Uganda cannot be stopped from selling its sugar to Kenya because the EAC is legally a single market courtesy of the Common Market Protocol of November 2009. Local cane farmers may have to look for alternatives to safeguard their livelihoods, writes DAVID NDII
Uganda is the ultimate banana republic (no pun intended). Ugandans consume more bananas per person than anyone else on earth. I have remarked in the past on the Jubilee administration’s penchant for skidding on banana skins. You might expect that while in Uganda, they would watch out for banana skins. No such thing.
It is difficult to fathom how the administration would have put out a message that could be construed to mean they had traded milk for sugar. Commercial dairying being a predominantly Kikuyu-Kalenjin affair, and sugar cane a Luo-Luhya one, even ignoring for the moment the President’s conflict of interest issues, the political dimension of it would still have made it the most slippery banana skin that the administration has stepped on to date. But such is the nature of mediocrity. Just when you think it could not get worse, it does.
Why is Kenya’s smallholder tea successful and cane sugar a dismal failure? There are three factors. The first is market orientation, the second is the nature of the products and the third is the business model.
Market orientation. Tea is an export crop, while cane sugar production was established as an import substitution industry. Because Kenyan tea farmers have to sell their produce in the world market, they have to be globally competitive. That is, they have to produce profitably a product the tea consumers out there want, at a price that they are willing to pay.
If they were not able to, there is not much that the government could do to protect them from competitors. It could be argued that the government could subsidize them. Perhaps, but not for long. It would quickly fall foul of competitors, who would report to the WTO. If that did not work, the competitors would do the same and being more competitive to begin with, the subsidy war would bleed us more.
The sugar industry on the other hand is a classic case of the pitfalls of import substitution. There are two of them. The first is that import substitution industries were seldom based on viability. Rather the argument was, we are importing so much of this product, why can’t we produce it ourselves?
The question that was seldom asked when import substitution industries were started was: can we produce our own competitively?
More often than not, the size of the market was hardly big enough for a viable industry. In the case of sugar, there was also immense political pressure — central Kenya had cash crops, coffee and tea, while western Kenya had none.
The second pitfall is that of infant industries refusing to grow up. Once an industry was given protection, there was no incentive for it to become efficient. In fact, the reverse happens.
The industry acquires political clout that ensures it is never exposed to competition. One way of doing this is ensnare the policy makers so that they acquire vested interests in keeping the industry protected no matter how inefficient. In the 70s, foreign investors did this by making policy makers sleeping partners, suppliers and distributors.
The infant industry problem is compounded if the industry is State -owned as is the case with our sugar industry. The industry becomes a gravy train for the elites since they know the State will always bail it out. This is precisely the case with our sugar industry. For well over a decade, we have sought protection from COMESA imports and have done nothing to make the industry competitive. We are not about to.
Product characteristics. The reason why Kenya’s smallholder tea is successful, in fact the most successful in the world, is because smallholder farmers are able to produce much higher quality tea than plantations. The reason is deceptively simple. The smallholder farmers pick ‘two leaves and a bud’ – the shoots that give the best tea. Plantation workers are paid by weight so they pick three or four leaves.
Even if the plantation wanted them to pick two leaves, the supervision costs of enforcing would be too high. It would need an army of supervisors to inspect every basket. And of course the supervisors could always collude with the pickers for a share of the additional earnings.
The only foolproof solution is for the plantation owners to inspect every basket. In economics, we call this a principal – agent, or incentive compatibility problem.
Sugarcane is the complete opposite. Smallholder sugar does not command any quality premium over plantation sugar. If anything, the labour value-added is very little. Labour is required during planting and harvesting. In the intervening period – close to two years—farmers do very little. The earnings from sugarcane production are in essence returns to capital and land rent.
To illustrate, let us suppose sugarcane is grown by an absentee landlord. The cane is sold in a competitive market. The alternative is to rent out the land at Sh5,000 per year. It costs Sh50,000 per acre to grow a crop which takes two years.
Even assuming a very generous return on capital at 20 per cent per year, in a competitive market, and equally generous “entrepreneurial rent’ at 10 per cent of capital employed. In a competitive market, the returns to the absentee landlord would be Sh35,000. An average smallholder farmer in Meru who picks her own tea will have made at least Sh300,000 on an acre of tea.
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