Working paper 2a - Evolution of Kenya’s Maize Marketing Systems in the Post-Liberalization Era

Abstract

Farm-level income and productivity growth throughout history has been intimately tied to productivity growth in marketing systems (North 1985). Abundant worldwide evidence has shown that the incentives and ability of farmers to make investments in productivity-enhancing inputs and production methods depends on reducing the transaction costs and risks of exchange across inputs, credit, and output. Throughout the world, the major share of staple food costs to the consumer is typically accounted for by marketing costs. In most countries in eastern and southern Africa, maize marketing costs account for about 40% to 60% of the total retail price of maize meal paid by consumers. The reduction of these costs represents a major opportunity to improve farm production incentives and simultaneously make food more affordable to lowincome consumers.

It is with this objective that since the early 1980s, donors and international lending agencies have promoted the reform of agricultural marketing in southern and eastern Africa as a central component of the Structural Adjustment Programs (SAPs) in Africa. The basic theory underlying donor advocacy of market reforms was neatly summarized by Barrett and Carter (1994): “Once governments free market channels and prices, private merchants will automatically bid up formerly depressed agricultural prices. By virtue of a positive price elasticity of supply, higher prices induce greater production, which further stimulates demand for purchased inputs, including hired labor.

Larger agricultural incomes were expected to have significant multiplier effects due to the relatively high marginal propensity to consume for the poor farmers. Thus a liberalized agricultural sector was expected to propagate prosperity across all sectors of the economy in a distributionally progressive manner.” In Kenya, maize market reform began around the same time as other countries in the region when it embarked on the Cereal Sector Reform Program in 1987/88. The European Union supported the program as part of the country’s overarching structural adjustment policies.

The reform process intensified in the early 1990s when, under pressure from international lenders, the government eliminated movement and price controls on maize trading, deregulated maize and maize meal prices, and eliminated direct subsidies on maize sold to registered millers (Jayne and Kodhek 1997). Maize and maize meal prices, which prior to policy change were set at pan-seasonal and pan-territorial levels, were deregulated. Private traders were allowed to transport maize across districts without any hindrance.

Prior to this policy change, they were required to acquire movement permit for varying quantities of maize that was to be transported. The government still participates in markets, albeit on a more limited scale. For the first time in several years, the NCPB in 1999 purchased about 72,000 tons of domestically produced maize as part of a governmental decision to stabilize maize prices.

The reform process was expected to reduce costs in the maize marketing system by encouraging more private sector participation in the market. In practice, the reform process has been slow and marked with a series of advances and reversals regarding the amount of freedom the private sector was to be permitted in maize marketing. Uncertain policy environment and frequent government interventions such as trade controls on maize imports and exports through use of tariffs and bans also affected the extent of cereal market reform and the response by the private sector.

For example, in 1994, the government introduced a variable import duty following substantial imports by the private that have been blamed for a slump in the price of domestically produced maize. The reluctance on the part of the government to refrain from controlling prices through policy tools such as tariffs and trade bans emanated from the perception that liberalization would expose maize producers and consumers to predatory practices of private traders (Kodhek et al., 1993).

Further reluctance stemmed from the concern that maize meal prices would no longer be controlled in an unregulated market which, especially in a drought year could adversely affect household food security (Pinckney, 1988). It was also feared that removal of food subsidies would hurt poor consumers by jeopardizing their access to food.

Unfortunately, and despite the fact that the liberalization process is 5-10 years old, discussions of grain marketing policy in the post-liberalization period have often taken place in an information vacuum. There is very little up-to-date empirical knowledge of the market structure, the behavior of the various actors in the marketing system, and the constraints they face that impede further innovation and productivity growth in the food system. As a result, policy debates about market reform are often based on conventional wisdom and notions about how the system is operating.

Some critics of the system point to an apparent lack of private sector response to liberalization, and continue to interpret their behavior as collusive and exploitative. In other cases, the government’s behavior in the maize marketing system is blamed for dampening the private sector’s response to liberalization. The purpose of this study is to shed some empirical light on the operation of Kenya’s grain marketing system in the post-liberalization period.

It identifies the major constraints on market participants that influence its performance and formulates strategies that could be used by governments and the private sector to promote the development of the evolving market oriented food systems.