Measuring Impacts of Cross-border Trade in Food Staples on Household Welfare in East Africa

Paper size: A4, character: Times New Roman, all margins cm Measuring Impacts of Cross-border Trade in Food Staples on Household Welfare in East Africa Paul Guthiga, International Livestock Research Institute (ILRI), Regional Strategic Analysis and Knowledge Support System (ReSAKKS-ECA), p.guthiga@cgiar.org Maurice Ogada, ILRI, ReSAKSS-ECA, m.ogada@cgiar.org Joseph Karugia, ILRI, ReSAKSS-ECA, j.karugia@cgiair.org Stephen Wambugu, Kenyatta University, Agribusiness and Trade, kwambugu12@yahoo.com Stella Massawe, ILRI, ReSAKSS-ECA, s.massawe@cgiar.org ABSTRACT Cross-border trade in food staples among the East African countries is mutually beneficial for achieving food security and improving household welfare Net exporters are expected to gain from the large regional market, while the net importers are expected to enjoy relatively more stable supply of food at fair prices In the past decade various initiatives have been implemented and intensified to make cross-border trade in food staples freer As a result the volume and value of cross-border trade in food staples has greatly increased in the region as reported in various trade statistics What remains unclear is the extent to which this increased trade has contributed to household welfare This study attempted to fill this knowledge gap The study blended qualitative and quantitative approaches to determine household welfare changes attributable to cross-border trade in food staples Qualitative approach involved focus group discussions with border communities and key informant interviews This was followed by quantitative analysis using the Demographic Health Survey (DHS) data for three East African countries DHS data is a geo-referenced multi-national, multi-year data collected with the aim creating an internationally comparable body of data on the demographic and health characteristics of populations in developing countries The data set contains information on the wealth status of the households summarized in an endogenously generated wealth index In this study, the impact of trade on welfare was measured by analysing the change in household wealth index overtime using Difference-in-Differences approach on propensity score-matched food surplus and food deficit households Results indicate that free cross-border trade in food staples is beneficial to both the producing and consuming households However, the benefits are only feasible when trade flow is uninterrupted Countries that implement periodic bans on exports disadvantage their producers, as Paper size: A4, character: Times New Roman, all margins cm much as their consumers benefit, which may in the long run discourage production The findings of the study have relevance in informing trade policies in the East African region Keywords: Cross-border trade, Household Welfare, East African region Introduction Cross-border trade in food staples among East African countries is important for achieving food security in the region The surplus food crop-producing regions benefit from widened market and better prices while the deficit regions benefit from relatively stable supply of the food staples Trade flows in food staples are driven by various factors such as comparative advantage in production, demand dynamics, and differences in growing seasons among others The observed mutual dependence on food trade among the East African countries is critical not just to achieve food security, but also to alleviate poverty and achieve rapid economic growth Through trade, food markets ensure income for farmers, sustainable and affordable supply of food for consumers, and employment opportunities for the entire economy The level of participation in trade varies among countries in the region, with Kenya being the most dominant player The country’s dominance is partly because of its better developed agriculture sector and advanced food industry It is a major processor of agricultural products; it imports large quantities of raw agricultural products and exports processed food products throughout the region Figure summarizes the major trade flow patterns of various agricultural products in the East African region Trade in food staples takes place through formal and informal channels Although the estimates vary across sources and for different products, figures for East and Southern Africa show that the value of informal, food-staple trade is almost as high as that of formal trade (see Figure 2) Pannhausen and Untied (2010) estimated that over 80% of agricultural produce and food is traded informally A study by Guthiga et al (2011) showed that the bulk of food staples traded formally across the borders into Kenya is normally destined for major urban areas which have large concentrations of consumers The study also noted that the bulk of informal trade in food staples is concentrated within areas adjacent to border crossings Figure 1: Regional flow of agricultural food commodities Paper size: A4, character: Times New Roman, all margins cm Source: Pannhausen and Untied (2010) Figure 2: Trends in intra-Eastern and Southern Africa (ESA) food staples trade 2008-2010 Sources: COMstat, UBOS, EAGC and FEWSNET Despite the benefits of freer trade in agricultural commodities, both tariff and non-tariff barriers to trade still persist, limiting the realization of the full potential of trade Some of the key barriers to trade in food staples include: export bans, complicated customs procedures, taxes, corruption, poor infrastructure, and poor flow of information among market players A study carried out by Karugia et al (2009) clearly demonstrated that non-tariff barriers are a huge impediment to free trade flows among countries in the region The study applied spatial equilibrium modelling to show that Paper size: A4, character: Times New Roman, all margins cm elimination of non-tariff barriers would have an overall positive welfare impact for all countries in the region although some actors in the trade value chain would loose In an effort to realize the full potential of increased trade in food staples in the region, various actors including regional economic communities, individual partner states, development partners, farmer organizations, and various regional business councils have been making efforts to facilitate increased trade in the region Examples of thse initiatives include:-Regional Agricultural Trade Expansion Support Program (RATES), Competitiveness and Trade Expansion program (COMPETE) both funded by USAID and the TRADEMARK funded by DFID The EAC has also undertaken initiatives to facilitate trade particularly the ratification of the East Africa common market protocol These initiative have addressed many specific issues such as developing simplified customs procedures such as waiver of the requirement for certificate of origin for small traders; advocating for transparency in the market by providing information to minimize exploitation of agricultural producers by middlemen; and advancing warehouse receipt systems, under which farmers deliver their harvest to a particular warehouse Other reforms include the establishment of a one-stop border post between Kenya and Uganda at Malaba, and improvement of transport infrastructure Evidence suggests that these efforts have jointly had a tremendous effect in increasing trade While it is difficult to attribute the results of increased trade to specific interventions, there is evidence that the intra-EAC trade has increased tremendously For example, in 2008 total intra-EAC trade volume increased by 37.6% (EAC 2010) Total intra-EAC trade in agricultural commodities increased by about 77% from US$ 26 million in 2005 to US$ 46 million in 2008 (EAC 2009) According to the Regional Agricultural Trade Intelligence Network (RATIN), total cross-border trade in maize, rice and beans increased by 65% between 2004 and 2006, with maize being the most traded commodity Kenya was the main recipient of the informal exports from the rest of the EAC members (ASARECA 2009) For the intra-Common Market for Eastern and Southern Africa (COMESA) trade, growth of maize trade has been spectacular, rising from an annual average of US$ 28.3 million between 2001 and 2003 to US$ 104.4 million between 2005 and 2007 (RATES 2008) Volume of maize traded has also increased over the years For instance, total maize export from Uganda to Kenya increased from 115, 000 metric tons in 2006 to 166, 000 metric tons in 2010 (Guthiga et al., 2011) Trade in food staples, which form the major component of agricultural trade, followed similar patterns The current trend of increasing trade is expected to persist given the rapidly increasing population and urbanization trends, and expected favourable economic conditions Furthermore, given the regional diversity in growing conditions and seasonal differences in growing and harvesting periods, it is clear that sizeable segments of the populations in each country will inevitably depend on cross-border trade from food surplus areas in one country to food deficit areas in neighbouring countries at various times of the year 1.1 Rationale of the study As described in the introduction section, the efforts of various actors in facilitating trade have clearly borne fruit The volume and value of cross-border trade in food staples within EAC has grown over the years but the actual impacts of the increased trade, especially at the household level, remain unclear It is not clear how the producing households are gaining (or losing) from the increased market access or how consuming households are gaining (or losing) from increased access to food Understanding welfare impacts is essential for justifying the substantial investments required to facilitate cross-border trade Positive welfare outcomes would provide the impetus for further investments while negative impacts would provide lessons on why the investments have not worked or point to the essential areas that might have been neglected Furthermore, as with any other development intervention, the gains from trade are likely to be distributed differently among different stakeholders Understanding these dynamics is important from a social perspective to inform any re-distributive policies that would be essential to compensate the losers Guthiga et al (2011) explored welfare effects of increased trade in maize between Kenya and Uganda Data paucity, however, limited the scope and depth of the study This study, therefore, set out to expand our understanding of the links between trade in food staples and household welfare using a Paper size: A4, character: Times New Roman, all margins cm comprehensive data set covering three East African countries (Kenya, Tanzania and Uganda) While recognizing that impacts of trade are rather diffuse and the pathways of impact complex, the study used existing information on agricultural production potential of different areas in the region, the observed trade flow patterns and related proxy indicators to sample and classify households and analyse how the observed trade patterns in the region might have affected the well-being of households 1.2 Objectives and research questions The overall objective of the study was to analyse the impact of cross-border trade on the wellbeing of households in the East African region To address this objective, the study was guided by the following research question: How has the welfare of households in surplus regions changed relative to those in deficit regions within the same country? Trade and Welfare Links The bulk of the literature on trade supports the argument that freer trade leads to improvement of welfare in the long run (Winters 2000) However, some argue that freer trade may hurt some segments of the society, at least in the short run (Winters 2000) Therefore, the question of impact of trade on welfare is empirical and perhaps situation-specific In the short term, trade can have an impact on welfare through channels such as changes in prices, employment, wages and consumption Assuming positive price transmission; for net sellers, an increase in the price of a commodity will lead to an increase in income For the net buyers, however, the rise in prices leads to a fall in real incomes Increase in cross-border trade often generates employment opportunities along the trade routes For example, increased demand for agricultural products in the market could lead to increased demand for hired labour in the farm, as farmers expand their production to take advantage of the improved prices Increased trade flows also create demand for workers as loaders, warehouse attendants, drivers, graders, etc Besides creating new employment opportunities, trade could lead to increase in wages to attract more labour from other sectors Expenditure on food generally constitutes a significant share of total consumption expenditure among poor households A decrease in the price of food staples would lead to an increase in disposable income This means that poor households could potentially consume more of the same food commodities, diversify their diets or use the savings to buy more assets, all of which enhance welfare In the long term, increased trade leads to productivity and economic growth and ultimately to poverty alleviation The pathway of impact in the long term is more complicated; it is expected to rise from spillover through sectoral linkages The extent to which increasing incomes in one sector result in increasing demand for outputs in another sector are key to growth Winters et al., (2004) argue that such spillover effects are usually stronger in rural areas because the shares of rural household incomes and consumptions are related to locally produced non-tradables As noted earlier, trade in food staples accounts for over 80% of agricultural trade in the region Since the largest share of the population in the region depends on agriculture for their livelihood, any improvement in income streams from agriculture through trade would translate to improvement in welfare for a large section of the society Existing projections indicate that a huge market for food staples exists and will continue to grow into the future The East African market demand for food staples will grow dramatically in the coming decades, from US$ 6.9 billion in 1997/1999, to US$ 11.2 billion in 2015 and US$ 16.7 billion in 2030 (Riddell et al 2006) As a result, production of food staples for the growing urban markets and deficit rural areas (often across borders) seem to represent the largest growth opportunity available to farmers in the region While the welfare benefits of trade between food surplus zones and food deficit zones, both within and between countries, in sub-Saharan Africa are well documented Paper size: A4, character: Times New Roman, all margins cm (see Diao et al 2008; Haggblade et al 2008), the actual impact on households is not well documented Data and methodology The study used demographic and health survey (DHS) data sets for the three countries The data sets predominantly contain health related information Information on the wealth status of the households, summarized in an endogenously generated wealth index, is also captured A key advantage of DHS data is that they are geo-referenced which was useful in re-sampling the households Collection of DHS data has not been synchronized for the three East African countries Thus, different countries have data for different years Kenya has data for 1989, 1993, 1998, 2003 and 2008/09, Uganda for 1988/89, 1995, 2000/01 and 2006 and Tanzania for 1991/92, 1996, 1999, 2004/05 and 2010 This compelled us to pick different baseline and follow up periods for each country For each country, however, the baseline had to be the first survey after 2000 when efforts to make cross-border trade freer were initiated Thus, baselines chosen were 2000/01 for Uganda, 2003 for Kenya and 2004/05 for Tanzania Follow up surveys were 2006 for Uganda, 2008/09 for Kenya and 2010 for Tanzania Because of varying baselines and follow ups and because wealth indexes may not be directly comparable across countries, cross-country comparisons were not possible The study grouped households into maize surplus and maize deficit For Uganda and Tanzania which are net exporters of maize, the households in maize surplus regions were deemed as the beneficiaries of freer cross-border trade, and for Kenya which is a net importer of maize, households in maize deficit regions were treated as the beneficiaries of freer trade Within-country analysis of change in household wealth index among the beneficiaries and the non-beneficiaries of cross-border trade was then conducted The aim was to determine whether the beneficiaries of freer trade were better off than the non-beneficiaries over time The comparison was based on households that were similar in observable characteristics such that the differences in changes of their wealth indices could, as much as possible, be attributed only to trade Findings The study recorded mixed results For Kenya, the beneficiaries of freer trade had their wealth index improve by about 1.6 points higher than that of the non-beneficiaries For Uganda, the change in wealth index was not any different for the two groups while for Tanzania, the supposed beneficiaries became worse off This implies that the households in maize scarce regions of Kenya, through increased cross-border trade in maize grain, were able to improve their welfare due more stable supply of more affordable maize Possibly they were able make savings from purchase of maize which they could have used to accumulate household assets On the contrary, households in the maize surplus regions of the country could have suffered a welfare loss due to competition from relatively cheaper maize from the neighbouring countries Increased cross-border trade in maize may not have had significant effects on household welfare in Uganda for two reasons Maize trade in Uganda has multiple players (see Guthiga et al., 2011 for details) who substantially reduce the benefits that eventually trickle down to the maize producer Indeed some traders bid for the maize before it is harvested Thus, it could be wrong to conclude that increased trade is not welfare-enhancing from the Uganda analysis Welfare-enhancement could be there only that it is appropriated to groups other than the maize growers Second, the follow up survey for the country is much closer to the year 2000 when border reform measures were initiated The reforms, therefore, might not have had meaningful effects on trade Degeneration of the wealth index of the maize surplus households in Tanzania is attributable to the periodic maize export bans This means the maize producing households are not taking full advantage of the expanded regional maize market Instead they are compelled to dispose their Paper size: A4, character: Times New Roman, all margins cm produce in the domestic market, possibly at lower prices This may also explain why the maize deficit regions have become better over time because the bans favour them Policy Implications The channels through which cross-border trade may impact on household welfare are many The impacts are more often so diffuse that capturing them quantitatively is very difficult especially on a regional scale This study, therefore, confined itself to direct impacts that are likely to accrue to the most immediate beneficiaries, the producers and the consumers of the traded products Our results indicate that trade liberalization contributes significantly to household welfare improvement However, not all segments of the society gain So, while it is important to enhance freer crossborder trade in food staples, it would be useful to put in place mechanisms to ensure that producers in the net exporting countries share the gains One option would be to enhance their direct participation in the cross-border trade, say through cooperatives rather than allow middlemen to take advantage of them REFERENCES Diao X, Fan S, Heady D, Johnson M, Nin PA and Yu B (2008) Accelerating Africa’s food production in response to rising food prices—Impacts and requisite actions ReSAKSS Working Paper IFPRI (International Food Policy Research Institute), Washington, DC, USA East African Community (EAC), 2009 East African Community Facts & Figures EAC Secretariat Report, Arusha East African Community (EAC), (2010) Trade Report, 2008 EAC Secretariat, Arusha, Tanzania Govereh J, Haggblade S and 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World Economy (9) 25, 1339-1367 Winters, L., McCulloch, N., & McKay, A (2004) Trade Liberalization and Poverty: The Evidence So Far Journal of Economic Literature (XLII).72-115 Winters, L.A., 2002 Trade, Trade Policy and Poverty: What are the Links? The World Economy 25(9): 1339–67 2.0 cm ... Keywords: Cross-border trade, Household Welfare, East African region Introduction Cross-border trade in food staples among East African countries is important for achieving food security in the region... Africa? ??s food production in response to rising food prices? ?Impacts and requisite actions ReSAKSS Working Paper IFPRI (International Food Policy Research Institute), Washington, DC, USA East African... all margins cm much as their consumers benefit, which may in the long run discourage production The findings of the study have relevance in informing trade policies in the East African region Keywords: