Agricultural Policy in Kenya: Applications of the Policy Analysis Matrix 9781501737442

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Agricultural Policy in Kenya

Food Systems and Agrarian Change Edited by Frederick H. Buttel, Billie R. DeWalt, and Per Pinstrup-Andersen A complete list of titles in the series appears at the end of the book.

AGRICULTURAL POLICY IN KENYA Applications of the Policy Analysis Matrix Scott Pearson, Eric Monke, Gem Argwings-Kodhek, Francisco Avillez, Mulinge Mukumbu, Stefano Pagiola, Daniel Sellen, and Alex Winter-Nelson

Cornell University Press ITHACA AND

LONDON

Copyright © 1995 by Cornell University All rights reserved. Except for brief quotations in a review, this book, or parts thereof, must not be reproduced in any form without permission in writing from the publisher. For information, address Cornell University Press, Sage House, 512 East State Street, Ithaca, New York 14850. First published 1995 by Cornell University Press. Printed in the United States of America © The paper in this book meets the minimum requirements of the American National Standard for Information Sciences — Permanence of Paper for Printed Library Materials, ANSI Z39.48-1984.

Library of Congress Cataloging-in-Publication Data Agricultural policy in Kenya: applications of the policy analysis matrix/Scott Pearson . . . [et al.]. p. cm.—(Food systems and agrarian change) Includes bibliographical references and index. ISBN 0-8014-3085-2 (cloth: alk. paper) 1. Agriculture and state—Kenya. I. Series. HD2126.5.Z8A37 1995 95-32837 3 3 8.1^6762—dc2o

This book is dedicated to the administration, faculty, staff, and students of Egerton University, Njoro, Kenya, with the authors’ gratitude and hopes that Egerton’s efforts to assist Kenya’s agricultural development will continue to be successful in the future.

Digitized by the Internet Archive in 2018 with funding from The Arcadia Fund

https://archive.org/details/agriculturalpoliOOunse

Contents

List of Figures List of Tables Acknowledgments Abbreviations

ix xi xv xvii

Part I. Introduction and Framework

1. Introduction Scott Pearson

3

2. A Framework for Analyzing Policy Options Scott Pearson and Eric Monke

n

Part II. History and Policy

3. A History of Agricultural Policy in Kenya Alex Winter-Nelson

31

4. Policies Affecting Current Agricultural Incentives Eric Monke, Daniel Sellen, Alex Winter-Nelson, Mulinge Mukumbu, and Francisco Avillez

49

Part III. Regional Studies

5. Nakuru: Growth in a High-Potential, Small and Large Farm District Alex Winter-Nelson

87

6. Kisii: Mixed Performance in a High-Potential, Small Farm District Gem Argwings-Kodhek

115

vii

viii

Contents

7. Nyeri: Strong Growth in a High-Potential, Small Farm District Daniel Sellen

141

8. Kakamega: Unmet Opportunities in a High-Potential, Small Farm District Gem Argwings-Kodhek

168

9. Siaya: Stagnation in a Low-Potential, Small Farm District Gem Argwings-Kodhek

191

10. Kitui: Resource Pressures in a Low-Potential, Small Farm District Stefano Pagiola

214

Part IV. Summary and Conclusions

11. The Baseline Results and Commodity Price Incentives Eric Monke and Daniel Sellen

249

12. Income Growth, Constraints, and Policy Eric Monke and Scott Pearson

273

References

281

Index

289

Figures

1.1 2.1 2.2 2.3 4.1 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 6.1 6.2 6.3 6.4 6.5 6.6 7.1 7.2 7.3 7.4 7.5

Linkages among Kenyan agricultural strategy, policy, variables, and objectives The policy analysis matrix PAMs for commodity and farm systems Location of study sites Milk production and rainfall, 1971-1989 Nakuru district map Crop calendar for a 3-acre farm in Bahati Division Crop calendar for a 5-acre farm in Molo South, Molo Division Cost by input type at farm level: Private values Private and social profits Source of divergences between private and social profitability Private profitabilities under differing price/yield conditions Effect of payment delays on farm-level profits Kisii District: Agroecological zones Crop calendar for Lower Keumbu Crop calendar for Upper Keumbu Kisii: Structure of crop production costs Simulation: Effect of capital cost on farm profits Simulation: Effect of varying wage rates on farm profits Nyeri: Principal agroecological zones Nyeri: Cropping system for typical coffee farm Nyeri: District crop hectarage, 1975-1989 Nyeri: Private farm costs by input type Nyeri: System divergences •

8 14 17 22 57 89 90 94 99 100 101 103 107 117 118 118 128 131 132 143 144 145 153 155

ix

X

7.6 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 9.1 9.2 9.3 9.4 9.5 10.1 10.2 10.3 10.4 11.1

Figures Nyeri: Sensitivity analysis on cost of capital Kakamega District: Agroecological zones Kakamega District: Study sites Cropping calendar for Sabatia Crop calendar for Mumias Crop calendar for Lugari Sabatia: Capital costs and profits Coffee: Capacity utilization and system profits Tea: Farm profits and postfarm efficiency Siaya District agroecological zones, study sites, roads, and towns Crop calendar for Upper Siaya Crop calendar for Lower Siaya Production costs for Siaya commodities Processing simulations for cotton and sugar Kitui: Agroecological zones Kitui Central Division: Representative cropping systems Kitui Central Division: Comparison of farm-level profitability in good and bad years Kitui Central Division: Sources of system-level divergences in cropping systems Index of real prices for Kenyan exports, 1980-1990

163 169 170 171 174 177 183 185 187 192 193 194 201 210 217 219 233 23 5 264

Tables

2.1

Sources of empirical information, Nakuru District

27

3.1 4.1 4.2 4.3 4.4 4.5 4.6

Economic indicators Maize: Price, production, and hectarage, 1975-1991 Wheat: Price, production, and hectarage, 1975-1991 Milk: Price, production, and consumption, 1971-1990 Coffee: Prices, production, and hectarage, 1975-1991 Tea: Price, production, and hectarage, i975“I99I Pyrethrum: Price, production, and hectarage, 1974/751990/91 Social prices for tradable commodities, 1989-1990

45

4.7 4.8 4.9 4.10 4.11 4.12 5.1 5.2 5.3 5.4 5.5 5.6 5.7

51

54 56 59 61 63 65

Decomposition coefficients for social costs of nontradables Calculation of social costs for milk production Performance of economic aggregates, 1970-1990 Inflation and interest rates, 1970-1990 Deficit financing, 1970-1990 Nakuru District agroecological conditions Land use in Bahati and Molo divisions Commodity systems studied, Nakuru District Private profitability of cash crops under differing price yield conditions Nakuru District whole farm models Simulation results: Impact of changes in crop mix, Bahati Location, Bahati Division Simulation results: Road improvements, Molo South, Molo Division

67 67 68 7° 88 91 96-97

104 105 106 108 xi

xii

Tables

Appendix 5.1

Baseline results for Bahati Division commodity systems, 1989 112 Appendix 5.2 Baseline results for Molo Division commodity systems, 1989 113 Appendix 5.3 Baseline results for Nakuru District dairy systems, 1989 114 6.1 Maize and beans production in Kisii, 1979-1988 119 6.2 Tea and coffee production in Kisii, 1979-1988 119 6.3 Pyrethrum, bananas, sorghum, and finger millet production in Kisii, 1979-1988 121 6.4 Kisii: Tea processing costs 130 6.5 Returns to labor 133 6.6 Whole farm analysis 135 Appendix 6.1 Baseline results for Kisii 140 Nyeri: Production trends for food crops and 7*i horticulture 146 7.2 Nyeri: Production and marketing information for representative commodity systems 151 Nyeri: Maintenance of coffee and associated 7-3 profitability 157 Nyeri: Effect of payment delays on coffee profits 158 7-4 Nyeri: Whole farm simulations 7-5 x59 7.6 Nyeri: Tomato processing simulation 162 Appendix 7.1 Baseline results 166-167 8.1 Sabatia: Whole farm analysis 184 8.2 French beans: Market power and private profits 186 Appendix 8.1 Baseline results for Kakamega 190 Crop production in Siaya, 1975-1988 9*i 195 9.2 Enterprise selection and labor requirements 202 Returns to labor 203 9.3 Baseline analysis: Transport, 1988-1989 205 9-4 Yala whole farm analysis 207 9-5 9.6 Rarieda whole farm analysis 208 Appendix 9.1 Baseline results for Siaya 213 10.1 Kitui Central Division: Acreage planted to major crops, 1985-1989 218 10.2 Kitui Central Division: Whole farm analysis 237 10.3 Kitui Central Division: Effect of decline in availability of communal grazing land on livestock profitability 240 Appendix 10.1 Kitui results: Private profitability at the farm level 244 Appendix 10.2 Kitui results: PAMs at the system level 245-246 11.1 Characteristics of baseline maize systems 252

Tables

xiii

253 254 257 258 258 259 263

ii»9

Characteristics of baseline wheat systems Characteristics of baseline dairy systems Characteristics of baseline coffee systems Characteristics of baseline tea systems Characteristics of baseline pyrethrum systems Characteristics of baseline systems for other cash crops Price series for coffee, tea, and pyrethrum, 1980-1990 Changes in social output prices and the effect on social

II.io

profits The effect of changes in the exchange rate on profits

2^7 270

II.2 H.3

ii.4 n-5 ii.6

ii.y ii.8

■

Acknowledgments

This book is the result of a collaborative research project among agricultural economists from the University of Arizona, Egerton Univer¬ sity, and Stanford University. The project was sponsored by the U.S, Agency for International Development under a grant agreement with the three universities, titled “Research and Training in Agricultural Policy Analysis.” The authors are grateful for the intellectual stimulation provided by Andrew Chomba Mwangi and Isaac Rop of the Egerton faculty, who were members of the field research team, and for the invaluable help in the field given by the team’s four research assistants—Francis Karin, Margaret Mutua, Margaret Nyambu, and George Okumu. Fieldwork commenced in June 1988 and ended in December 1990. Updating of the research results has been done under a subsequent contract between USAID and the University of Arizona for policy research within the Kenya Marketing Development Program. The authors acknowledge with gratitude the encouragement, patience, and ideas of numerous officials in the USAID Kenya Mission, the academic community in Kenya and the United States, the government of Kenya, and Kenyan agriculturalists. Highly notable in this very large group were James Gingerich, Dwight Smith, Juma Lugugo, Richard Musangi, Richard Goldman, John Karanja, and Kiganthe Gitu. We are especially apprecia¬ tive of the time and information provided to us by anonymous Kenyan farmers, traders, and processors, many of whom overcame their early suspicions and showed much interest in our work. In assembling the manuscript, we also have benefited greatly from the support provided by Linda Phipps of the University of Arizona, Linda Perry and Claudia Smith

xv

xvi

Acknowledgments

of Stanford University, and Robert Baulch and Adolfo Barajas, graduate student assistants, Stanford University. To these friends and to many more far too numerous to mention, we express our deep gratitude. S.P. and E.M.

Abbreviations

AEZ AFC BAT CBK CSLMB EC GMR ICA KBL KCC KFA KNTC KPCU KTBH KTDA LDC MOA MBP NCPB NBFI PAM PBK UHT

agroecological zone Agricultural Finance Corporation British American Tobacco Coffee Board of Kenya Cotton Seed and Lint Marketing Board European Community guaranteed minimum return International Coffee Agreement Kenya Brewers Ltd. Kenya Cooperative Creameries Kenya Farmers’ Association Kenya National Trading Corporation Kenya Planters Cooperative Union Kenya Top Bar Hive Kenya Tea Development Authority less developed countries Ministry of Agriculture maize-beans-pigeon peas National Cereals and Produce Board nonbank financial institution Policy Analysis Matrix Pyrethrum Board of Kenya ultra heat treated

I

Introduction Scott Pearson

Because of agriculture’s prominence in total output, employment, and trade, planners in Kenya have long considered growth of agricultural incomes as imperative to a successful development strategy. Agriculture accounts for about a third of gross domestic product; more than 80 percent of the labor force is engaged in agriculture; 70 percent of merchan¬ dise exports are agricultural; and 33 percent of manufacturing sector output is based on agricultural products. For some time to come, attempts to improve living standards must give particular attention to increased incomes and productivity in the agricultural sector. The most forceful expression of the importance of agriculture appeared in Sessional Paper No. 1 of 1986. Three principal policy initiatives were to be used to help farmers and agricultural marketers unleash more of the country’s considerable agricultural potential: “First, within existing crop patterns, farmers will be encouraged to adopt more productive practices, especially the wider use of improved varieties, fertilizer, and disease and pest control. Second, research into new varieties, especially maize and other grains, will be reorganized and accelerated to generate the new, highyielding varieties that will be essential to keep pace with consumption. Third, to a limited extent the production pattern will be diversified in favor of crops such as tea, coffee and vegetables that produce much higher incomes and generate considerably more employment per hectare than other crops and livestock activities.” (Republic of Kenya, Sessional Paper No. 1, 1986, p. 63) Despite this strategy statement, there has been little improvement in sectoral performance. Growth rates of agricultural output have slowed markedly since the 1960s and 1970s, from nearly 5 percent per year to less 3

4

Scott Pearson

than 3 percent. Because recent rates have been less than the rate of population growth, food production per capita declined an estimated 15 percent during the 1980s. The government’s three-part strategy—to introduce changes in farming input intensities, agricultural technologies, and cropping patterns—has not yet been implemented successfully. This experience underscores that strategy statements are not sufficient to change economic performance. To be successful, strategies must be asso¬ ciated with new policies that break prevailing constraints and provide incentives for producers and consumers to change. A common problem for policymakers arises at the central level: whereas objectives may be easily identified and well understood, the constraints preventing the furthering of objectives are not. Such judgments require detailed empirical information and economic analysis about agriculture in the important- producing re¬ gions of the country. A principal objective of the research reported in this book is the compilation of such information. Emphasis is given to identi¬ fication of constraints to change and the realization of higher incomes, especially for smallholders. Constraints to change can arise from several sources. Failures in the labor and capital markets and imperfect competition in the markets for commodities are one set of potential constraints for Kenyan farmers. Because of the integral association between increased investment and technical change, capital markets and the conditions of access for farmers to those markets are pertinent in developing countries (McKinnon 1973). Concerns about labor markets and the presence of imperfections have been prominent in earlier survey work of Kenyan agriculture (Livingstone 1986; Collier and Lai 1986). Assertions about the lack of competition in marketing of agricultural products are common, particularly at the central level of government; such assertions have been important in motivating the government to establish marketing boards, cooperatives, and other parastatals to manage many of the important commodity markets. A second group of constraints are preexisting policies. Some policies are designed to further other objectives not entirely compatible with those outlined in the Strategy Paper. Examples of potential conflicts among objectives are easy to find. Within the agricultural sphere, food security is an important objective that has led to a number of interventions in the maize and wheat markets that have detrimental implications for farm income growth. In the industrial sector, policies to promote development have given great emphasis to protection from import competition; the compatibility of such policies with agricultural development remains an issue for research. Fiscal policy and constraints on the government budget have hampered the acceleration of agricultural research and investments in rural infrastructure. A final set of potential constraints is presented by world markets. The

Introduction

5

attainment of higher farm incomes through promotion of cash crops implies increased reliance on world markets. Some of the most prominent cash crops in Kenyan agriculture are coffee, tea, horticultural crops, and pyrethrum, and producer prices in each of these markets are linked very closely to world market incentives. Expected future world prices thus are central to judging the sagacity of further expansion in exports of these commodities. For some commodities, it is necessary also to consider the possible interaction between increased Kenyan production and world market prices. Such interactions are especially important in the tea and pyrethrum markets, where Kenya already has a significant share of world exports. To the extent that increased production of cash crops requires a reduction in production of other crops—such as dairy products, maize, or sugar—expected future world prices for these import substitutes influence the desirability of expanded export production.

Framework for Agricultural Policy Analysis Growth in agricultural output, income, and employment originates either from expansion of cropped area or from increases in productivity, most commonly associated with higher yields. In establishing their agricul¬ tural strategy, Kenyan policymakers have recognized the very limited scope for achieving agricultural growth through area expansion. Kenya’s extraordinary rate of population growth—about 4 percent annually, among the highest in the world—has meant that almost all arable land already is cultivated. Most growth in area under field crops has occurred at the expense of pasture, and the converted lands tend to be in marginal agroclimatic zones. Efforts to expand cultivable acreage through irrigation projects have proven very expensive and technically difficult. Productivity rises when the value of output increases more than the costs of inputs so that profits grow. Kenyan planners want to emphasize three sources of agricultural productivity growth—using higher input intensities, developing and disseminating better technologies, and switch¬ ing cropping patterns to favor production of more profitable commodities. In effect, raising the intensity of input use means finding ways to convince more farmers to adopt technologies (seed varieties, input packages, and farming practices) that are currently practiced by Kenya’s most progressive agriculturalists. In contrast, technological change is expected to occur through the research, development, and introduction of technologies hith¬ erto unknown in Kenya. The third source of change, switching cropping patterns, requires farmers to specialize more in higher value crops (typi¬ cally for sale in commercial markets) and less in subsistence food produc¬ tion (for farm household consumption).

6

Scott Pearson

Defining a feasible strategy is a necessary first step in agricultural devel¬ opment. But most farmers and marketers, in Kenya and throughout the world, will not respond to government rhetoric, no matter how sensible and well-presented. Instead, producer behavior will change only in re¬ sponse to alterations in incentives. The successful implementation of strat¬ egies thus requires reinforcing government policies that create incentives for producers to change their practices—adopting a different technology or using more land, labor, and other resources to grow higher value crops with already known technologies. A central theme of this book is that policies matter—the government of Kenya, at least potentially, has within its grasp the capability to engender future rates of agricultural production growth substantially above expected increases in population. The key to success is to blend a thorough understanding of the microeconomic constraints and incentives facing farmers and marketing agents and institutions with an appreciation of the limitations created by the macroeconomic environment and international commodity markets. Each set of policies, then, establishes a degree of positive (or negative) incentives for producers to expand output and income (and probably also employment). It thus becomes desirable to examine what policy levers the Kenyan government has at its disposal and how different policy sets might ease the constraints presented by imperfect markets, inefficient policies, or unpredictable world markets. The succeeding chapters of this book are concerned with these two central tasks—studying the impacts of recent policies (i.e., those in effect in 1990, the base year for the empirical analysis) on the principal commodity systems of selected districts in Kenya, and simulating the likely changes in agricultural productivity that might arise from assumed policy changes. The remaining task, here, is to introduce the categories of policy instruments available to the government of Kenya and then to point out how these policies fit into a framework for agricultural policy analysis. For analytical purposes, it is helpful to place the entirety of government policy instruments into five categories—macroeconomic policies, public investments, price level, price stabilization, and marketing regulation. Macroeconomic policies are fiscal, monetary, and exchange rate policies— those set for the entire economy within the constraints of balancing government budgetary and foreign exchange accounts. Despite the central role of agriculture in the Kenyan economy, policymakers rarely, if ever, decide macro policies to benefit this sector alone. But the effects of macro policies on agriculture need to be well understood even if this set of policies has to be taken as given in deciding agricultural incentives. Public investments provide one means of intervening directly to change agricultural costs or returns. This policy instrument consists of ex-

Introduction

7

penditures from the government budget on “public goods,” items requir¬ ing capital investment by government because private investors have diffi¬ culty appropriating their benefits and hence underinvest in them. Prominent public goods in Kenyan agriculture are transportation and irrigation facilities, research and extension networks, and educational institutions. The three remaining categories of policy instruments are specific to individual commodities and are often grouped together under the rubric of agricultural price policies. The first group is made up of commodityspecific policies that raise or lower the domestic price of a tradable com¬ modity relative to the comparable world (parity) price. Instruments that affect price level include domestic taxes or subsidies and international trade policies—taxes, subsidies, or quantitative restrictions on imports or exports. In contrast, price stabilization policies reflect the government’s desire to stabilize domestic prices (usually of primary food staples) when domestic food supplies shift or prices on world commodity markets are unstable. In addition to using domestic tax/subsidy and trade policies for price stabilization, governments sometimes subsidize public storage of food staples to offset shifts in domestic supplies (from domestic weather shocks). The final category of policy instruments consists of public regula¬ tion of agricultural marketing—transport, storage, and processing. Some governments hope that public control of marketing will offset perceived imperfect competition. Whether such market failures are widespread and whether public regulations make markets work more efficiently are mat¬ ters for careful empirical investigation. Kenyan planners have targeted three principal economic variables as central to their strategy of raising agricultural productivity—agricultural income (from food and cash crop output, at farm and postfarm levels), food crop output, and agricultural employment (in both farm and postfarm activities).1 The first item on the agenda for policy analysis is to understand how a set of policies affects agricultural income, output, and employment (Figure i.i). If, for example, the changed policy set provides more positive incentives for some commodities, agricultural output will increase relative to the costs of inputs, and profits (and thus incomes) will rise. But whether this new income will be generated efficiently, whether food crop production will rise or fall, and whether employment will change are matters for detailed empirical analysis at the microeconomic level. Once the empirical link between policy and income, output, and em¬ ployment has been made, the second question on the policy analysis ‘Republic of Kenya, Sessional Paper No. i of 1986 on Economic Management for Renewed Growth (Nairobi, Kenya, 1986), pp. 1, 2, 62.

8

Scott Pearson

Figure i.i. Linkages among Kenyan agricultural strategy, policy, variables, and objectives

agenda can be addressed. How can policymakers assess whether one set of policies is preferable to another? An analytic answer to this question requires that the researcher make a linkage between the three economic variables and the policy objectives. A simplified, but convenient, way of analyzing this relationship is to link (i) agricultural income growth with the objective of efficient growth of national income, (2) increases in food crop output with the objective of national food security and food price stability, and (3) gains in agricultural employment with the objective of improvement in rural-urban income distribution. In this framework, policymakers have to make their own value judgments on each objective, especially when conflicts occur. For example, a policy set creating more agricultural income and employment also could reduce food output; in this instance, a trade-off arises between income (and equity) and food security. In evaluating these trade-offs, policymakers can reassess the effective¬ ness of their strategies and associated policy sets, thus closing the circle of agricultural policy analysis. The policy instruments used to effect the strategy (currently or in simulated futures), the impacts of these policy sets on income, output, and employment, and the subsequent influences of changes in these variables on the basic objectives are the main matters for empirical analysis. Policymakers then have to decide whether the com¬ bined strategy and policy set are likely to bring desired results.

Introduction

9

Organization and Content of the Book This book summarizes the principal results of a research project con¬ cerned with assessing opportunities for agricultural growth in Kenya—the empirical dimensions of the framework for agricultural policy analysis (shown on the right side of Figure i). The Policy Analysis Matrix (PAM) is the methodological framework used to organize relevant information. As a conceptual framework, the PAM assists in understanding interactions among the many policies that influence agricultural incentives and helps illuminate the trade-offs (if any) between objectives. As an empirical framework, the PAM provides measures of economic efficiency and of transfer effects of policy on particular commodities, technologies, and regions. Although no single approach answers all the important questions that can be asked about agricultural policy, the PAM is a particularly insightful way to address many of the issues important to Kenyan agricul¬ ture. Chapter 2 presents a summary of the rationale that underlies the PAM. The second background section of the book summarizes the histori¬ cal and current policy environment. Chapter 3 contains a historical review of policy, and Chapter 4 is an analytic description of the current policy environment for agriculture. The remainder of the book describes the procedures and results of fieldwork begun in August 1988, essentially completed in December 1990, and cross-checked intermittently in 1991 and 1992. Attention is given first to describing the regions chosen for the fieldwork and the commodity systems used to characterize the production, marketing, and processing technologies in each region. Next, the procedures and results of data collection efforts are discussed. The three principal categories of data are budgets of costs and returns, the structure and function of factor markets (land, labor, and capital) in each region, and the social (efficiency) prices for inputs and outputs. These descriptive sections identify the principal constraints limiting agricultural change and serve as background for dis¬ cussion of the research results. The results are presented on a regional basis in Chapters 5 through 10, to compare the impacts of policy among commodity systems, agroclimatic zones, and technologies. PAMs are constructed also for representative whole farms within the regions. The whole farm models are used to examine two particular issues: the potential impacts on farm incomes of changes in postfarm processing and marketing activities; and the potential impacts on farm incomes of changes in cropping patterns. Both changes are conditioned heavily by policy decisions that ease constraints. Invest¬ ment policy influences the private costs of using road infrastructure and the location and cost of many agricultural processing activities. Price and

io

Scott Pearson

marketing policies have a major impact on farmers’ choices among alter¬ native crops and technologies. The research results reported in this volume focus mainly on measure¬ ment of baseline PAMs and on the likely inputs of changes in macro and crop price policies. Subject to future results from ongoing research on public investment, price stabilization, and marketing policies, the com¬ bined impact of policies on agricultural productivity and the feasibility of Kenya’s agricultural strategy are summarized in the two concluding chap¬ ters. In Chapter n, the profitabilities of commodity systems are contrasted under two alternative scenarios—in one, food crop prices rise relative to cash crop prices, and in the other, the exchange rate is changed to remove overvaluation. Three key elements of agricultural strategy—changes in macroeconomic policy, improvements in marketing institutions, and de¬ velopment of capital markets—are reviewed in Chapter 12.

2 A Framework for Analyzing Policy Options Scott Pearson and Eric Monke

The Policy Analysis Matrix (PAM)—the methodology used in this study—is designed to analyze the pattern of incentives at the microeconomic level (influencing producers, processors, and marketing agents) and to provide quantitative estimates of the impacts of policies on incentives. This information is used to explore several topics of interest to policymakers, such as the pattern of competitiveness and the potential for the economy to exploit competitive advantage; the formulation of public investment policy to support particular commodities, regions, and farm types; and the allocation of public research and development expenditures within the agricultural sector. Such issues are often at the heart of policy debates about the most desirable course of agricultural development. The PAM approach is useful also as a way to organize existing knowledge about agriculture. PAM results thus serve as an information baseline for monitoring and evaluating the effects of policy and for identifying policy¬ relevant research needs.

Growth and Excess Profits Models for the analysis of economic growth often are highly aggregated, using a few categories of outputs and inputs to characterize the economy. These models can show the importance of broad changes in economic policies that might encourage increases in investment, savings, or the reallocation of investment among sectors of the economy. Such results are useful in establishing macroeconomic policies, but they are usually too aggregated to identify appropriate investments in particular comii

12

Scott Pearson and Eric Monke

modities or regions. Nor are these models able to suggest whether the envisioned changes are consistent with private market incentives and the nonefficiency goals of economic policy, such as food security and interregional income distribution. Insights of this sort require a microeconomic perspective of the growth process. In a microeconomic view of growth, excess profit (defined as the differ¬ ence between total returns and the costs of all inputs, including capital) is a key indicator. Positive excess profits provide an impetus for resources to move into the commodity market and increase output. Negative excess profits have the opposite effect—resources are encouraged to leave the market and take up production elsewhere in the economy. Production of the commodity declines until output prices increase (because of declines in commodity supply) or until only more efficient producers (with zero or positive profits) are left in the market. Responses to both positive and negative excess profits result in income increases for the economy because resources have moved to more productive employment. In competitive markets, excess profits are eliminated in various ways. If commodity prices are flexible, the response of producers to positive excess profits encourages output prices to decline; the response to negative profits encourages prices to increase. Output prices (and total production) con¬ tinue to change until excess profits are eliminated, at least at the margin. Another way for excess profits to disappear involves changes in the prices of domestic factor inputs. If positive profits are present, the prices of inputs such as labor, land, and capital (the wage rate, the rental rate, and the rate of return to investment) may increase because producers demand more inputs to increase output. Conversely, negative profits can be reduced by decreases in input prices. Measurements of excess profit provide a detailed understanding of growth potentials among different industries. Examination of the re¬ sponses to excess profits offers insights into the distributional effects of growth. These effects will vary with the type of adjustment in the com¬ modity market. Declining output prices allow consumers to buy larger quantities at lower prices; increased output prices compensate the produc¬ ers remaining in the industry. Increased prices for domestic factors show up as higher per capita incomes for owners of the factor services; decreases in factor prices allow output prices in other commodity markets to decline, eventually benefiting consumers of those commodities. The varying effects of growth on factor returns and consumer prices underscore that income growth is not the only objective of economic policy. The nonefficiency effects of growth also are important concerns for policymakers. Nonefficiency effects include impacts on income distribu¬ tion (among individuals, regions, and sectors of the economy) and changes in the degree of food security. Because of these effects, some growth

A Framework for Analyzing Policy Options

13

opportunities will be undesirable, and policymakers may use policy instru¬ ments to ensure that the economy does not pursue them. However, empiri¬ cal knowledge of growth opportunities is still valuable information, because it makes explicit the trade-offs between income growth and nonefficiency objectives. Excess profits thus can be used also to measure the opportunity cost to the economy of allocating resources to further nonefficiency objectives.

The Policy Analysis Matrix The concept of economic profit is the cornerstone of PAM analysis. Profit is defined as the difference between revenues and costs—the value of outputs minus the costs of all inputs. When calculated at observed market prices, the result is termed “private profit.” The definition of private profit is embodied in the first row of PAM: A — B — C = D (Figure 2.1). The letter A is used to represent the value of revenues at market prices. The costs of inputs are divided into two categories. The cost of tradable inputs—letter B in Figure 2.1—is the market value of inputs available in world markets. In practice, many of these inputs are produced domesti¬ cally. But these commodities are treated as tradable inputs because they also are available in international markets and represent potential imports or exports. The second category of input costs are primary domestic factor costs, denoted by the letter C in PAM. Primary domestic factors are land, labor, and capital. Domestic factors are treated separately from tradable inputs because they usually are available only in domestic markets. Some inter¬ mediate inputs, such as electricity or transportation services, may be similar to primary domestic factors because they also are available only in domestic markets. In PAM, these intermediate input costs are disaggregated into tradable and primary domestic factor components, avoiding the need for a third category of inputs. Measurement of costs and returns at private market prices reveals the presence of excess profits and the actual competitiveness of the enterprise. When profits are positive, the enterprise has an incentive to expand pro¬ duction and new firms desire to enter the industry and mimic the produc¬ tion practices of the profitable enterprise. Both of these responses would appear to generate growth. However, if market prices for inputs or out¬ puts differ from their values in alternative productive or consumptive uses, actual competitiveness and positive private profitability may be misleading indicators of the potential for growth. In the presence of such divergences, positive excess profit at market prices is not sufficient information to tell if the economy gains from increased output.

14

Scott Pearson and Eric Monke

Figure 2.1. The policy analysis matrix

Input Costs

Revenues

Tradable Commodities

Primary Domestic Factors

Market Values

A

B

C

D

Efficiency Values

E

F

G

H

Effects of Divergences

I

J

K

L

Profits

An example illustrates the potential for market prices to misrepresent potential gains to the economy. In this example, an input, fertilizer, is used to produce farm output. Farmers are assumed to have no problems of access to fertilizer supplies and to know the effect of fertilizer on crop yields. The fertilizer is imported from the world market and initially is available to farmers at a market price of 100. This price represents the import parity price—the cost of importation plus the transport and han¬ dling costs needed to move the fertilizer from the port to the farmgate. The farmer is assumed to increase fertilizer application rates until the value of increased output is just compensated by the increased cost of the fertilizer; at that point, the farmer exhausts all opportunities to increase excess profits. Policymakers might decide to encourage output by subsidizing one-half the cost of fertilizer. Comparisons of costs and revenues at the new prices will show that farmers now earn additional excess profits because the cost of fertilizer has declined from 100 to 50. Farmers, therefore, have an incentive to increase fertilizer use until the marginal value of output from increased fertilizer use becomes 50; opportunities for adding to excess profits then will be exhausted. The increase in fertilizer use causes growth in farm output. But such growth is apparent only because it fails to take account of the opportunity cost of fertilizer—the value of resources that the economy had to give up to obtain the fertilizer. The real cost of the fertilizer is still the import parity price, 100. Policy has not altered this real cost, but only transferred part of the cost of fertilizer from farmers to taxpayers or other income-earning activities of the government. Unless fertilizer is valued at 100—the price net of the tax (divergence)— policymakers will not be able to judge whether the contribution of increased farm output to national income is positive or negative. The second and third rows of PAM are concerned with sorting out the influences of divergences on the private market values of outputs and inputs. The second row shows what private costs and returns would be without divergences. The values of outputs and inputs are measured at their opportunity costs or social (efficiency) values. In Figure 2.1, E

A Framework for Analyzing Policy Options

15

represents the efficiency value of outputs, and F and G denote the effi¬ ciency values of tradable inputs and domestic factors, respectively. The letter H represents excess profit at efficiency prices (social profit) and shows the potential (as opposed to the actual) competitiveness of the activity. When excess profit is positive at efficiency prices, expansion of the activity can be associated unambiguously with an increase in national income. The rationale for calculation of the individual revenue and cost elements of the second row—E, F, and G—borrows heavily from cost-benefit analy¬ sis and international trade theory. For example, the Little-Mirrlees method of project evaluation argues that efficiency prices for tradable outputs (E) and tradable commodity inputs (F) are given by world prices because these prices would prevail in the economy if there were no domestic government policies. A similar conclusion comes from international trade theory— setting domestic prices equal to world prices allows the economy to exhaust potential gains from trade and realize maximum national income. The desirability of equal domestic and world prices no longer holds when the country is large enough to affect world prices, but maximum income is still associated with a particular set of world prices. Trade theory also provides the theoretical basis for efficiency pricing of domestic factors (G). Efficiency prices of domestic factors are defined as the prices that would prevail if factors were employed so as to maximize national income. Because maximum national income involves the production of commodities at world prices, factor prices are linked implicitly to world market prices even though primary factors are not traded internationally. The difference between private market values and social (efficiency) values is defined as the net effect of each divergence. Divergences are caused by three kinds of constraints—policies that create inefficient out¬ comes, failures of factor or product markets to allocate efficiently, or special conditions in world markets that cause import or export prices to be inappropriate indicators of efficiency. These divergence values make up the third row of PAM and can be evaluated for each of the categories of revenues (I), costs (J and K), and profits (L). The most common source of divergences is policies (termed “distor¬ tions”); an assessment of policies that affect producer incentives is one of the principal tasks of PAM analysis. The list of potential interventions is large. Some policies seek to alter outcomes in commodity markets; these usually are pursued through commodity price policies—taxes, subsidies, and quantitative controls that apply to domestic production or trade of the commodity. A second category of policies, macro-policies, affects incen¬ tives throughout the economy rather than just in a single commodity market. Macro-policies include factor market policies that directly influ-

16

Scott Pearson and Eric Monke

ence the prices of labor, capital, and land; exchange rate policies that affect the domestic prices of internationally traded commodities relative to those of nontraded commodities; and macroeconomic policies that influence the distribution of purchasing power between the government and the private sector. One additional category of effects—market failures—must be consid¬ ered if efficiency prices are to represent the opportunity costs of inputs and outputs. Like policy distortions, market failures alter costs and revenues and prevent the economy from realizing potential income gains. Market failures fall into three categories. Perhaps the best-known type is imperfect competition, in which a small number of sellers or buyers is able to influence aggregate supply or demand and therefore exert some influence on market price. The second category of market failures includes externali¬ ties and public goods. Of particular interest in PAM are the externalities involving producers who are unable to charge consumers for the full value of the things that they produce or who do not pay all the costs associated with production. Institutional market failures constitute the final category, including situations in which markets are inadequately developed or do not exist because of a lack of adequate rules and regulations to ensure competitive behavior in the market. Because both the rows and the columns of the matrix are based on accounting identities, the entries in PAM satisfy a double constraint that characterizes all successful accounting methods. The aggregate impact of divergences on the incentives facing the producer (L) thus can be found in two ways: as the difference of the elements in the third row (I-J-K) or as the difference between private and social profits (D-H). These results are useful to determine the source of competitiveness—whether the activity is profitable because of the support of policy (H < O, L > O) or because of natural comparative advantage (H > O).

PAMs as Systems A PAM can be estimated for any production activity that can be repre¬ sented by a budget of costs and returns—farm production, industrial processing, and marketing or other service sector activities. But PAM results also can be presented at a more aggregate level. One of these aggregation exercises involves representation of a commodity chain—a set of farm production, marketing, and processing activities that is essential to link producers with consumers. Consumption depends simultaneously on all of these activities, and knowledge of the complete pattern of incentives is needed to assess actual or potential competitiveness. In PAM, the aggregation of farming, marketing, and processing activi-

A Framework for Analyzing Policy Options

17

Figure 2.2. PAMs for commodity and farm systems

ties is referred to as a commodity system (Figure 2.2). PAMs for individual activities—farm, farm-to-processor, processing, and processor-tomarket—are added together to generate measures of aggregate competi¬ tiveness and policy transfers. The measures of private profitability for the system require careful interpretation. Private profit for the commodity system is the aggregate of profits that accrue to different activities, whereas actual competitiveness at private market prices depends on positive profit¬ ability for each of the activities. Social profitability and total transfers have interpretations like those made at the activity level. The social profit of the system is a particularly useful measure because some domestically pro¬ duced outputs can be compared to world market counterparts only after they have been processed and delivered to a wholesale market. Milk, for example, is not traded internationally in raw form and becomes tradable only when processed. Empirical estimation of the system values is more complicated than direct addition of the results at the activity level. Each output and input relevant to the production process can be counted only once; double counting can be a particular source of confusion for outputs because the output from one activity is an input to the next activity in the commodity chain. Adding values across different activities requires a common

18

Scott Pearson and Eric Monke

numeraire, such as hectares or units of the final product. Conversion ratios are applied to the relevant activity budgets to convert values to this common numeraire. A third complication arises because four activities may be an inappropriate number to represent the system. For some commodities, processing is trivial and can be ignored. For others, two marketing activities (farm-to-processor and processor-to-market) may understate the number of transactions required to handle, transport, and store the commodity. But the four-activity framework has proven workable as a starting point for empirical analysis, and it is straightfor¬ ward to expand or contract the number of activities recognized in the system. The second aggregate perspective for PAM analysis is the farm system (Figure 2.2). Farmers do not think only in terms of individual commodi¬ ties, but instead consider the farm as a composite of commodities, animals, and technologies, with numerous complementarities and constraints bind¬ ing together the different activities. Figure 2.2 shows that the PAM for the whole farm can be constructed as a composite of the farm activities in the relevant commodity systems. For the purposes of budget calculations, the whole farm can be described in terms of revenues and costs. Revenues come from the sale or home consumption of crops and livestock products. The farm’s costs include inputs used in the production of crops and livestock and transportation expenditures used to service the crop and livestock activities. Care needs to be taken in the farm system aggregation. Crop and livestock activities must be weighted to reflect their relative importance in total cropped area and total livestock population of the representative farm; costs and quantities used of inputs serving multiple production activities (such as machinery) should add up to totals that are consistent with aggregate availability; all intrafarm transportation activities need to be represented somewhere in the individual activity budgets; and a numeraire (usually land area) has to be chosen to allow addition of costs and revenues across a disparate group of commodities. But so long as all inputs and outputs are attributed to one of the crop or livestock commod¬ ity systems, the whole farm PAM will give an accurate accounting of revenues, costs, and profits. The results of whole farm analyses provide insights into aggregate farm income and the net effect of policies (and market failures) on income. Such calculations are particularly useful in comparisons across different farm systems. Whole farm results also provide a convenient framework in which to discuss farm-level issues, such as the total demand for farm labor and capital equipment. But they are less useful in highlighting the relative importance of particular policies. The impact of policy distortions on total revenues, for example, is a composite of effects of commodity policies for

A Framework for Analyzing Policy Options

19

all the outputs of the farm. Without commodity system PAMs, the values of the elements in the whole farm PAM cannot be calculated. Conse¬ quently, commodity system PAMs are necessary complements to whole farm PAMs.

Principles of Data Collection Data collection begins with the identification of representative com¬ modity systems. These systems are made up of four activities—farm production, transportation and storage from the farm gate to the proces¬ sor, processing, and transportation and storage from the point of process¬ ing to a wholesale market (Figure 2.2). Attention is focused on the activities that are most typical of current production practices or those thought to have potential for significant expansion in the future. This description of agricultural commodity systems is based on field observa¬ tion and on discussions with local experts from the Ministry of Agri¬ culture, academic and research institutions, and prominent firms in the commodity markets. Budget data are collected from surveys initiated by the PAM researchers. Secondary data also provide part of the information needed. If secondary information is of sufficient quality, the fieldwork focuses on verification, updating, and collection of details about input-output relationships. Even in such a seemingly straightforward exercise, however, problems arise with respect to proper calculation procedures. Common complications are the treatments of nonmarketed outputs and inputs; usually these are valued at market prices, implying that their value to the household or firm is the same as their value in the market. Family labor, for example, is valued at the market wage for hired labor, adjusted for gender, age, and skill level. In many situations, family labor may not be able to find hired employment as an alternative to working on the family farm, and the analyst may feel that the opportunity cost for family labor is less than the market wage. But such perspectives are readily incorporated within the market-equivalent approach to pricing. When private profitability calcula¬ tions turn out to be negative, the result can be interpreted as showing acceptance of rates of return (to family labor, for example) that are less than market values. The remaining two rows of the PAM—costs and returns at efficiency prices (E, F, G, and H) and the effects of divergences (I, J, K, and L)—are derived from information collected at the field sites and elsewhere. The efficiency values of revenues and tradable input costs (E and F) and trade taxes (parts of I and J) are based on world price data collected in govern¬ ment offices and in publications concerned with world markets. Informa-

20

Scott Pearson and Eric Monke

tion about the efficiency values of domestic factors (G) and policies that cause differences between private and social values of factors (part of K) are collected mostly from locations outside the field sites. The work at the field sites relevant to divergences is used to identify market failures (such as imperfect competition) that can cause private (market) prices to be different from social (efficiency) prices. Some of the transformations needed to convert private values to social values are straightforward. World prices are used as the efficiency stand¬ ards for tradable commodities even though these prices may be distorted by policies and market failures in foreign countries. Foreign policies usu¬ ally are beyond the influence of domestic politicians, and (distorted) world prices thus represent the prices that would prevail in the economy in the absence of domestic policy. Such situations may seem unfair to the domes¬ tic agricultural sector, but world prices continue to represent the opportu¬ nity cost of the commodity to the domestic economy. More problematic are the calculations of efficiency prices for primary domestic factors. One approach to their estimation is to make use of the linkage between world commodity prices and factor prices with the help of a general equilibrium model. But such models generally are unavailable or lack the necessary detail to price convincingly the primary factors used in agricultural activities. The next best approach is to exploit the double¬ constraint structure of PAM. When direct derivation of efficiency values is not feasible, values are estimated indirectly by identifying the particular policies and market failures that influence factor prices. Adjustments of private market prices to their efficiency values are based on assessments of the quantitative significance of policy distortions (particularly factor price policies, such as minimum wage rates or interest rate controls) and factor market failures. Sensitivity analyses also are useful procedures to evaluate the impact of changes in social factor price estimates. The most difficult information to obtain for social evaluation are the quantity data. A full assessment of the impacts of policy on profitability requires accounting for the effects of price divergences on output level and input use. Three categories of effects can cause social quantity measures to be different from private quantity measures: changes in relative input prices can alter the combination of inputs employed to produce a given level of output; changes in input prices can alter the amounts of inputs used and thus the level of output; and changes in output prices can encourage changes in input use that in turn change the level of output. Measurements of these effects usually require a long time series of detailed data that are rarely available, even for developed economies. A common empirical approach to manage such problems is to rely on assumptions of fixed input-output coefficients (as is done in social cost-benefit analysis) and thus to preclude any price response by the producer. A less restrictive

A Framework for Analyzing Policy Options

21

approach is to construct a set of alternative technologies (each with fixed input-output coefficients) to portray production alternatives. The tech¬ nique with the largest social profit becomes the budget relevant for the second row of PAM.

Study Sites Six districts—Kakamega, Kisii, Kitui, Nakuru, Nyeri, and Siaya—were chosen for the fieldwork. Locations of the districts studied are shown in Figure 2.3. These regions are among those thought by agricultural experts and policymakers to have the greatest potential for expanding production and contain most of the important commodities and agroecological envi¬ ronments in Kenyan agriculture. Within each district, between one and three divisions were selected for intensive study. Divisions were chosen to represent the important crops and farming systems of the district. Because one of the principal concerns of the study is to examine the farm-level impacts of changes in postfarm activities, the selections also sought to capture some of the variation present in marketing infrastructure. The six districts are expected to receive emphasis in the allocation of future invest¬ ments in rural infrastructure, and the study of marketing-related issues thus has particular importance in these areas. Nakuru (Bahati and Molo divisions) represents the agriculture of the upper and lower highland zones. Wheat and maize are the most prominent cereals; these two crops occupy between half and three-quarters of the cropped area in the Nakuru divisions. A wide range of cash crops are also grown, including pyrethrum, potatoes, coffee, tea, dairy, and horticultural crops. The most prominent cash crop varies from region to region. In Molo, pyrethrum dominates; in Bahati, coffee and potatoes are most important in cultivated area. These areas are distinctive among the study sites in terms of farm size. In Molo Division, large farms are much more common than in the other study sites. About two-thirds of land in Molo is held by farms larger than 50 acres; half of the arable land in Bahati is in estates. But small farms are important as well. A large part of Bahati first was farmed intensively as a settlement scheme, and Molo recently has been settled intensively by small-scale farmers. Infrastructure varies markedly among the divisions and influences the extent of cash-crop orientation among farmers. The infrastructure serving Bahati is relatively good. Two paved roads link most sections of the division to Nakuru, and secondary roads are of adequate quality to allow most farmers year-round access to the main transit routes. Cash cropping is an important activity for almost all farmers. Molo provides a sharp

22

Scott Pearson and Eric Monke

Somalia

Figure 2.3. Location of study sites

1 - Kakamega District

2 - Kisii District

3 - Kitui District

4 - Nakuru District

5 - Nyeri District

6 - Siaya District

A Framework for Analyzing Policy Options

23

contrast. Many areas remain sparsely populated, and in some parts of the division (particularly the south), roads have deteriorated during the past few decades. Rains in April and June often leave secondary roads impass¬ able, hampering farmers’ access to market opportunities. The divisions in Kisii (Keumbu) and Nyeri (Mathira, Mukurweini, and Kieni East) are primarily in the lower highland and upper midland agroecological zones. These zones contain some of the most productive agricultural land in Kenya. A wide variety of crops are grown, including maize, beans, sorghum, finger millet, coffee, tea, pyrethrum, and horticul¬ tural crops. Parcels often are cropped on a year-round basis. As in the upper highlands areas, staple foods are the most prominent crops, but here, they often are grown as cash crops. Maize and beans account for about two-thirds of cropped area in Kisii and about 3 5 percent of planted area in Nyeri. Important secondary staples are finger millet, sorghum, and bananas in Kisii; potatoes are most prominent in Nyeri, accounting for nearly one-fourth of cropped area. The highland and upper midland zones account for the majority of Kenyan production of coffee and tea. Tea is the most important cash crop in Kisii and appears to be increasing in popularity. Coffee is more promi¬ nent in Nyeri but is declining because of low prices and problems with delayed payments to farmers. Other important cash crops in the Kisii area are pyrethrum and bananas; the Nyeri divisions produce large amounts of milk, horticultural crops, and potatoes. Smallholders dominate farming in both districts, and farms are usually less than one hectare in size. Population densities are relatively high as well. Kieni East is an exception. This area has been settled relatively recently; farms are larger and population densities are low. The quality of primary road infrastructure is roughly correlated with population densities. Roads are relatively poor in Kieni East, and market¬ ing networks there are often rudimentary. In contrast, the other divisions (Mathira and Mukurweini) have well-developed linkages to local urban centers (Nyeri town and Karatina) as well as to the more distant markets of Nairobi and Mombasa. Keumbu division in Kisii also is well served by primary roads, but the quality of secondary roads is highly variable. Agriculture in the remaining districts—Kakamega, Siaya, and Kitui—is dominated by the upper and lower midland zones. Conditions are quite different among the three districts, however, and they represent a con¬ tinuum of agroecological conditions. Kakamega has ample rainfall, and a large proportion of the district falls in the upper midland zone (Sabatia and Lugari divisions). Maize and beans are the dominant crops in Sabatia, followed by tea and coffee. Some attention is being given at present to the introduction of horticultural crops (such as French beans) and zero-graz¬ ing dairy. Lugari has several different maize systems, including large

24

Scott Pearson and Eric Monke

mechanized systems and the labor-intensive systems common to small farm areas. Coffee and sunflower also are suitable but appear far less attractive than maize. The lower midlands zone is represented by Mumias Division. Sugarcane is the most prominent crop, followed by maize and beans, cassava, groundnuts, and sweet potatoes. The Siaya site (Yala Division) is located in the lower midlands zone and is hotter and drier than Kakamega. Maize and beans are the dominant crops, but large areas also are devoted to more drought-tolerant sorghum. Technologies are different from those in the higher-productivity areas. Hybrid seeds are not common, fertilizer applications are rare, and yields are half to two-thirds those attained in the other areas. For maize, farmers complain about the lack of a suitable variety of hybrid seed and the lack of resistance to pests. Chemical fertilizer, necessary to realize the produc¬ tion potential of hybrids, is thought to encourage the growth of striga weed and reduce yields below those of the traditional varieties. Although hybrid sorghum yields are triple those of local varieties, the local varieties are much more common in the area. The use of local seeds appears linked to taste preferences, but some farmers complain also about the difficulties of bird attacks on the early-maturing hybrid varieties. Sugarcane is the major cash crop alternative; minor amounts of cotton and groundnuts are also grown. The Kitui site (Central Division) contains the most difficult production environments among the study sites. Rainfall is relatively sparse on aver¬ age and highly variable over time and between locations. The district is periodically afflicted by drought, which can cause widespread crop failure and loss of livestock. Soils have low organic matter content and in many areas are vulnerable to erosion, particularly since the most intense rains come early in the growing season when ground cover is poor. Maize and beans are predominant, with pigeon peas usually added to the crop mix. Millet, sorghum, and cassava are also common, particularly in the drier areas. Cash crops are scarcer than in the other regions. Some cotton and small amounts of tobacco are grown. Most farms raise some livestock, particularly in the drier regions, and engage in small-scale activities such as sisal, mango, and honey production. In all three districts, most agricultural output comes from smallholders. These farms have a strong bias toward production for home consumption needs, particularly in Siaya and Kitui. Average farm size across the districts tends to increase as agricultural productivity declines, but local population pressure is an important factor as well. Yala is the least densely populated of the divisions, and farm sizes there reflect the constraints of technology and family labor supply. In contrast, many parts of Kitui are densely populated, in spite of relatively poor soils and low intermittent

A Framework for Analyzing Policy Options

25

rainfall. More than 40 percent of the farms in Kitui are smaller than 1.4 hectares. The quality of transport systems in the three districts is roughly corre¬ lated with agricultural productivity. The Kakamega divisions have the best developed road network. Yala has several major thoroughfares, but farm roads are less developed with consequent difficulty of access to markets. In Kitui, most roads are earthen or murram.

Empirical Estimation of Costs and Returns Because original budget data are time-consuming and expensive to collect, the approach used in PAM research typically makes maximum use of secondary data. For this study, a comprehensive search was made of likely data sources, including the Ministry of Agriculture, the Ministry of Livestock Development, university libraries, and various donor institu¬ tions. Synthetic budgets were prepared by organizing this information into standard formats and comparing the various estimates of quantities and prices of outputs and inputs. If synthetic budgets provided a complete accounting of costs and returns, fieldwork concentrated on verification and updating of the available information. When synthetic budgets were not available or proved unreliable, primary surveys were used to prepare representative budgets. Secondary data were most plentiful for the farmlevel activities but usually had to be complemented with substantial addi¬ tional information from the field surveys. All postfarm activities required some original data collection. Data were collected with a purposive survey technique aimed at demar¬ cation of commodities and technologies. In each region, the survey team consulted district and division personnel in the Ministry of Agriculture and the Ministry of Livestock Development. These personnel reviewed syn¬ thetic budgets, provided additional unpublished material relevant to the study, made suggestions about the choices of commodity systems and technologies in the division, and identified local experts at the field sites (usually technical assistants from the extension service). The local experts arranged appointments with farmers whose practices were considered representative of particular locations or technologies. These appointments usually were made with “contact” farmers who could serve as expert observers of practices in the area. To guard against possible bias in reporting, neighbors often were requested to join the interviews. As a further check on representativeness, the survey team interviewed farmers not chosen by the technical assistants. Particular efforts were made to include women in the interviews because they were responsible for many

26

Scott Pearson and Eric Monke

of the production activities. Between 60 and 80 farm interviews were conducted in each of the regions. Information gathered from the farm interviews was quantitative (such as yields, prices, and input usage) and qualitative (such as common pro¬ duction problems, preferences among crops, access to input markets, operation of factor markets, and farming strategies). A formal question¬ naire was not used, although written interview guidelines were on hand to ensure that all important information was acquired. Each interview typi¬ cally covered two or three commodities. Consensus responses to questions usually were achieved in the course of the discussions; specific answers were recorded if practices differed significantly. Information for the postfarm level involved more structured interviews. Most processors maintained formal records of inputs, outputs, and prices, so questionnaires were applied easily. For many of the processing activities, such as coffee, tea, and pyrethrum, a complete census of the region’s firms was possible. Relevant data were gathered at the study sites and from interviews at firm headquarters (usually in Nairobi or in a nearby city). Interviews with transporters were similar to farm interviews because most lorry owners lacked formal records. Interviews were done in an opportunistic manner at rural and wholesale markets and processing firms (common points for unloading and loading) or were arranged by cooperative unions or processors. Between five and ten full interviews were done with transporters in each region. Additional interviews were conducted to confirm particular aspects of the transportation budgets. This method of empirical estimation can be illustrated with summary reference to the fieldwork carried out in Nakuru District. The information presented in Table 2.1 summarizes the primary and secondary sources of information gathered in Bahati and Molo divisions of Nakuru. In Bahati, the PAM research team interviewed 136 farmers in 51 group meetings, and in Molo, the team met with 156 farmers in 49 meetings. Interviews were conducted in English, Swahili, Kikuyu, or Kalenjin, as best suited the farmers. In addition, processing interviews were carried out at eight of the coffee pulpers, the only tomato cannery, the creameries in Molo and Nakuru, the sole potato cold store, and the single processing plant of the Pyrethrum Board of Kenya.

Conclusion The strength of the PAM approach to agricultural policy analysis is its simple framework. PAM is capable of showing noneconomists critical facets of many important issues in economic policy and is sufficiently general in structure to accept analytical sophistication. Both aspects are

A Framework for Analyzing Policy Options

27

Table 2.1. Sources of empirical information, Nakuru District A. Bahati Division Farmers

Expert observers

Maize-beans

21

14

Wheat

10

5

Small-scale coffee

11

5

Large-scale coffee

5

2

Tomatoes Pyrethrum Oranges Zero-grazing dairy

40 23 19 7

20 3 10 1

Agents

Expert observers

2 5 10 6

0 0 0 0

Processors

Centers

Expert observers

Pyrethrum Coffee Tomatoes

1 6 1

1 2 1

Farmers

Expert observers

Maize and maize-beans Wheat

38

14

4

0

Potatoes

44

8

Pyrethrum Dairy

54 24

15 3

Agents

Expert observers

Production

Transport Rail Lorry Pickup (matatu) Tractor-trailer

Secondary sources MOA Farm Management Guidelines 1988 (FMG), Farming Systems Kenya (FSK) National Plant Breeding Station (NPBS), FMG, CIMMYT, Kenya National Farmers Union (KNFU) Coffee Board of Kenya (CBK), Coffee Research Station (CRS) CBK, CRS, Kenya Planters Cooperative Union (KPCU) FMG Pyrethrum Board of Kenya (PBK) None FMG, MOLD

Secondary sources Kenya Rail Tariff Schedule None None None

Secondary sources Pyrethrum Post Coffee Research Station None

B. Molo Division

Production

Transport Lorry Donkey

Processors Dairy

15 21

0 0

Centers

Expert observers

2

0

Secondary sources MOA Farm Management Guidelines 1988 (FMG), Farming Systems Kenya (FSK) National Plant Breeding Station (NPBS), FMG, CIMMYT Farming Systems Kenya, FMG, CIP (Nairobi) Pyrethrum Board of Kenya (PBK) FMG, Dairy Training Inst., KCC

Secondary sources None None

Secondary sources None

28

Scott Pearson and Eric Monke

essential for successful policy analysis. Results have to be understood easily by policymakers to have an impact on policy debates; many eco¬ nomic analyses are unused for want of an understanding audience. Policy analysis frameworks also should be flexible enough in information re¬ quirements so that analyses can be performed in data-scarce environments. If available, general equilibrium models can determine social efficiency prices of primary domestic factors. Where possible, econometric estimates of input-output relationships and output responses can provide the input and output quantities relevant to calculation of social efficiency revenues and costs. But such estimates are not essential to the construction of PAMs, and researchers have other options for estimating the necessary parameters. Initial efforts to develop PAMs require assumptions or guesses about appropriate values for some parameters. PAM results then can be en¬ hanced by the sequential improvement in the quantity and quality of information. Once an initial PAM baseline is prepared, the analyst can see the relative importance of various information gaps and begin to organize subsequent research efforts in an efficient manner. By following these sequential procedures, policymakers and analysts together can deepen their understanding of the relationships among policies to relieve con¬ straints, improve agricultural competitiveness (private profitability), and enhance efficiency (social profitability).

3 A History of Agricultural Policy in Kenya Alex Winter-Nelson

Throughout Kenya’s history, a generally supportive policy environment has encouraged substantial growth in agricultural production. From the early period of European settlement, governments in Kenya were influ¬ enced by powerful rural constituents. This led to policies favoring specific elements of the agricultural sector both before and since independence. Agricultural policies have contributed to relatively strong agricultural performance. But policies have not benefited all rural groups equally and the gains to certain sectors have not been costless. A lesson from Kenyan agricultural history is that reforms to increase the efficiency of government intervention or to expand the population it serves can stimulate impressive economic growth.

Settler Economy

Agricultural policy in the Kenya Colony began with the realization that the Mombasa-Kisumu railroad could not be operated profitably with freight from Uganda alone. The success of the British endeavor in East Africa hinged on the profitability of the railroad, and European settlers in Kenya were seen as the only group that could generate enough commercial activity to make the railroad economic. Consequently, agricultural policy during the first half of this century was designed to support European producers. Although not intended to serve Africans, the institutions and infrastructure built in the settler period became the basis for policy and development in independent Kenya.

31

32

Alex Winter-Nelson

Land and Labor Policy in the Settler Period

As late as 1900, the prospect of European settlement in Kenya seemed unlikely. Colonial authorities felt that efforts to settle South Asians, who could be satisfied with lower incomes than Europeans, held more poten¬ tial. However, in 1902 the European residents of Nairobi (numbering about 30) pressed for rights to exclusive settlement of the highlands by Europeans. The Crown Land Ordinance of 1902 alienated a one-mile strip of land along the railway to concessionaires who would develop and sell property to white farmers. Under the Crown Land Ordinance of 1915 and earlier ordinances, over 7 million acres of highland territory—20 percent of the arable land in Kenya—was reserved for European ownership (Colony and Protectorate of Kenya 1931; Sorrenson 1968). Settlers required labor as well as land to make their enterprises produc¬ tive. The relative scarcity of labor was overcome by forcing the African population into the monetized economy. Land alienation reduced options for productive employment in the traditional economy and thereby drove some Africans into the estate sector. Taxes were used explicitly to direct Africans into the employment of settlers. Asa 1920 Foreign Office circular stated, “No actual force can be used to compel a man to go out and work; he can, however, be forced to pay a tax” (from Ndeti and Ndeti 1980, p. 17). The 1901 hut tax was complemented with a poll tax in 1910 to cover males not owning a hut; the poll tax was increased in 1915 and 1920 (Smith 1976). Private labor recruiters were widely reputed to use force and chicanery to bring workers to the White Highlands (Stichter 1982). In response to land pressure, taxation, and coercion, tens of thousands of Africans moved to settler estates where they provided labor in exchange for access to land and cash income to cover their tax burdens. By 1928, as many as 40 percent of the working-aged males from Nyanza and Central Districts were employed on European-owned farms (Kitching 1980). By World War II, these agricultural laborers vastly outnumbered the Euro¬ pean population of the White Highlands. With their livestock, the em¬ ployed squatters occupied up to 3 million of the 7 million acres reserved for Europeans (Martin 1947).1 Fiscal and Commodity Policy in the Settler Period

The inequality of resource allocation in the colony was extreme. In 1920, Kenya’s 1,183 European settlers held an average of 2,750 acres per capita while over 3 million Africans supported themselves on less than 25 acres per capita (Colony and Protectorate of Kenya 1931; Heyer 1976a). 'By 1945, there were an estimated 200,000 squatters in the scheduled area but fewer than 3,000 European farms (Colony and Protectorate of Kenya, 1944).

A History of Agricultural Policy in Kenya

33

In spite of abundant land resources, the success—or even survival—of the settlers in a strange and often inhospitable environment was not certain. For the first two decades of settlement, many Europeans managed little more than subsistence (Bates 1989; Hill 1949). However, fiscal policies, restriction of competition, and increased settlement generated a boom among European farmers during the 1920s. Between 1920 and 1930, the area planted in wheat, maize, and coffee increased by 1,400, 500, and 245 percent, respectively (Colony and Protectorate of Kenya 1931). Settler agriculture was established in an environment of preferential fiscal policy and market protection. Between 1920 and 1923, close to 70 percent of tax revenue was contributed by Africans (Smith 1976). Mean¬ while, spending clearly favored the European settlers. Public investment in transportation infrastructure, including the extension of railroad spurs into Kitale and Solai, benefited European farmers almost exclusively (Mosley 1983). Similarly, publicly sponsored agricultural research was directed at cash crops suited to large-scale production in the highlands. These crops included coffee, tea, pyrethrum, and maize. Investments in infrastructure and research had impressive returns, but African farmers rarely benefited from the government spending (Smith 1976). Even Africans who held land near the areas of European settlement could not take advantage of new public investments in infrastructure and agricultural research because they were restricted from export crop pro¬ duction. Ostensibly, export crops were “scheduled” for European produc¬ tion to ensure quality control and safeguard African food supplies.2 However, the success of African smallholder coffee production in Uganda and Tanzania proved such claims to be unfounded. The thinly veiled purpose of the restrictions was to protect European producers from com¬ petition. Of the export crops, only cotton, which was ill suited to the conditions of the highlands, could be grown legally by Africans.

Credit and Marketing Interventions in the Settler Period In the 1930s, the European settlers were stricken with the combined effects of the world economic depression, locusts, and drought. The colo¬ nial government responded by subsidizing rail transit for scheduled crops (financed in part by increases in the fees for African-grown cotton); pro¬ viding concessional credit to European settlers through the Land Bank,

2The Africans’ alleged inability to cope with cash crops was explained by Kenya’s director of agriculture in 1932 as follows: “You might say that those areas in the Kikuyu Reserve which are best suited to growing coffee had better grow coffee and nothing else to get the best return from each acre per annum, but then there is the question of the food requirements of the people. The native is not sufficiently advanced to grow coffee and sell it and with the proceeds buy food and other necessaries” (Quoted from Mosley 1983, p. 40).

34

Alex Winter-Nelson

which lent to farmers after commercial banks had frozen agricultural lending; and establishing crop marketing boards (Smith 1976; Heyer 1976a). Different commodity marketing arrangements were developed for ex¬ port crops and food crops. For export crops, centralized marketing boards were created to increase efficiency and improve Kenya’s position in the world market. Vertical integration through these organizations allowed investment in indivisible technologies and achievement of economies of scale. Rather than imposing taxes, these boards passed on world prices to producers. An innovative arrangement was found for wheat. Under the Sale of Wheat Ordinance of 1933, all wheat production was pooled by the Kenya Farmers’ Association (KFA). Through the KFA, wheat growers acted as local monopolists, selling wheat domestically at an artificially high price and exporting surpluses at the lower world market price. Because the local price exceeded the world price by a wide margin, a tariff on wheat imports was imposed to protect local production. The KFA proposed a similar arrangement for maize but was blocked temporarily by European coffee growers who feared that the program would increase the cost of African labor (Mosley 1983; Heyer 1976a).3 The increased demand for cereals in North Africa and the Middle East during World War II stimulated the further development of credit and marketing institutions with lasting impact on the future of agricultural policy. Maize shortages in 1941 were followed by the Increased Produc¬ tion of Crops Ordinance of 1942. Through this ordinance, farmers could submit a cropping plan and be assured a minimum price for production. They also received insurance against unavoidable crop failures. The gov¬ ernment’s pledge to purchase a fixed quantity at a specified price implied a guaranteed minimum return (GMR) that became the collateral for advances of farm inputs from state agencies and for private loans (Bates 1989, p. 22). With crop-secured loans it was necessary to ensure that the crops would be produced and that the lender could have the option to appropriate them. Agricultural committees inspected farms through the season. To eliminate the possibility of disposing of maize to an unauthorized buyer, the Kenya Farmers Association was made sole legal buyer in the Ordi¬ nance of Maize Control of 1942. These ordinances provided farmers with security against both price and yield risk and secured increased production for the government. During the war, they also tended to hold the maize

3 This

artificially high price of wheat affected mostly colonial administrators, bureaucrats, and South Asian merchants. It had little impact on the African population for whom maize was the primary staple.

A History of Agricultural Policy in Kenya

35

price beneath the world market level to the consumers’ advantage (Mosley 1983). In the short run, this combination of marketing and credit policies overcame deficiencies in the domestic capital market and uncertainties in the world grain market. For the longer term, it set the pattern of monopsonistic grain marketing and crop-secured lending which is still government policy (Heyer 1976a; Bates 1989). During the four decades ending with the close of World War II, agricul¬ tural policy in Kenya encouraged rapid development in highland areas reserved for Europeans. The policies and institutions established to solve problems faced by European growers resulted in pervasive intervention in both the commodity and capital markets and highly uneven development across regions. The strategies of this period set an example that policy interventions still follow.

Postwar Colonial Rule During the postwar period, efforts to intensify production in the sched¬ uled areas placed intolerable pressure on the African reserves. The African response to this stress dramatically influenced the course of agricultural policy and development. The 1946 Development Plan called for intensifi¬ cation of land use in the scheduled areas through increased settlement by Europeans. To that end, 493 British ex-servicemen were settled on 483,000 acres of previously alienated land. To assist the postwar settlers, the colonial government provided generous credit through the Land Bank and technical training at the Egerton School of Agriculture (Heyer 1981; Bates 1989). Training at Egerton stressed the importance of mixed farming systems, including the use of grade cattle in contrast to monocrop plantation agriculture. This change had great consequences for the African squatters. The low level of activity on most European farms had allowed squatters employed by Europeans to farm and herd on their own accounts without actually owning land. As grade cattle and dairy operations were added to European farms, the activities of African squatters became incompatible with settler agriculture. Because the local cattle held by squatters were sources of disease, the success of new mixed farm enterprises demanded the removal of African livestock. Elimination of squatters’ livestock, which had begun at the instigation of European dairy farmers in the 1920s, accelerated in the postwar period. This left Africans on European-owned farms with the choice of returning to the already overcrowded reserves or of becoming wage laborers with greatly reduced rights compared to those of squatters. Reflecting this stress, the rebellion against the colonial powers

36

Alex Winter-Nelson

began in the areas where mixed farming had its greatest expansion— Naivasha, Njoro, and Elburgon (Bates 1989; Throup 1988; Kanogo 1987). The squatters who left the White Highlands were primarily Kikuyu men who were repatriated to the Kikuyu reserves of Central Province. The situation they found there bore little resemblance to precolonial Kikuyu agriculture. The alienation of land from Africans had altered the relative value of land and labor in the African Reserves. Proximity to the expand¬ ing market in Nairobi further increased the value of land by enabling landowning Kikuyus to profit from trade in horticultural products.4 The returning squatters constituted a threat to the land rights and, therefore, the livelihoods of those who had remained on the reserves. Tribal councils, dominated by the successful long-term residents of the reserves, prevented the former squatters from receiving land rights. Occasionally, colonial authorities were called upon to legitimize exclusionary land rights in support of the established African farmers (Sorrenson 1967). Displaced in both the scheduled areas and the reserves, the former squatters became the core of the Mau Mau movement. Frustrations over access to land erupted into violence against Europeans in the scheduled areas and against the relatively prosperous African farmers in the Kikuyu reserves. Areas further removed from the White Highlands were not subject to the same intensity of disruptions in land and labor rights and were far less involved in the rebellion (Sorrenson 1967, 1968; Bates 1989).

The Swynnerton Plan After years of halfhearted efforts to improve African agriculture through unpopular soil conservation programs,5 the eruption of violence resulted in both military repression and efforts to accelerate development in the reserves. The assistant director of agriculture, R. J. M. Swynnerton, pro¬ vided the economic policy response in 1954 with what has become known as “the Swynnerton Plan.”6 The central element of the plan was the consolidation and registration of land held by Africans. The formalization of individual land tenure was intended to satisfy the Africans’ demands for land and promote smallholder development. The plan aimed to create an African rural elite as the vanguard of development and the first defense 4 Whereas some Africans in Central Province profited from the technologies and market options developed for the European settlers, most Africans living outside of the highlands could not reap such benefits. 5 The cost of these efforts was borne almost entirely by the African farmers who were required to provide labor, reduce farmed area, and destock (Sorrenson 1967). 6Officially, “A Plan to Intensify the Development of African Agriculture in Kenya,” Colony and Protectorate of Kenya, 1954.

A History of Agricultural Policy in Kenya

37

against revolt. It contained a strategy for the development of smallholder agriculture that is still reflected in Kenyan policy. The centerpiece of the Swynnerton Plan was land tenure reform within the Kikuyu Reserves. Overcoming failures in the land market was seen as mandatory for any development. The planned land reform consisted of determining the ownership of cultivated plots, consolidating fragmented plots into contiguous land parcels, and registering those parcels to indi¬ viduals. Open land was to be allocated in plots large enough to meet the subsistence needs of farm households and to provide modest cash income as well. “Able, energetic, and rich Africans” were expected to acquire more land, whereas the “bad and poor farmers” would eventually sell property and become a landless class, employed on larger African farms. The second element of the Swynnerton Plan was the relaxation of restrictions on the production of export crops by Africans. This key change removed biased and distorting policy. Under the plan, progressive African farmers were expected to grow coffee, tea, or pyrethrum to gener¬ ate cash income and absorb landless labor. To ensure quality standards, production was controlled and allowed only for farmers whose processes were tightly monitored. Nonetheless, production of these crops expanded dramatically. In 1951, there were fewer than 2,000 acres of coffee in the native reserves. By i960, 33,000 acres were planted, and by 1964 over 235,000 African growers had planted 125,000 acres of coffee. Coffee production grew from 1,000 metric tons in 1955 to over 16,000 metric tons in 1964. Expansion of coffee and tea became the basis for agricultural growth throughout the 1950s and to the late 1980s (Heyer 1981; Republic of Kenya, Statistical Abstract 1964). The official encouragement of African farm development was backed with considerable public spending on infrastructure and extension. The resulting growth benefited large numbers of African farmers, but there was no effort to aid all Africans equally. The plan offered nothing new to the dry, low-elevation areas, where coffee, tea, and pyrethrum were unprofit¬ able, or to the semiarid pastoral regions. Within the high-potential areas, the interventions focused on successful farmers, leaving unserved much of the population that had fought for access to land. This concentration on progressive farmers and the high-potential areas remained a characteristic of agricultural policy long after colonial rule ended (Heyer 1981; Smith 1976).

While the removal of cropping restrictions produced a boom in African production, continued public investment in the White Highlands and favorable world market conditions made the 1950s an exceptionally pros¬ perous period for European farmers. Kenya’s European community thus was both surprised and dismayed by the Lancaster House announcement

38

Alex Winter-Nelson

of January i960 that declared a rapid transition to independence under African rule in Kenya (Heyer 1976a).

Land Policy during the Transition to Independence In 1961, agriculture accounted for 85 percent of Kenya’s export earn¬ ings, and the large-farm sector was responsible for three-quarters of that total (Republic of Kenya, Economic Survey 1962). Consequently, a primary concern during the transition to independence and the early independence period was to preserve the productive large-farm sector while satisfying demands for broader access to land. The solution crafted before independence called for one-sixth of the scheduled area to be purchased by the state, subdivided into small- and medium-scale farms, and sold to Africans on concessional terms. Another one-sixth was to be transferred as intact farms to African buyers. To encourage the support of the European settlers, land was to be valued at 1959 prices that reflected a decade of successful farming and confidence in European rule (Heyer 1981). After Kenya gained independence in 1963, the African government essentially adopted the British colonial land program. The expensive land transfer program was financed in part by Great Britain and other donors; this foreign assistance covered one-third of the cost of purchasing European-owned lands. In 1963-64, government spending on the settle¬ ment program exceeded total spending on agriculture and livestock development. In 1967-68, land transfers still consumed about 50 percent of the agricultural budget (Republic of Kenya, Economic Survey 1967, 1969). The initial resettlement program transferred over a million acres of land to about 35,000 African families. In this program, successful farmers were settled on relatively large farms (33 acres) and landless households were allocated smaller “high-density” plots (23 acres). Another 35,000 families received land in smaller settlement schemes, and even more land was transferred with farms intact (Republic of Kenya 1971; Heyer 1981; Lofchie 1989). As Bates (1989) indicates, the African authorities were keen to facilitate transfer of farms intact to African owners to preserve the large-farm sector. This process permitted affluent Africans to replace Europeans as the dominant rural elite in the country. To satisfy the remaining demands for access to land, policymakers in the Republic of Kenya focused on allocation and registration of arable land that had remained under African occupation (Lofchie 1989). The central role of land registration was a continuation of the Swynnerton Plan. However, whereas the Swynnerton Plan suggested that clear title would

A History of Agricultural Policy in Kenya

39

stimulate development, land registration after 1963 was further justified as a mechanism for increasing lending to small farmers and breaking capital constraints on farm development (Okoth-Ogendo 1976).

Policies and Institutions in the Republic of Kenya Although the large-farm sector remained, the structure of Kenyan agriculture changed fundamentally after independence. Whereas smallscale farms accounted for less than a quarter of the value of agricultural production in i960, they produced over half of the value of agricultural output in 1967 (Republic of Kenya, Economic Survey 1963, 1970). Agri¬ cultural institutions had to be reoriented to match the transformation of Kenyan agriculture. Smallholders were integrated into the formal agricul¬ tural system, but the institutions that constitute this system have been costly to operate and have not been able to serve all regions of Kenya equally well.

Institutions for Rural Finance in the Republic of Kenya The most obvious need for new institutions was in finance. Land reset¬ tlement could not occur without extensive credit for the purchase of both subdivided plots and intact farms. Even with donor assistance, the use of I959 prices for land valuation resulted in substantial debt burdens. Moreover, African farmers in resettlement areas faced serious shortages of working capital. In response to these needs, targeted credit was provided to large-scale farmers though the Land Bank, later the Agricultural Fi¬ nance Corporation (AFC), and to small farmers through the Cooperative Bank and its cooperative credit schemes, the Department of Lands and Settlement, and the AFC. In 1970, KSh no million ($15.4 million) was lent to over 7,500 farmers by the AFC alone. Although some funds did reach smallholders, land title requirements excluded most small-scale farmers outside of the settlement schemes. Consequently, large areas of Kenya received few loans, and the bulk of the finance went to large-scale producers (Vasthof 1968). As in the 1930s, much lending was eventually sponsored by the central bank (Republic of Kenya, Economic Survey 1968, 1970, 1971). Problems in rural finance appeared widely in the settlement areas, where small farmers were expected to repay two-thirds of the cost of land purchase. In 1970, only 55 percent of loans due in settlement areas had been collected. Payment performance in the settlement areas was generally poor because of low farm returns as well as an unwillingness to pay for

4o

Alex Winter-Nelson

land that was widely perceived to be a basic right,7 Although some farmers were evicted for nonpayment, the political consequences of such actions led to payment moratoria and debt rescheduling in the late 1960s and 1970s (Republic of Kenya 1971; Von Pischke 1974). By 1968, over half of the debts from loans for agricultural land remained unpaid (Republic of Kenya, Economic Survey 1968). This high rate of default reflected collection problems both in smallholder resettlement schemes and in the large-farm sector. The high delinquency rates on loans to African farmers who had little experience in plantation agriculture eventually required external capital infusions with substantial assistance from the World Bank and other donors (Heyer 1981). The response to the problems in land-based lending was to extend the use of crop-secured loans. Crop collateralization, which allowed lend¬ ers access to a more easily collectible asset, could be extended without title-deed. For estates, these loans continued to be administered by the relevant export crop marketing board or the AFC (which required that maize and wheat be sold to the cereals board). For smallholders, coopera¬ tive societies became the primary conduits for crop-secured lending (Bates 1989). Securing loans with crops had mixed results. The AFC continued its programs serving primarily large-scale farmers, but cooperative societies scaled back activities in the 1980s following widespread defaults in the 1970s. Crop-secured lending had two side effects. First, it demanded an increased bureaucratic presence in small-scale farming areas to ensure that appropriate production techniques were used and that produce was mar¬ keted through channels open to the lender. In spite of regulations in both the input and output markets, sales in informal markets hampered the projects. Second, the lending was generally subsidized and rationed through nonprice mechanisms. Such lending created biases toward large farmers, whose loans were less costly to administer, and stimulated exces¬ sive use of capital in production (Adams, Graham, and von Pischke 1984; Lele 1989).8 Crop-secured lending brought into question the government’s continued emphasis on land registration. There is little evidence that registration alone increases the security of land tenure beyond that achieved informally in Kenya. Furthermore, the widespread abandonment of title-based bor¬ rowing contradicts arguments for land registration based on the capital 7 Loans were based on the assumption that settlement farms would generate specific income levels. Between 1964-65 and 1967-68, fewer than 20 percent of settlement farms achieved the target income levels (Republic of Kenya 1971). 8 Since the 1970s, analysts have questioned the need for targeted agricultural lending in Kenya. Since much farm development is possible through the use of low-cost technologies, such as improved seeds and fertilizers, credit could be unnecessary (Donaldson and von Pischke 1973).

A History of Agricultural Policy in Kenya

41

market. Consequently, registration does not appear to be required for farm development. Moreover, given the widespread informal subdivision and transfer of registered land, the process may become ineffective quickly (Green 1987; Shipton 1988).9

Commodity Markets in the Republic of Kenya The crop marketing boards needed restructuring to serve the growing ranks of small-scale commercial farmers. Institutional changes to meet the new conditions widened and deepened the government’s presence in the rural economy. Although some of the new institutions effectively pro¬ moted smallholder development, the expansion of government activity has been administratively and financially demanding. Recently, these institu¬ tions have become a significant drain on the budget. Export Crop Marketing Boards. The colonial authorities, who had foreseen the problem of adapting institutions to smallholder coffee pro¬ duction, fostered the development of cooperatives to bulk, pulp, and transport smallholder coffee.10 Rather than dealing directly with small¬ holders, the Coffee Board worked through the Kenya Planters Cooperative Union (KPCU) and a manageable number of cooperative societies. Follow¬ ing that colonial pattern, smallholders in the Republic of Kenya have been required to market their coffee, tea, pyrethrum, and other products through cooperatives (Heyer 1981). As smallholder agriculture expanded, so also did the importance of the cooperatives. The value of coffee sold through cooperatives in the settlement schemes increased from KSh 5 million in 1963-64 to over KSh 48 million in 1967-68. Since 1966, when smallholder coffee production surpassed estate production, cooperatives have handled the majority of Kenyan coffee. By 1990, there were over 2,000 agricultural cooperatives and societies in Kenya (Republic of Kenya, Economic Survey 1970, 1990). The importance of these institutions in the rural economy is magnified by their roles as primary processors of com¬ modities, such as cotton and coffee, as well as marketing agents. The performance of Kenya’s cooperatives has been mixed. Initially, most cooperative societies were understaffed and lacked trained managers and bookkeepers. Some cooperatives have been identified as detrimental to their membership’s interests because of inefficiency and corruption (Min¬ istry of Agriculture, Annual Report Central Province 1976, 1977). More9 Further criticisms of land consolidation and registration note that it negates the risk reduction achieved through scattered plots (Heyer 1976a) and may affect distribution (Okoth-Ogendo 1976). 10Smallholder tea production was considered impossible because of the need for factory processing soon after harvest.

42.

Alex Winter-Nelson

over, since farm production is bulked at the cooperative level, the system discourages small-scale farmers from improving product quality. Farmers in some areas have tried to circumvent cooperatives by forming smaller “self-help groups” or by pressuring parastatals to deal with individual small-scale growers.11 Producer organizations outside of the official coop¬ erative system have received little government support and are opposed by the influential Ministry of Cooperative Development. The marketing boards continued throughput pricing policies as the cooperative system developed. For coffee, tea, and pyrethrum, coopera¬ tives received the world price minus the boards’ processing and marketing costs. Only for cotton was there a mechanism for taxing producers and for stabilizing producer prices. Imposed by colonial authorities, this stabilization scheme may well have worked against the growers. As a result, there has been little demand from coffee and tea producers to adopt similar schemes (Heyer 1976c). The export crop marketing boards also have supported small-farm development through direct intervention. The most successful example is the Kenya Tea Development Authority (KTDA). Because tea leaves must be processed in capital-intensive factories soon after picking, tea produc¬ tion by smallholders was considered infeasible in Kenya prior to independ¬ ence. To facilitate smallholder tea production, the KTDA established transportation links (tea roads) and factories in smallholder areas. These infrastructure investments, made possible by substantial donor and gov¬ ernment support, were complemented with research and extension to meet smallholders’ needs. The production response was spectacular. Between 1970 and 1985, smallholder tea production increased by over 13.5 percent annually (Heyer 1981; Lele and Christiansen 1989). In a less dramatic manner, the KPCU and the Coffee Board, through its Coffee Research Station, sponsored significant research and extension in smallholder coffee production. The Pyrethrum Board of Kenya (PBK) also undertook considerable research and extension to support its small-scale producers. Both the Coffee Research Station’s new Ruiru 11 variety and pyrethrum varieties P4 and P107 hold promise for widespread adoption. Other export crop parastatals, such as the Cotton Seed and Lint Market¬ ing Board (CSLMB), have received less central government support and have had limited success in marketing or research.12 The most successful agricultural research programs continue to be funded through export-crop marketing institutions like the KTDA, the PBK, and the Coffee Board. Research in other areas has been less ad¬ equately funded and less successful. Although the development of hybrid "These efforts have been particularly successful for pyrethrum growers in Molo Division of Nakuru District. 12On the CSLMB, see Lele, Van De Walle, and Gbetibouo 1989.

A History of Agricultural Policy in Kenya

43

maize varieties in the 1960s had a tremendous effect on production in the highlands, there have been no recent major technological breakthroughs for food crops.13 Research for semiarid areas has been neglected in particu¬ lar (ISNAR 1981; Lele and Meyers 1989). Food Marketing Institutions. The most important food marketing insti¬ tution has been the one managing maize, currently the National Cereals and Produce Board (NCPB).14 During the colonial period, grain marketing controls were used to raise local prices and to stabilize producers’ incomes. Since independence, the government has become more concerned with maize affordability for consumers, and the price-discriminating function of the Cereals Board has declined. The board’s joint mandates became the provision of maize in all parts of the country at a price affordable to consumers and the assurance of a reliable outlet for farmers’ production. Through the board, the government tried to provide food security in urban areas and to afford farmers price security by guaranteeing preannounced pan-territorial prices for maize at all stages of the marketing chain. To defend the official prices, the NCPB, like the KFA during the colonial period, controlled the movement of cereals across district lines within Kenya and the import and export of maize. Although less than half of Kenya’s maize production is marketed and some 30 to 40 percent of marketings are informal, intervention by the NCPB is critical whenever national or regional production shortfalls occur. The board’s objectives have been pursued with varying success despite high financial and efficiency costs. Insufficient imports and poor distribu¬ tion in times of low harvests caused acute maize shortages in 1965, 1971, 1980, and 1985. In general, food-deficit rural areas received little attention regardless of local conditions; shortages may occur in these areas even in years of national surplus.15 Price and movement controls were used to facilitate crop-collateralized lending, to stabilize prices, and to protect farmers and consumers from exploitative traders who were expected to appear in an underdeveloped market.16 Since 1983, the government has tried to fix the farmgate price between its export and import parity levels. Even when the official price falls within the wide cif-fob band, the price and movement controls H Hybrid maize planting increased from 400 acres in 1963 to over 800,000 acres in 1973 (World Bank 1983). Relatively little improved maize is planted outside of Central and Rift Valley provinces. 14 The NCPB also controls the marketing of wheat, beans, and rice. 15 Bates (1989) describes the NCPB’s failure to provide food security in rural Meru District. 16The 1966 Report of the Maize Commission of Inquiry (p. 31) states, “The interests of the unsophisticated producers have to be watched. This means that there must be some checking of the quantities of maize paid for and the quantities actually taken by buyers. There is a risk of producers being cheated.”

44

A lex Winter-Nelson

fragment the market, increase marketing costs, and encourage maize production in inappropriate areas (Heyer 1976c; de Wilde 1984). Pan-territorial pricing creates distortions in producer incentives and inef¬ ficient production patterns since prices do not reflect the differences in transport costs among surplus areas. Similarly, by dampening seasonal variation in the consumer price of maize, the system discourages private storage. Whereas the provision of a floor price and the management of stocks for food security may promote important government objectives, the move¬ ment controls are difficult to justify on either efficiency or equity grounds. It has long been recognized that the system introduces the possibility for “unfairness, inefficiency, corruption, and black-marketing” (Republic of Kenya 1966). The indictment of 42 senior NCPB officials in January 1989 for embezzlement reflects the problems of fraud and inefficiency in the system.17 Most observers agree that the financial cost of operating the country’s multitude of parastatals, and the NCPB in particular, has become burden¬ some. Between 1980-81 and 1985-86, the deficits of the NCPB more than doubled, from KSh 312 million to KSh 647 million (Lele and Christiansen 1989). Over the same period, charges by the NCPB per bag of maize more than trebled, from KSh 40.25 to KSh 133.55. The second major food marketing institution is the Kenya Cooperative Creameries (KCC). Established by European dairymen during the colonial period, the KCC has been organized as a producer cooperative and held an effective monopoly over the market for processed dairy products until the early 1990s. Although most milk production is consumed on farm, almost all milk sold in urban areas is marketed through the KCC at fixed producer and consumer prices. Price policy attempts to match producer price stabil¬ ity with consumer affordability. The resulting producer prices have shown little variation and have failed to increase at pace with changes in the costs of production. Although small-scale producers selling to the KCC are also shareholders, they have little input in policymaking. The central govern¬ ment has not exerted substantial control over the KCC’s operation. The KCC’s autonomy has resulted in considerable suspicion of its management and allegations of corruption and financial mismanagement (Heyer 1976c). During the 1960s, 1970s, and 1980s, there were repeated calls for restructuring of the institution. Parastatal deficits have become a major issue in government finance. The NCPB’s trading losses in the late 1980s accounted for almost 20 percent of the entire public sector deficit. Its 1988 deficit of KSh 5,000 r Reported in the Economist Intelligence Unit, Kenya: Country Report, 1989, No. 2. See also, Weekly Review, “Parastatals, Two in Court for Embezzlement,” January 3, 1992.

A History of Agricultural Policy in Kenya

45

Table 3.1. Economic indicators 1967-73 Real GDP growth rate Population growth rate Growth rate in real agricultural output Rate of inflation (CPI) Current account deficit as percent of GDP Debt service as percent of exports Central Bank borrowing as percent of GDP Foreign assistance as percent of GDP

1974-78

1979-81

1982-84

1984-87

8.5 3.5

4.7 3.6

4.2 4.0

3.7 4.1

5.4

4.1

1.5

4.2 3.0

16.0

11.2

6.2

4.7 1.0

1990

1992

5.1 4.2

4.3 4.0

0.4 4.0

4.4

4.3

3.5

-4.2

14.0 4.7

7.4

10.5

6.0

19.6 7.2

27.5 4.7

6.4

14.3

18.2

21.3

34.6

n.a.

3.6

6.0

10.4

10.4

2.0

1.3

8.0

9.0

7.8

23.3

n.a.

Source: Compiled from Lele (1990), Agricultural Growth and Assistance to Africa: Lessons of a Quarter Century. Table 11. World Bank, World Debt Tables, Economic Survey, 1993, OECD, Geo¬ graphic Distribution of Financial Flows to Developing Countries, n.a. not available.

million, which was underwritten by the government, approached 4 percent of GNP and exceeded total recurrent spending on economic services.18 Because of their multiple economic and political objectives, some parastatals cannot be expected to operate profitably. Nonetheless, the losses of many parastatals have become intolerable. The financial burden of the agricultural public enterprises has made it difficult to contain the nation’s budget deficits and reduce inflation (Table 3.1).19 In 1982, the Ndegwa Report, commanded by the government, advo¬ cated eliminating many of the country’s 150 parastatals to conserve scarce government resources. Between 1982 and 1990, however, the number of parastatals rose to around 200. Some promising steps to restructure these institutions were undertaken in late 1991 and early 1992. A parastatal reform committee, headed by Kenya’s vice-president and in¬ cluding the governor of the Central Bank and other senior government officials, set specific procedures for privatizing or restructuring stateowned institutions. These procedures include the privatization of profit¬ able firms through sale of public shares, the liquidation of chronic loss-makers via sale of assets, and the direct sale of other institutions through competitive bidding. Numerous parastatals already have been identified for sale. Furthermore, strategic parastatals, including the NCPB, 18These figures are from Economic Survey, 1990, and the Economist Intelligence Unit, Kenya: Country Report, No. 3, 1988. 19 Public finance for the parastatals may be crowding out private investment. In 19&9i parastatals accounted for 10 percent of commercial bank lending (Statistical Abstract, 1990).

46

Alex Winter-Nelson

the KTDA, and the AFC, have committed to specific performance con¬ tracts aimed at increasing efficiency and reducing deficits (Weekly Review, January 31, 1992).

Fiscal and Monetary Policy in the Republic of Kenya Fiscal policy during the colonial period served the interests of European farmers at the expense of the Africans. After 1963, macroeconomic poli¬ cies remained reasonably favorable to agriculture. Unlike many other African countries, agricultural exports were not targeted for heavy taxa¬ tion. Revenues were raised through local self-help programs, import tar¬ iffs, and international assistance or borrowing. Furthermore, policymakers resisted the temptation to overvalue the Kenyan shilling by large amounts. In these respects, the policy served the interests of agriculture in general and the rural elite in particular. But the costs of the parastatal system that was developed to serve agrarian interests may be undermining fiscal and monetary conservatism to the detriment of both agriculture and industry. Although colonial policies benefited agriculture, the expansion of smallscale farming demanded some modifications of fiscal policy after the transition to independence. The independent government sought to provide badly needed services in rural areas but wanted to avoid the regressive taxes of the early colonial period. Funding was available mainly for agricultural and infrastructure spending in settlement schemes and other parts of the highlands. Regionally, this spending pattern was consist¬ ent with practices during the colonial period, but African farmers became the beneficiaries. During the 1980s, there was a shift in the regional distribution of spending in favor of lower elevation areas in Rift Valley Province. To conserve resources, the government promoted self help (harambee) programs to provide social services. Through harambee, communities organized themselves to finance local development projects internally. The harambee movement resulted in the establishment of dispensaries and schools throughout the country without direct impact on the government budget. But the local self-help approach, like public investment, did little to alleviate the regional disparities inherited from the colonial period. In spite of generally sound macroeconomic policies, growing parastatal deficits and declining terms of trade have eroded Kenya’s fiscal strength. Persistent budget deficits have impeded efforts to control inflation. In the 1980s, inflation hovered at about 10 percent; inflation reached 20 percent in 1991 and 27 percent in 1992. Shortages of capital for development programs have increased Kenya’s dependence on foreign aid. In 1981, development assistance was $465.5 million or 8 percent of GDP and 20

A History of Agricultural Policy in Kenya

47

percent of the total government budget. From 1989 to 1992, annual development aid exceeded $1 billion, accounting for more than 15 percent of GDP and over 40 percent of the public budget (OECD 1993). A substantial increase in foreign borrowing and the debt-service ratio accom¬ panied the growth in foreign aid. Between June 1988 and June 1992, total indebtedness rose from KSh 77 billion to KSh 166 billion. The accelerated flow of foreign capital did not offset the sudden decline in production in the early 1990s. Annual GDP growth fell to near zero in 1992 while agricultural production actually declined (Table 3.1).

Summary and Conclusions Measured by the growth in smallholder production and incomes, Kenyan agricultural policy has been a qualified success. However, govern¬ ment intervention did not serve all African farmers equally. Beginning with the Swynnerton Plan in 1954, growth has depended primarily on coffee, tea, and maize. Marketing institutions for these valuable crops from high-potential areas have functioned better than those for less profitable commodities from poorer regions. Similarly, high-value export crops grown in well-endowed areas have received the bulk of research attention. Even food crop advances, such as improved maize varieties, had the greatest impact and highest adoption rates in Central Province and the former White Highlands. Agricultural policy since independence, therefore, has served best the areas that were already relatively well endowed. Within the high-potential areas, interventions to support agriculture favored the relatively wealthy over the poor. Land resettlement provided additional resources to those who had been successful previously. Rationed credit flowed to those eligible to borrow larger amounts. Notwithstanding the widespread effect of improved maize on farmers in the highlands, agricultural extension favored progressive farmers (Heyer 1981). During the first decade of independence, the share of income accruing to the poorest 40 percent of the Kenyan rural population de¬ clined. However, rapid growth meant that even the poor grew richer in absolute terms (Collier and Lai 1986). During the 1980s, however, economic expansion was not rapid enough to ensure such widespread gains. Successful policies enabled the well-endowed farmers and marketers to overcome problems associated with factor market imperfections, world markets, and crop technologies. The reservation of land and crops for Europeans may have contributed to early development by encouraging the flow of capital into the Kenya Colony. However, the removal of restric-

48

Alex Winter-Nelson

tions on African settlement and African cash crop production was prob¬ ably responsible for more agricultural growth than any other Kenyan policy (Heyer 1976b; Smith 1976; World Bank 1983). Similarly, policy biases in favor of specific areas or reliance on public enterprises for certain activities may have been desirable in the past to generate growth in income and investment. But reforms to support previously neglected areas, to reduce public expenses, or to remove distorting policies could offer signifi¬ cant opportunities for future growth. Past agricultural growth in Kenya was based on expansion of cultivated area, changes in crop mix, and the adoption of improved maize varieties. The government reinforced agricultural growth through settlement policies, the removal of smallholder restrictions on crop production, the support of crop development authorities, and the promotion of hybrid maize. With few opportunities to increase cultivated area, future agr¬ icultural growth is most likely to come from new crop mixes, new technologies, and increased input intensities. To determine the appropriate policies to support such changes, policymakers require information on the specific economic and ecological factors that now constrain farmers. Economic analysis needs to examine the effects of existing policies and market failures in various regions of the country and on agents in the agricultural system to identify which policies could best stimulate future growth.

4 Policies Affecting Current Agricultural Incentives Eric Monke, Daniel Sellen, Alex Winter-Nelson, Mulinge Mukumbu, and Francisco Avillez

This chapter focuses on the effects of government policies on incentives faced by agricultural producers. The results provide justifications for the social prices used to evaluate the efficiency of agricultural systems. The key areas of interest are price and regulatory policies in the most promi¬ nent commodity markets, policies that govern the macroeconomic envi¬ ronment (fiscal, monetary, and exchange rate policies), and policies that influence the behavior of the domestic factor markets (labor, land, and capital). This survey of current policies confirms the findings of other researchers that direct distortions of agricultural commodity prices are relatively minor. Of much greater importance are the interventions that indirectly affect farm prices: government and parastatal institutions influence postfarm activities in many of the commodity markets, and policies for the nonagricultural sector distort the foreign exchange rate and thus implicitly tax tradable agricultural commodities. The implications for farm incomes of increased efficiency in processing and marketing activities and alternative foreign exchange rate regimes are analyzed in subsequent chapters.

Commodity Markets and Policies The analysis in this and subsequent chapters is concerned primarily with six commodities—maize (and its common intercrop, beans), milk, wheat. 49

50

Eric Monke et al.

tea, coffee, and pyrethrum. Maize and milk are the most important food staples; their production occupies 70 percent of the 5.2 million hectares of Kenya’s arable land (Government of Kenya 1986, p. 63). Production is dominated by smallholders, although relatively large farms supply much of the formal marketings. Government policy is aimed at national selfsufficiency in both commodities through price regulation and maintenance of a strategic reserve. In most years, Kenya is self-sufficient in maize and milk, although in drought years large quantities have been imported. Wheat is the second most important cereal crop but occupies less than a tenth of the area under maize. Three-quarters of Kenya’s wheat is produced on large holdings. The demand for wheat is growing rapidly, reflecting increased demand for bread in expanding urban areas. Demand exceeds domestic supply, and government policy is aimed at reducing the import gap. Coffee, tea, and pyrethrum have long been prominent sources of rural employment, farm income, and foreign exchange. Coffee and tea have been Kenya’s principal agricultural exports and usually account for almost half of Kenya’s export earnings. In recent years, this hegemony has been challenged by the growth of horticultural exports. Pyrethrum revenues are small compared to those from coffee or tea, but pyrethrum is an important cash crop alternative in the higher altitude areas of the high-productivity zones. As with maize and milk, smallholders are responsible for the bulk of production.

Cereals Maize, the backbone of Kenyan agriculture, is grown in almost all agroecological zones and on nine-tenths of Kenyan farms. It provides about 40 percent of the population’s caloric requirements. Eighty-five percent of the crop is grown on smallholdings. Maize is produced with a variety of farming technologies, ranging from labor-intensive smallholder operations with few purchased inputs to large, capital-intensive farms. Planted area has grown at an annual rate of about 3.8 percent, nearly keeping up with the population growth rate (Table 4.1). Yields vary greatly across the country and over time. According to remote sensing data, yields in the latter half of the 1980s ranged from 0.72 metric tons (mt) per hectare (ha) in marginal areas (such as Kitui District) to over 3.6mt per ha in high-potential areas of western Kenya, such as Uasin Gishu, Kericho, Nandi, Trans Nzoia, and Kisii districts (Ottichilo and Sinange 1990, p. 14). It is difficult to generalize about a trend in maize yield because of the variability in weather patterns and inconsisten¬ cies between data sources. In most years, average yields in the more productive regions have been between 2 and 2.5 mt per hectare, but drought can reduce yields to very low levels. Large quantities of maize

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