Sunday, January 1, 2017

Disruptive innovation: The most viable strategy for economic development in Africa

Without question, Africa is the poorest region in the world. The chart below shows the growth of gross domestic product (GDP) per person – an imperfect but widely used measure – for Africa and the rest of the world. Not only is the rest of the world six times richer than Africa, GDP per person has grown at a faster rate. These numbers are significant because they do not simply represent the macro-economic realities that governments in African countries must manage; they also translate to the circumstances in which millions of people live their lives. The numbers translate to the additional 50 million people in Africa living in extreme poverty today than did in 1990. They translate to the millions of babies, children, and mothers that die annually because they cannot afford life-saving medication. They translate to skyrocketing unemployment which reduces the barriers to youth involvement in terroristic activities. The numbers are very significant.

Source: Human Progress retrieves data from the World Bank, OECD, Harvard University, etc. See

But perhaps of even more significance is the demographic transformation that Africa is experiencing, and will continue to experience over the next several decades. Now home to 1.1 billion people, by 2050 the United Nations estimates that Africa’s population will reach 2.48 billion; by 2100, 4.39 billion people, a majority of whom will be youth.

When the slow pace at which Africa is developing is combined with the demographic transformation, contrary to the sentiments of many optimists, the future does not look bright. But it can.

Disruptive Innovations Targeted at Non-Consumption
No country has developed in sustainably without investments in disruptive innovations. There are two types of disruptive innovations, low-end disruptive innovation and new-market disruptive innovation. I write about the new-market disruptive innovations, which are targeted at non-consumption, a circumstance where a majority of people in a society are unable to afford a particular product due to cost, time, or skill constraints. These innovations transform the existing complicated and expensive products to simple to use, more affordable products, thereby making them more accessible to a larger set of people in society, such as M-PESA, the mobile money platform in Kenya. They serve as the engine of economic development in a society.

Can Africa Spur Disruptive Innovations

It is tempting to discount the possibility of executing disruptive innovations in Africa because of the many obstacles to innovation on the continent, including poor infrastructure, the difficulty of doing business, and the very low incomes on the continent. But when these obstacles are framed as opportunities, innovators can build truly disruptive companies.

In fact, it is precisely because these obstacles exist that disruptive innovations can thrive in Africa.

Nollywood and Noodles

Nollywood, Nigeria’s film industry, has taken many in the world by storm. While Hollywood’s revenues dwarf Nollywood, it is difficult to overlook Nollywood’s impact in Nigeria. The industry, according to a UN report, is now worth approximately $5 billion, employs more than one million people, and generates around $800 million annually. Nollywood has been able to thrive precisely because it is a disruptive innovation targeted at the average Nigerian citizen unable to purchase, watch, and perhaps relate to Hollywood movies. The innovators in Nollywood have keyed into the vast non-consumption of movies in Nigeria, and Africa, and have created relevant and relatable movies that have given birth to a booming industry.

When Haresh Aswani decided to start importing Indomie Noodles into Nigeria in 1988, the decks were stacked against his company, Tolaram. Nigeria was ruled by a military government, GDP per capita was only $256, and 78% of people lived on less than $2 per day. But Aswani began importing noodles into Nigeria and since then, has built 11 factories that manufacture many of the inputs for the noodles. The company directly employs approximately 10,000 people and hundreds of thousands indirectly. A packet of Indomie Noodles costs roughly 18 cents, a product affordable by the majority of Nigerians. Tolaram has begun expansion plans into other African countries. Where many see obstacles, the company sees opportunity.

The Rebirth of an Old Idea

Investing in disruptive innovations is not a new strategy for creating prosperity. The United States, many European countries, the Four Asian Tigers, and many other rich countries followed this strategy with great success. The returns from their investments were then invested in infrastructure, education, healthcare, and in building institutions. It is tempting to spend billions of dollars on infrastructure, institution building, education, healthcare, and other development indicators that are correlated with prosperity. But a closer look at rich countries today shows that investments in disruptive innovations came first. Africa should thus follow suit.

Governments should support entrepreneurs whose business models are targeted at non-consumption. By doing this, they will inevitably create jobs for many people, as was the case with Nollywood and Indomie Noodles. This, will ultimately lead to unfettered prosperity in Africa.

Agribusiness can help to unlock the true potential of Africa

The challenges faced by small farmers are similar across the developing world – pests, diseases and climate change. Yet in Africa the challenges are even greater. If farmers are to survive at current rates (let alone grow), they need to have access to high-yielding seeds, effective fertilizers and irrigation technologies. These issues threaten the region’s ability to feed itself and make business-growth and export markets especially difficult to reach. Other factors include the rise in global food prices and export subsidies for exporters in the developed economies, which leave African farmers struggling to price competitively.
Organizations such as The International Finance Corporation (IFC) provide and mobilize capital, knowledge and long-term partnerships in agribusiness. It has provided over $25 billion in financing, mobilized investments from partners and provided advisory services across the continent. Connecting the private sector with global and regional NGO’s and the public sector is one of the most important steps. Of the $3.7 billion invested in Sub-Saharan Africa in 2015 by the IFC, $1.8 billion came from other investors.
Modernization of technologies, innovative technologies and widening access to markets is central to turning such huge sums of money into results. In Kenya, a mobile app called M-Farm allows farmers to directly send messages requesting guidance and data on crop prices. It also helps farmers to connect directly with food suppliers; thus reducing reliance on middlemen and market buyers. Cutting costs in this way can go some way to mitigating the impact of subsidized exports from the developed economies.
In Ethiopia, access to simple market knowledge has also helped small food manufacturers grow. AfricaJUICE is the first Fairtrade certified fruit juice in sub-Saharan Africa and it has been able to expand through the provision of technical expertise and understanding global markets and industry practices. This assistance came from the World Bank, alongside equity financing of $6 million.
Agribusiness is growing fast, yet the true potential is stymied by limited mechanization, fragmented markets, price controls and poor infrastructure. For a sector that contributes 25% to Africa’s overall gross domestic product (GDP) and accounts for 70% of all employment, it is an industry that presents enormous opportunities to investors.

A woman farmer who works in the maize fields on the Canhumbuca Farm in Huambo, Angola. © Anita Baumann

For policymakers and investors, one of the hurdles is knowing how to find and identify those small-scale farmers or food manufacturers that have really strong commercial potential. In Angola, this challenge has been met by the creation of a state-backed organization called Fundo Activo de Capital de Risco Angolana (FACRA). It is a public venture capital fund that supports Angolan SME’s in agribusiness and other sectors in building, innovating and expanding their existing business. It opens doors for businesses that have the potential for growth and makes it significantly easier for investors to enter the Angolan market.
Aside from providing growth opportunities and support for market-entry, organizations such as FACRA also have a role to play in helping Africa to become self-sufficient in food and become a regional exporter. With 70% of the workforce already working in the sector, Africa already benefits from having a mobilized workforce. Honing in on communities that have such strong potential is one way of helping to support economic growth.
Like so much in Africa, things have to happen from the ground up, through investing in small projects and local communities. The financial and administrative burden for such initiatives very often fall on the government but the private sector has the ability to get involved at a local level too, if it can take a long-term view and work in partnership. The introduction of world-class machinery and support for the type of infrastructure needed for rural communities to succeed are two areas where foreign investors can take a stake through public-private partnerships (PPP’s) or direct investment.
Direct investment brings with it a range of financial incentives for foreign investors. Infrastructure linking rural communities to markets is much-needed. Mechanization is also particularly important in achieving greater production and capacity and so too are storage facilities and modern irrigation and water conservation technologies. These are all areas where investors can bring capital and technical expertise to an industry sector that has enormous economic potential.
As African economies continue to work against the tide of low oil and commodity prices, there is determination regionally and on the national level to achieve diversification and economic growth within the SME sector, not only in agriculture but all burgeoning sectors.
Agribusiness is especially important because of the scale of opportunity and the important role that it plays in supporting a wider value chain, job growth and economic diversification. Now is the right time for all African stakeholders, global bodies and private investors to come together and create an environment that helps Africa to feed itself and deliver economic growth for ordinary people, national economies and investors.

How can we help smallholder farmers seize opportunities in Africa?

Agriculture is at the heart of addressing poverty in Africa.
The recent End Poverty Day activities in Africa, which focused largely on agriculture, was also a reminder of how central the sector is to ending poverty and boosting prosperity.  Indeed, the different stakeholders I work with on a daily basis—which includes African governments, development partners, civil societies, the private sector and farmers—all agree: Agriculture is important to the future of Africa.
Much more than in any other region, agriculture is a major driver of African economies, typically representing 30-40% of GDP and 65-70% of labor force. Despite the fact that Africa is the most rapidly urbanizing region, agriculture will remain the dominant sector for many years in most African countries. The poverty impact from agricultural growth is higher relative to other sectors. Agriculture is important for growth, poverty and food.

It’s true that Africa’s agricultural transformation will be a complex, multi-sectoral agenda that requires different enabling factors, from sufficient financing and the right policies to the implementation of climate-smart agriculture. It’s also true that success depends on one crucial factor: the engagement of smallholder farmers. In short, Africa’s agricultural transformation will need smallholders to succeed.

Smallholder farmers continue to dominate African agriculture although some countries--for example, Ghana, Tanzania and Zambia--are experiencing a rise of medium-scale farms of between five and 100 hectares as part of the region’s broader economic transformation. Smallholder farmers still control the largest areas for production.  They employ 70% of the work force, farm most of the land, and are home to most of the poor – so the most obvious way to make agricultural growth pro-poor is to engage with huge numbers of small farms.

However, smallholder farmers face two major challenges today. One is that they are at a major disadvantage in linking to modern value chains because of their low volumes of sales, poor market information and contacts, and limited ability to meet the high standard requirements of many high value markets. Because of their small size and reach, they are perceived to be high cost and high risk farmers by private agrodealers and financial institutions.

So how can people working in the agriculture sector support smallholder farmers?

First, there is need to provide supportive incentives and policy reforms for farmers and agribusinesses. For example, modern inputs and credit remain out of reach for many smallholders. Farmers could benefit from a package of inputs and credit. The issue of land tenure policy reform is critical. Between 10-45% of businesses describe access to land as major constraint.  There is need to build institutions that help farmers--including youth and women-- access land and engage in profitable commercial agriculture.

Work also needs to be done on scaling up investments in infrastructure and technology, particular technology that helps farmers produce more food. Neglecting to invest in agricultural research and the creation of many small, underfunded research institutions has caused setbacks that will need to be addressed. Africa also needs investments to develop agricultural education at all levels. Finally, Africa’s aging infrastructure cannot launch or sustain internationally competitive commercial agriculture without investment, especially in irrigation, roads, energy, and logistics, especially port infrastructure.

We also need to strengthen institutions to make markets work better for smallholder farmers. Some of these institutions would provide critical services such as access to finance, market intelligence, marketing and business development services—all things that the private sector currently has few incentives to provide. Finally, we need to focus on improving coordination and leveraging partnerships among the different key players including but not limited to multilateral and bilateral development finance partners, the private sector, the Consultative Group on International Agricultural Research and African national and regional institutions.

The challenges facing agriculture are great but we have reasons to be optimistic. Agriculture’s value added increased by 5.1% between 2000 and 2013. There’s no limit to what agriculture can achieve—in terms of feeding Africa, creating jobs, and helping to end poverty and boost prosperity. We have to work hard to make sure that smallholder farmers will be part of the work to meet Africa’s growing food and beverage markets –which are expected to top $1 trillion in value by 2030.

Thursday, May 19, 2016

Continuous geometric growth in a finite biosphere is impossible

Continuous geometric growth in a finite biosphere is impossible
There is nothing quite as seductive as extrapolation.  I remember when I was in junior high study hall, we budding gearheads would sit around making "calculations" such as "if you can get a car to go 80 Kph with 150 horsepower, you should be able to go 320 Kph with 600 horsepower." And while this childish foolishness was wrong for dozens of sound reason, it was certainly no worse than the typical budget, growth, or profit calculations one finds in daily newspapers or teevee newscasts.

Geometric extrapolation is even worse.  It is probably the most commonly practiced form of utter insanity. For how long have we known this is crazy?  The Sumerians taught us about the S-curve at least 4000 years ago.  The S-curve is based on the historical experience of producing things--whether corn or iPhones.

Michael Hudson on the humans who knew better
Hudson says that – in every country and throughout history – debt always grows exponentially, while the economy always grows as an S-curve.
Moreover, Hudson says that the ancient Sumerians and Babylonians knew that debts had to be periodically forgiven, because the amount of debts will always surpass the size of the real economy.
For example, Hudson noted in 2004:
Mesopotamian economic thought c. 2000 BC rested on a more realistic mathematical foundation than does today’s orthodoxy. At least the Babylonians appear to have recognized that over time the debt overhead became more and more intrusive as it tended to exceed the ability to pay, culminating in a concentration of property ownership in the hands of creditors.
Babylonians recognized that while debts grew exponentially, the rest of the economy (what today is called the “real” economy) grows less rapidly. Today’s economists have not come to terms with this problem with such clarity. Instead of a conceptual view that calls for a strong ruler or state to maintain equity and to restore economic balance when it is disturbed, today’s general equilibrium models reflect the play of supply and demand in debt-free economies that do not tend to polarize or to generate other structural problems.
And Hudson wrote last year:
Every economist who has looked at the mathematics of compound interest has pointed out that in the end, debts cannot be paid. Every rate of interest can be viewed in terms of the time that it takes for a debt to double. At 5%, a debt doubles in 14½ years; at 7 percent, in 10 years; at 10 percent, in 7 years. As early as 2000 BC in Babylonia, scribal accountants were trained to calculate how loans principal doubled in five years at the then-current equivalent of 20% annually (1/60th per month for 60 months). “How long does it take a debt to multiply 64 times?” a student exercise asked. The answer is, 30 years – 6 doubling times.
No economy ever has been able to keep on doubling on a steady basis. Debts grow by purely mathematical principles, but “real” economies taper off in S-curves. This too was known in Babylonia, whose economic models calculated the growth of herds, which normally taper off. A major reason why national economic growth slows in today’s economies is that more and more income must be paid to carry the debt burden that mounts up. By leaving less revenue available for direct investment in capital formation and to fuel rising living standards, interest payments end up plunging economies into recession. For the past century or so, it usually has taken 18 years for the typical real estate cycle to run its course.
As I have previously pointed out, our modern fractional reserve banking system is really a debt-creation system, which is guaranteed to create more and more debts. The modern banking system is therefore exacerbating the debt growth problem which countries have suffered for thousands of years.
Hudson calls for a debt jubilee, and points out that periodic debt jubilees were a normal part of the Sumerian, Babylonian and ancient Jewish cultures. Economist Steve Keen and economic writer Ambrose Evans-Pritchard also call for a debt jubilee.
If a debt jubilee is not voluntarily granted, people may very well repudiate their debts.

It is important to understand the reasons why geometric extrapolation is ultimately impossible because those assumptions are built into almost every newscast, financial arrangement, political planning, etc.  It would be a rare days anymore when the subject is implicitly brought up at least ten times.

At this link, you can find 23 different charts showing historic geometric growth of human activity--which is why all of them are destined to crash in the very near future.
The human economic growth story is incredible. Population increased exponentially, as did global wealth, factory output and other measures of development.
But the flip side is the steady exhaustion of resources and destruction of the environment. As growth continues, planetary tensions will increase too. This is why we're running into peak everything.

Real Economics are best Described by Evolutionary Theory

In 1859, Charles Darwin would publish his seminal work entitled "On the Origin of Species by Means of Natural Selection, or the Preservation of Favoured Races in the Struggle for Life."  This work would set off controversies that resound to this day.

Before Darwin, the generally accepted idea was that the world was the way it was because that is how the Creator wanted it.  The majority of intellectual speculation, whether of a scientific, philosophical, or religious nature, assumed that the goal in life was to discover those divine rules that ordered a fixed universe.  After Darwin, while folks still sought to discover the natural laws with universal applications, the focus shifted to describing the mechanisms of change.

No wonder Darwin is often considered the most disruptive thinker in history.

Taking Darwin out of the biology context is a hazardous occupation.  The ugliest of the non-biological manifestation of Darwin's theories is often called "
Social Darwinism."  Perhaps the most famous social Darwinist in USA was the 19th century chairman of Political Economy at Yale by the name of William Graham Sumner.  His most famous student was a kid from Minnesota named Thorstein Veblen.

Veblen was influenced by Sumner--though not in ways usually expected.  Veblen thought Social Darwinism was a monstrous error and devoted much of his life's work to debunking Sumner's teachings.  This did not mean Veblen rejected the theories of evolution.  Far from it.  In 1898, even before his first book was published, Veblen wrote an incredibly important paper entitled “Why is Economics Not an Evolutionary Science”.

Suddenly, the extant economics looked as static and ridged as any holy book.  Veblen would go on to write a body of work that would described "economic man" as a dynamic actor with complex motives who was constantly evolving.  Veblen is usually considered one of the fathers of a discipline called evolutionary economics.  Wikipedia defines this speciality thus:

Evolutionary economics is part of mainstream economics as well as heterodox school of economic thought that is inspired by evolutionary biology. It stresses complex interdependencies, competition, growth, structural change, and resource constraints but differs in the approaches which are used to analyze these phenomena.
Evolutionary economics deals with the study of processes that transform economy for firms, institutions, industries, employment, production, trade and growth within, through the actions of diverse agents from experience and interactions, using evolutionary methodology.
Evolutionary economics is validated by the existence of something that can only be called evolutionary industry.  Toyota imported evolutionary concepts into their system of quality control and called it Kaizen (continuous improvement).  The results were stunning--Toyota so revolutionized quality control they were able to leverage this reputation into their present status as world's largest automaker.

Why this is important

Evolutionary economics, especially in its heterodox manifestations, is hands down the best ways to understand and describe the complexity of the real world.  Typical non-evolutionary economic statements like

The market is always rational
A corporation exists only to maximize the return to the shareholders
Free Trade will bring generalized prosperity

are wrong because they are as static and ridged as any theological statement they so resemble.  This blog rejects static economics--mostly because dynamic descriptions of economic behavior are far more accurate.

Evolutionary industry is important because if we ever produce one, the green sustainable society will happen one tiny little improvement at a time.  And the folks MOST likely to create those new green bits and pieces are those most industrially evolved already.

Tuesday, April 26, 2016

Corruption; the Necessary evil.

I learnt of the term necessary evil way back in high school in a biology exam; in fact my biology teacher had to crack its meaning; I could not decipher its meaning even after series of  drilling by the biology teacher and numerous group  discussions ; till weeks later I understood what necessary evil is. To those who subscribe to the Christian mythology, I likened it to Judas Iscariot who sold Jesus to the Pontius army for a mere 30 bob; which such one evil act he ushered in the necessary Christian covenant with God. In one of our many sister schools, there was a sewage treatment plant that processes raw sewage to fertilizer. This essential product was given to the locals who made booming harvests from their corn and tuber fields. Instead of sugar factories in western Kenya of complaining of low quality cane from farmers, they can produce more ethanol.  I also learnt chicken droppings are a good supplement for dairy herd and fish.
To the Kenyan citizenry, I believe corruption is a necessary evil; I laud the national government on being keen to devolve this resource though not provided for in the 2010 constitution. It functions seamlessly in the context of a closed economy, where the only leakage from the circular flow of income is through inflated Government purchases and money laundering. Among the additional factors of production is an amorphous factor called corruption; its nebular nature allows it to disrupt the normal market demand-supply rules and inject the essential entrepreneurial impetus in a nascent economy.  To realize the full benefits there should be no capital flight inform of overseas bank account ; such proceeds of bleeding the government coffers should be invested loco and sustainably. The cost of capital is nil and as such to ensure the macroeconomic indicators such as inflation remain stable, the cost of capital will be some flashy lifestyles and hangers on; this has a larger multiplier effect than interest paid to the banks since in reaches a wider population.

The only check needed here is to ensure corruption doesn’t gnaw into capital inflows, FDI and Chinese neocolonialism. The proceeds of corruption needs to be reinvested back into the economy, in productive tested sectors like real estate, security/bonds markets. This will create employment of labor and capital.
Assuming the national government budget of KeS 1 trillion; 40% goes to administration. The balance 600billion is spent on supplies and development; 40% of this is sucked into corrupt pockets of dealers and tenderprenuers. If the kes240b is put into economically feasible and sustainable investments, the impact would be bravura. I have watched satellite towns grow out of this money; the purchasing power of the local grow multifold improving their lifestyles and life expectancy thus inching closer to Sustainable development goals. In laissez fairre economy, the government has no role in business; it’s the role is to provide enabling factors. In a highly taxed society, the violation of taxation principle of “no direct quid pro quo’ can only be achieved through bleeding the overbearing Caesar. It’s through corruption that the public funds with no accountability land into the hands of entrepreneurs eager to impact their lives and those of their communities. The impact is more direct and wide than the much hyped Kenyan Economics stimulus program during the 2008 global economic downturn. I have always believed, any sound mind being given an opportunity, the potential in them comes to fore. At the county level ordinary latrine masons and Mr. Fixit have matured to contractors doing office blocks and refurbishments; cyber café attendants have turned into IT consultants opening Facebook accounts for county bosses.; the Juakali artisans hatched by former President Moi can fabricate mkokotenis (hand drawn carts) and gates worth millions. This is must be the eighth wonder of the world. What do we need to see to believe we are global trendsetters?
The antidote we offer for corruption appreciates that the vice is here to stay; the so called independent institutions like EACC, Judiciary, Asset Recovery Agency, Prisons, parliamentary oversight committees et al ,  only serve the already corrupt but none seeks to address the mindset, the moral grounding and aspirations of the corrupt or aspiring. It’s inherent in the human nature to circumvent the rules, thus as in the Garden of Eden, we are evil. Then how can we turn this evil into a force to reckon with? The transpiration in kingdom plantae if prolonged it can kill the same plant it meant to serve. The stomata apertures serves as the control mechanism. With the assumption of a rational imp, is corruption bleeding the Caesar unsustainably?  I believe not.
Deciduous trees shed their leaves in periods of prolonged sunshine thus no loss of life sustaining sap substrate. What triggers this shedding of leaves and ultimately loss of the stomata? Are the stomata, the antidote ineffective? Does this lost water condition the environment? Well, if human beings, thus Kenyans, are intrinsically evil, then we only need to rope in the essential component of necessity and this corruption will serve us all well. Drawing further from the analogy of the plant, the trunk and the branches can shake off the leaves and the public coffers suffer no more hemorrhage; or the leaves, the Kenyan citizens must fall off the branches. But is this feasible in a free market economy? Is this pragmatic enough in face of inefficient government agencies? Can we trust the government to create wealth for all? We must embrace the necessary evil or perish.
ngubia emoji.

Monday, September 21, 2015

Quit sugar for small holder banana economy...

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.
Of course the two are not directly comparable. The tea earnings include returns to labour (about 50 per cent), which for the telephone farmer is a cost. Half of the balance is the quality premium. Once direct costs such as fertilizers are taken care of, the returns per acre become comparable to the sugarcane growing absentee landlord. And that is precisely the point. The purpose of smallholder cash crop farming is to provide them with profitable self-employment—to make them small capitalists, not slaves of capital.
Business model.
The architects of Kenya’s smallholder tea industry were remarkably clever and foresighted. In the 60s, state ownership of enterprises was in vogue. They went against the grain and chose outgrower owned, private sector managed enterprises.
The State, through the Kenya Tea Development Authority (KTDA), guaranteed loans to the factories which were repaid by deductions from farmers earnings. The factories were managed by the multinational tea plantation companies on contract and progressively replaced by the KTDA as local capacity was developed.
This is why the privatization of the industry did not entail sale of assets. The farmers had financed the assets. The State had simply been a facilitator and custodian.
The sugar industry took the State- ownership route. The one exception to some extent was Mumias which was a joint venture between the government and Booker Tate, a multinational sugar company, which managed the company until it was privatized and management localized. The rest is history.
Privatization is not a solution. As noted, the contribution of sugarcane to the value of sugar is comparatively little. Most of the value is created at milling, which is capital intensive. Sugarcane today is politically priced at well above its economic value.
The cost is paid by consumers twice, directly through high prices, and indirectly as taxpayers through bailouts. Private millers will have no business paying for cane more than its economic value.
There is no business model I can think of where, in a regionally integrated competitive market, sugarcane would emerge as the best alternative for western Kenya’s smallholder farmers. The only one with a fighting chance is if the government gives the farmers the mills, debt free, but this entails a huge assumption—that the farmers would run the mills efficiently. Doubtful.
One of the arguments forwarded against the Uganda deal by among others, my good friends Prof Anyang Nyong’o and Dr Mukhisa Kituyi, is Uganda does not have a sugar surplus and the deal will be a conduit for barons to bring in sugar from farther afield. I don’t disagree that mischief could be afoot, but the surpluses argument should not arise.
The EAC Common Market Protocol was signed in November 2009. It became effective on July 1 2010, with a five-year transition period which ended on June 30 this year. The EAC is now legally a single market. In a single market, you produce where it is cheapest and sell where it is most profitable. The Ugandan millers are not obliged to satisfy the Ugandan market first before selling in Kenya or any of the other EAC countries for that matter.
They are not demanding market access because they have a surplus, but because the Kenyan market is more profitable. They are entitled to our market. Moreover, you don’t produce a surplus and then look for a market. You find a market and then produce for it.
We may be able to stave off external competition for a while, but the bell has tolled for western Kenya’s sugar industry. The Kerio Valley Development Authority (KVDA) estimates that it can grow sugarcane on large scale at a quarter of the western Kenya cost in the Turkwell basin. Tana River County can put more land under large scale irrigated sugarcane than the entire western Kenya sugar belt with plenty to spare. The Ugandan millers or other investors could, and probably will, invest in large scale production here. Are we going to stop them?
What are the alternatives for western Kenya? There is no shortage of them, and at any rate, the lesson the region should learn from sugarcane is that mono-cropping is a bad idea. As I hope I have demonstrated, the alternatives should be evaluated on two criteria. The first is that it is labour intensive, meaning, it enables the farmers to employ themselves.
The second is that the farmer accounts for a high percentage of the end value of the product. A good example is, lo and behold, milk! Dairying is labour intensive, cows (or goats) must be fed and milked every day. Second, milk comes from the cow ready to drink.
That is as high a percentage of end value as you are likely to get. Processing i.e. pasteurizing and packaging fresh milk does not add value to milk per se, it simply improves the logistics of getting it to a mass market.
Most Kenyans in fact prefer their milk straight from the cow. As it happens, there is a technology, the “milk ATMS”, which is making it possible for farmers and consumers to cut out the processors from the value chain.
The milk ATMS have taken the market by storm, in the US and Europe as well. It is a good example of a highly disruptive technology. In the US, the milk processor lobby has secured bans in several states.
The informal market controls 80% of the Kenyan milk market; may the guys who sell chopped sugar cane may soon have a dominant share....