protectionism

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

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Is Industrialisation the answer to Kenya’s Economic Problems?

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This article first appeared in my weekly column with Business Daily on Apri1 19, 2015

Industrialisation is often touted as the answer to development in Kenya and Africa as a whole. Industrialisation here refers to the process in which a country transforms itself from a society based on primarily agricultural and natural resource extraction into one based on manufacturing of goods.

There is already indication that the government is grappling with the issue of industrialisation as seen in a proposal, made a few weeks ago, to end the importation of second-hand clothes and vehicles. The argument is that imports should be curtailed in order to foster industrialisation in the East African Community (EAC).

This is import-substitution industrialisation, which is essentially a trade and economic policy which advocates replacing foreign imports with domestic production premised on the notion that the region should attempt to reduce its foreign dependency through local production of industrialised products.

17148876-abstract-word-cloud-for-import-substitution-industrialization-with-related-tags-and-termsThis has been a dominant theme in development economics targeting mass poverty and increasing productivity within a given country or region. It is an inward-looking economic theory focused on bringing developing countries into the prosperity of industrialised nations.In all fairness, this position makes sense in some ways; the intention of ushering in development and self-sufficiency by moving beyond agriculture and natural resource extraction through subsidising vital industries is laudable.

As it stands, non-industrialised countries such as Kenya are dependent on industrialised ones because they have no alternative but to buy manufactured goods which lead to a vicious cycle. Further, industrialisation can be a useful link between rural and urban areas where the outputs of one feeds into the inputs of the other. Successful industrialisation also relies on efficient and functional transport and communications systems. Industrialisation can also lead to creation of better links between rural and urban areas as well as improve transport and communications.

It can also improve Kenya’s export profile, which is a trade deficit country. Indeed, Kenya recorded a trade deficit of Sh86,484 million in January 2015 alone. Industrialisation can also play an important role in creating products which meet domestic needs can be exported to earn forex.

trade_deficit_generic_mediumIn terms of function, industrialisation forces companies to compete with international competitors in terms of quality and price. At the moment EAC governments are seeking to facilitate industrialisation by banning imports of second-hand goods. The upside to this is that it allows new industries the time and space to get their formula right. Yet a ban on imports means that inefficiencies and sub-standard goods will be allowed to flourish, limiting choice and forcing consumers to buy expensive goods of potentially low quality.

Not only is this against the poor but it can also lead to industrialisation supported by protectionist government policy which can cultivate a culture of mediocrity. Industrialisation also poses additional challenges such as whether Kenya has the following: a variety of raw materials to produce finished goods, a constant supply of affordable energy, a large number of engineers, a dependable supply of both skilled and unskilled workers as well as capital goods and money for investment.

Further, the creation of by-products and waste has to be carefully managed to avoid chronic, dangerous pollution from becoming the norm. As Kenya eyes industrialisation as a catalyst for economic development, a cost-benefit analysis must be done to determine how it can be structured to spur sustainable development.

Ms Were is a development economist. anzetsew@gmail.com, twitter: @anzetse