The Economics of a Pound a Morsel

A story is told of a young girl, of about five who loved her pearls. They were fake childish pearls but she held onto them, aggressively so when her dad requested of those pearls. Finally, to the insistence of her father more than anything else, she finally handed him her pearls in tears. In exchange, he gave her real smoldering new pearls. “Sometimes,” he told her, “we give up what we have to get something better than we have ever conceived.” Herein, in this tale, lies an economic lesson greater than we would ever perceive.

It is without a doubt that the Kenyan economy has recently been staggered by the inconsistent foul cries that have embattled the sugar industry. I would like to begin by saying that a mere child’s play research has led me to uncover the fact that the Sugar Industries’ problems did not begin yesterday as we may be led to believe. The battles that we witness today are not novel and the cries that graze our ears are not unheard of.

Screenshot_2015-08-21-17-17-20~01

(A screen shot from a report on the Hansard in the 1990s)



Screenshot_2015-08-21-17-11-04~01(A screen shot from the Hansard from the 1980s)

The debate that rages is unfortunately not a political debate. It ought to be seen for what it really is. It is an economic debate and unfortunately, both sides are waging uninformed attacks on either side. I always wonder, in such moments, such rare much needed economists-stamping-their-authority kind of moments, why economists choose to duck their tails between their legs and watch the cauldron of insanity instantaneously tip. This is a Kenyan phenomenon I will never understand.

The Sugar industry sustains about 250,000 smallholder families, not 60,000 as the media has been reporting. It also sustains about 25% of the population, which depends either directly or indirectly on the sugar industry and contributes about 15% to the country’s GDP with Mumias accounting for almost half of the country’s produce according to a report released by Monitoring African Food and Agricultural Project, implemented by Food and Agriculture Organisation.

In 2014, the Kenya Sugar Directorate said that Kenya had produced about 591,658 tons of sugar, occasioning a 1.4 percent drop from a record harvest of 600,179 tons in 2013. 600,000 tons is about as good as it gets and this is good, comparing it to produce from other countries. However, the truth is that, despite the quantity, Kenya has a demand for about 800,000 tons of sugar of whose deficit the government meets by importing sugar from other countries. The reason for this is because, in Kenya, the cost of production for a ton is about $570 while in other countries, the cost of production is at about $240 to $290. These high costs of production mean that the government has to inject more money into Sugar producing industries to lessen the burden on the common consumer in the form of indirect subsidies. Moreover, it is the industry’s highest stakeholder.

Anyone familiar with street economics knows of the Production Possibilities Frontier Curve on which capitalistic modern economies derive their lifeblood from. The theory is simple. If a primordial economy produces one product in the beginning and it wishes to introduce another, it will have to spend and take resources from the primary product to be able to produce the second. As it does this, the cost of producing the second is outweighed by the benefit, as the resources taken from the first product are merely the excesses. However, as time rages on in the production of the second, the resources taken from the first are better and hence, a point will reach when the cost is greater than the benefit. The production possibilities frontier happens when a balance is strikes and each economy is operating at maximum efficiency. Where the Cost= the Benefit.

This may seem simple but Kenya is not a primordial economy. Our PPF curves may not be operating at maximum efficiency but the Sugar Industry at this point and for a long time has been supping on resources that could be used to develop other industries and improve more lives. Billions spent on the deathbed of the Sugar millers take away millions to be spent on other things such as free or affordable education. Hence, there are only two questions. Is the benefit derived from local sugar production greater than the cost of sustaining the industry?

The cost of production to satisfy Kenya’s demand amounts to about to about 480,000,000 million dollars. The cost of importation of 800,000 tons is about 240,000,000 dollars. The cost of production at this point without satisfying the demand at hand is about 300,000,000 dollars. The additional cost of importing the rest is about 60,000,000 dollars. This is still greater than the cost of importing raw sugar in total with about 120,000,000 dollars. The decision to spend money resuscitating the industries takes away about 120,000,000 dollars, which could be worth about 120,000 student lives.

This seems like a cold-hearted approach, where numbers are used to negate the benefit shared by 250,000 families that depend on sugar directly or indirectly. However, the decision is not to weaken the sugar industry by exports, but to improve it in a way that will allow it to thrive in future. To allow importation of sugar for a while will save us more than 120,000,000 dollars that we can invest in training of farmers to adopt new, more effective technologies that will allow the production of more tons of sugar, (24,000) a day for the sustenance of the population and the improvement of the mills. Alternatively, it could allow the farmers to invest in other kinds of crops. The areas used to grow sugar are highly fertile and could be more productive for other kinds of crops. Farmers would be better off if weaned off sugar.  Whatever the resolve, the money saved should be reused for the sake of the community deprived of their income, for purposes of training them to better adopt to the shifting gears of development.

A model of lowering tarrifs for the purpose of lessening the burden on individual consumers could be adopted to allow importation. With strengthening of the industry, the government could increase tarrifs progressively to allow for local produce easier penetration into the market.

There is a sort of closed-minded business like approach to this. Economies are open-ended and to bring in a mind fed in closed loops is not beneficial to growth and expansion of production possibilities. We ought to stop bickering and look at this as an opportunity to develop a stronger much grounded economy. Maybe, it is time we handed down these fake crystals for the sake of greater pearls.

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