by widespread promotion of market liberalization policy agendas in Sub-Saharan Africa (SSA) and other low-income regions. Furthermore, as households’ disposable income increases, so does demand for variety in goods and services, thereby inducing increased demand-side market participation, which further increases the demand for cash and thus supply-side market participation. The standard process of agrarian and rural transformation thus involves households’ transition from a subsistence mode, where most inputs are provided and most outputs consumed internally, to a market engagement mode, with inputs and products increasingly purchased and sold off the farm (Timmer, 1988; Staatz, 1994). Despite two decades of experience with market liberalization in SSA, structural transformation is progressing agonizingly slowly and with very unequal distribution of the limited welfare gains (Barrett et al. 2007). Part of this appears due to sharp differences in the apparent returns to participation in different markets, differentiated by commodity, function (e.g., storage, transport, retailing), and barriers to entry (Barrett21997, Barrett et al., 2005; Haggblade et al., 2005). Individual household members, if not entire households, often move out of agriculture altogether rather than move from subsistence agriculture to commercialized agriculture (Mazumdar 1987, Lucas 1994). But with rapid outmigration, urban areas may not be able to provide adequate employment or social services fast enough to support their rapidly growing unskilled labor forces, with the risk of increasing urban (absolute, as well as relative to rural) poverty and squalor. Since investments in services to encourage people to remain in rural areas often meet with at best partial success, the identification of ways to increase the returns to agriculture through market participation, and thereby provide incentives for more households to remain in rural areas while their children build up the necessary human capital to facilitate a socially viable transition into other sectors, is a research challenge of critical importance. This paper explores patterns of household agricultural market participation in Mozambique, a country at an early stage in the structural transformation of its rural economy. We take an asset-based approach, hypothesizing that household participation in crop markets will be associated with asset endowments, and that participation in higher return markets may require different asset portfolios (amount and types of asset) than does participation in less remunerative markets. Toward that end, we study three distinct types of crop market: (i) spot markets for a basic food staple, maize (characterized by low barriers to entry, high transactions costs and low returns); (ii) contract production of a relatively undifferentiated commodity – cotton – for a known buyer (characterized by potential barriers to entry, moderate risk of financial loss, low transactions costs); and3(iii) contract production of a quality-differentiated product, tobacco (similar characteristics to (ii) but with higher potential financial returns and risk). Since endogeneity is an intrinsic problem when studying the relationships between assets and market participation we cannot infer causality. But if asset stocks are strongly associated with smallholder market entry, especially into more remunerative markets, this carries potentially important implications for governments and their private sector, civil society and donor partners who make investments and design programs that seek to increase smallholder market participation. Simply put, if the asset poor are unlikely to participate actively in commercial markets, especially contract markets which offer greater expected returns, then efforts to stimulate increased smallholder agricultural commercialization may fail without complementary efforts to increase household wealth. Our study adds to a small but growing literature that raises this possibility (Cadot et al. 2006, Barrett 2007). The paper's principal finding is that private household assets, especially land, but also livestock, labor and equipment, are strongly positively associated with crop market participation. Furthermore, earnings increase at a sharply increasing rate as one moves into the upper tail of the land distribution in Mozambique, for all crops, not just cash crops. Another important finding is that, while public goods such as infrastructure and market information are positively correlated with cash crop