An economic analysis of Kenya's sugar industry with special reference to the self- sufficiency production policy

Abstract

The objectives of the study included: (i) determination of demand and supply functions for sugar and assessment of the structure and general behaviour of the sugar industry; (ii) evaluation of the performance of the sugar industry in relation to the self-sufficiency policy; (iii) prediction of future developments of the sugar industry in relation to the self-sufficiency policy; and (iv) formulation of market improvement proposals that could find useful applications in the sugar industry. These objectives are stated in relation to Kenya's sugar industry. Relevant data were obtained and analysed using relevant analytic models and statistical procedures. The hypotheses based on the stated objectives were then tested. The results of these hypothesis tests in relation to Kenya's sugar industry were: (i) Changes in cane and sugar prices have a significant impact on cane and sugar production; (ii) Increases in the prices of competitive products, especially with regard to maize prices, have an adverse effect on cane and sugar production; (iii) Changes in the level of sugar price and national disposable income have a significant impact on sugar consumption; (iv) Domestic price of sugar is positively correlated to the world market price of sugar; (v) The lag in adjusting cane and sugar production to desired levels following changes in cane and sugar prices is statistically significant; (vi) The Government policy has not been effective in relation to achieving the self-sufficiency goal within the 1966-1976 target period; (vii) Kenya is likely to become self-sufficient in sugar during the next decade. The performance of the sugar industry is thus found to be unsatisfactory from the self-sufficiency norm, although the performance is considered to be satisfactory from the (i) stability of prices, employment and output, and (ii) labour relations criteria. An important conclusion of the study is the fact that both production and consumption of sugar are sensitive to economic factors. Price and income elasticities are found to be low, although the results are comparable to those obtained from studies on sugar industries in other parts of the world. Therefore, the use of a sugar pricing policy to influence production and consumption in order to achieve a self-sufficiency status would likely lead to a high consumer price and take a relatively long time to achieve its objectives. Such a policy is considered socially inequitable. This study recommends an alternative sugar policy that is likely to lead to self-sufficiency while maintaining a sugar price that is considered more socially equitable. The recommendations involve (i) the indexation of the current domestic sugar price to the fluctuations in the world market price of sugar, and (ii) the operation of a price-support fund from which the Government is to subsidize domestic sugar production only when the average production cost exceeds the indexed domestic sugar price. These recommendations are considered equitable in the sense that they do not disrupt the established production pattern, yet they result in a fair price to consumers because there is no longer a need to increase the sugar price just for the sake of giving a price incentive to producers.