Imports

Use imports to develop domestic manufacturing

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This article first appeared in my weekly column with the Business Daily on August 6, 2017

Kenya is an import economy; we import just about everything from garlic and oranges to construction materials and heavy industrial machinery. The general view, which I largely accept, is that an import economy constrains economic growth and development due to several reasons. The first is that, an import economy dampens the ability of local manufacturing to meet the needs of the local market; instead foreign nations meet the country’s needs. As a result, imports lock out local manufacturers from benefitting from domestic demand. Secondly an import economy essentially creates a situation where domestic demand generates jobs and income for foreign countries. As a result, local job creation is muted because the market has been captured by foreign entities.

That said, since Kenya is an import economy it is important to find means through which the situation can be leveraged for economic growth as there are some benefits to the status quo. The first is that an import economy creates market capture that can be exploited by domestic industry. In being an import economy, it is clear which products Kenyans buy and the related market size for each product type can be easily estimated. This provides a basis on which government can launch effective import-substitution strategies as there is a sure bet market to which local industry can sell if their goods are of similar use, quality and value.

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(source: http://www.canada-usblog.com/files/2016/01/Import.jpg)

Secondly, innovation is garnered through imports. As an import economy, the country gets a clear sense of the new ideas as well as the standards and features that sell in domestic, regional and international markets. When a Kenyan buys a snack made in Italy, it provides local snack manufacturers an opportunity to see the quality of snacks that garner an international market. Thus imports provide a source of innovation and standards that can be emulated by local manufacturers.

Thirdly, because an import economy is flooded with products from around the world, it provides an opportunity to create export-oriented manufacturing where local manufacturers learn about what products sell regionally or internationally. Thus imports provide the foundation for creating a manufacturing sector that is export-oriented. Through learning about standards and innovation in the point elucidated above, local manufactures have a clear idea of what sells on the international market. Thus, through the analysis of imports, government can determine priority industries in the country and track imports in those industries to get a clear idea of what type and quality of product can be the foundation for the  country’s on own export push for manufactured products.

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(source: https://www.incimages.com/uploaded_files/image/970×450/manufacturing_pano_18867.jpg)

Thus imports can be leveraged for both import-substitution AND export- orientation strategies; the two are not mutually exclusive. However, the negative effect of imports can only be mitigated if there is deliberate effort both from government and manufacturers to exploit the gains that imports provide. In doing so, Kenya can transition from being a country reliant on imports to one where local manufacturers regain domestic market share and also build export capacity and sales.

Anzetse Were is a development economist; anzetsew@gmail.com

This is what’s missing in the Uganda sugar row

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This article first appeared in my weekly column with the Business  Daily on August 23, 2015-

The headlines have been full of the sugar row unfolding across Kenya. Why is Kenya importing sugar from Uganda? Should the sugar industry be protected? What about the livelihood of sugar farmers? Sadly this issue has been politicised and muddied what the focus of the conversation ought to be. So let’s deal with a few issues.

Firstly, should Kenya be importing sugar from Uganda? Well, Uganda produces about 465,000 tonnes of sugar consumes 320,000 tonnes, leaving it with a 145,000-tonne surplus. Kenya produces 650,000 tonnes of sugar against a demand of 860,000 tonnes, leaving a 210,000-tonne deficit. So even if Kenya imported all of the excess sugar from Uganda, we would still have a deficit. Some sugar farmers are of the view that no imports should be allowed, but clearly that is not practical.

(source: http://naibuzz.com/wp-content/uploads/2015/08/lugazi-sugar.jpg)

On the issue of the pricing of sugar from Uganda, according to the Departmental Committee on Agriculture, Livestock And Co-Operatives (DCALC) the average cost of producing a ton of sugar in Kenya is USD 870, compared to USD 350 in Malawi; USD 400 in Zambia and USD 300 in Brazil. The Kenya Sugar Board puts sugar production costs in Uganda at USD 180 a tonne. So yes it is true that Ugandan sugar is cheaper than Kenya’s but so is sugar from anywhere else it seems. But one has to ask, if this is a negative reality. The truth of the matter is that 45% of Kenyans live at or below the poverty line. Why should the poor pay more money for sugar because Kenya’s sugar industry is uncompetitive? Why should the sugar industry expect the poor to pay for its inefficiencies?

That said, government seems set on protecting the sugar industry. Duty on imported sugar was more than doubled to protect local production from cheaper imports. Sugar importers are charged Sh44.75 per kilogramme, up from Sh19.40. Of course some economists are of the view that this should not be happening because in raising duty, the government is enabling the continued survival of a sector that is inefficient, unproductive and uncompetitive; but protection of the industry continues.

(source: http://prudentpress.com/wp-content/uploads/protectionism.gif)

The other side of the coin however is the reality is that there are thousands of farmers and millions of households who rely on sugar for income. Indeed, according to the DCALC the sugar industry in Kenya directly and/or indirectly supports six million Kenyans and has a major impact on the economies of Western Kenya and Nyanza regions and, to a lesser extent, Rift Valley. So the reality is that any factor that is perceived to be a threat to these households will cause acrimony.

However the industry is beset with issues; according to the IEA, these include poor cane husbandry practices lead to low yields and the use of poor seed variety which results in low sucrose content and late maturity. Other factors include expensive inputs and agricultural equipment, lack of credit facilities for small growers (which dominate the sector; of the 300,000 cane farmers only 4,500 are large scale), the lack of irrigation facilities and poor infrastructure. Further modern technology is often not used although it would decrease the cost of production.

(source: http://www.africanfarming.net/images/Kenya_Africa_sugarcane_corruption.jpg)

But this brings in the broader question of whether the sugar belt in Kenya should be dominated by sugar farming. Are there other crops that can be farmed there that help address Kenya’s food security issues as well as yield more profit for farmers? This should be a core part of the conversation because sugar has not appeared to have made a noticeable impact on improving the lives of residents of the sugar belt.

Additionally, and this is the part Kenyans seem to enjoy addressing the most, there is the issue of sugar smuggling. The Kenya Sugar Board clearly has weak surveillance capacity and thus cannot effectively handle the issue of sugar smuggling along Kenya’s porous borders particularly in Eastern and North Eastern. Cases abound of business people repackaging imported sugar and selling it as locally manufactured sugar. This allows them to enjoy massive profit margins while glutting the sugar market and thus placing downward pressure on the price cane farmers earn for their crop. So a key element of this conversation is finding out who is doing the smuggling and how they can be stopped. Accusations and counter-accusations are of no use here.

But also bear in mind that there are irregularities within the sugar industry as well; between 2006-2012 a sugar company is said to have exported unknown quantity of sugar to the Democratic Republic of Congo, Ethiopia, Rwanda, Southern Sudan, Uganda Italy and the UK. Why did this happen when Kenya suffers from a sugar deficit?

This article has not exhausted all the angles that need to be considered in the sugar row but clearly there are numerous issues that ought to be addressed. And frankly, most of them are internal to Kenya. So Kenyans should not target their hostility at Ugandan sugar but rather use this issue to take time for self-reflection and look at the role Kenya itself plays in creating the problem in the first place.

Anzetse Were is a development economist; email: anzetsew@gmail.com, twitter: @anzetse