Agricultural trade policy and development:
Incorporating institutional and
dynamic aspects
Niek Koning (WI)
Giel Ton (LEI)
Roel Jongeneel (LEI)
Prem Bindraban (PRI)
Contents
SUMMARY
1. Introduction
2. Institutional and dynamic approaches for analyzing agricultural
trade policies and development
2.1 Mechanisms that influence world market prices
2.2 Mechanisms that influence agricultural development in low-income
countries
3. Regional patterns
3.1 Balanced growth
3.2 Unbalanced growth
3.3 Involution
4. Case proposal 1: Bolivia
4.1 Introduction
4.2 Genesis of Bolivia’s unbalanced growth
4.3 Interest representation in agriculture
4.4 Key institutional mechanisms
4.5 Agricultural trade policy and negotiation alliances
4.6 Conclusion
5. Case proposal 2: Kenya
5.1 Introduction
5.2 Colonial evolution
5.3 Post-colonial evolution
5.4 Situation in some important subsectors
5.5 Key mechanisms
5.6 Trade policy
6. Outline for further research
References
2
Summary
With respect to agricultural trade policy and development, Dutch policy makers are faced
with two important experiences:
 At the negotiation tables, the more or less united front of developing countries has broken
up into groups with partly conflicting positions.
 Model studies have become less positive about the effects of trade liberalization on
developing countries than they used to be in the past. It appears that many of the poorest
countries might lose rather than gain.
A common background of these experiences is that developing countries are involved in
different development patterns. These influence their stance in the negotiations as well as the
effects of that trade reforms have on their economies. Especially the dynamic aspects of such
patterns are difficult to incorporate in standard trade models. The implementation plan of the
BO-IC project ‘agricultural trade policies and development’ envisaged national case studies to
explore the institutional-dynamic patterns in which different countries are involved and the
consequences that these patterns have for trade negotiations and trade simulation models. This
report lays the foundation of these studies.
The report begins with surveying the literature on mechanisms by which economies can
behave differently from the standard model (Section 2). Eight such mechanisms are
identified:
 market power (that affects prices);
 dynamic disequilibrium (idem, but by chronic over- or underproduction);
 endogenous price fluctuations (caused by myopic expectations of investors);
 spatial concentration (that can lead to first-mover advantages);
 strategic control of material flows (by superpowers);
 linkage effects (of agricultural growth on wider development).
 endogenous (self-reinforcing) growth;
 poverty traps.
After this, three idealtypical patterns are described in which these mechanisms play different
roles (Section 3):
 Balanced growth. In this pattern, supportive policies facilitate an economic revolution in
agriculture that paves the way for industrialization and endogenous growth. This pattern
prevails in countries with a long history of population growth, agricultural intensification,
social differentiation and state formation. Social differentiation and property rights in
material assets rather than in people encourage the expression of interests on a class basis,
creating farmer demand for supportive farm policies. The supply of such policies is eased
because state formation and the need to invest have fostered an ascetic-commercial
culture in the middle class and a concern for long-term national interests in civil servants.
Because agricultural markets are prone to dynamic disequilibrium and fluctuations,
supportive farm policies include adequate price policies. In the Japanese Empire
(including Korea and Taiwan), pro-farm policies allowed balanced growth already before
WWII. In other countries, refusal by colonial governments to support agricultural prices
caused poverty traps and stagnation, but decolonization paved the way for policy changes
that encouraged Green Revolutions and successful industrialization.
 Unbalanced growth. This pattern is marked by extreme inequality, marginalization of
rural workers, and export orientation that is reinforced by weak domestic demand. It is
found in countries with a prehistory in which landowning elites confronted a rightless
mass of workers. In the (sub)tropical Americas, for example, displacement of indigenous
populations and European demand for minerals and tropical luxury crops encouraged
large farms that had a need for bound labour that could not escape exploitation in spite of
3
the abundance of land. It led to the evolution of aristocratic planter societies, which
responded to international price declines from the late 19th century by tightening
repressive labour regimes or mass eviction of workers to pave the way for low-cost
mechanization. It resulted in a significant economic development, but one that reproduced
inequality and poverty, weak domestic demand of goods for mass consumption, and
thereby the one-sided export orientation of large farms.
 Involution. This pattern is hinged on a complex of poverty traps that causes rural
stagnation and an absence of linkages that could stimulate non-farm activity. It is found
where geography and material flows produced undifferentiated peasant societies with
extensive farming systems, embryonic state structures and ‘personalist’ socio-political
relations, like in large parts of Africa. In such circumstances, an ascetic-commercial
culture and long-term view among civil servants are lacking. Moreover, strong farmer
movements are hampered because interests tend to be expressed on a clientelist rather
than a class basis. As a consequence, supportive farm policies do not materialize. Instead,
economic stagnation leads to a political market based on doling out public sector jobs and
to an inflated bureaucracy that weighs heavily on the private economy.
Especially the patterns of unbalanced growth and involution can shape the outcomes of trade
policy reforms in ways that are not considered by standard models. With unbalanced growth,
trade liberalization may one-sidedly benefit large growers and wealthy landowners. Trickling
down of gains to poorer segments of the population is not ensured, and enhanced profitability
of large farms may even induce a further marginalization of rural workers. With involution,
effects such as preference erosion and increased import competition may reinforce existing
poverty traps. This may hamper the development of new activities so that the reallocation of
labour that standard trade models assume does not occur.
In addition, these patterns help to explain the stance of different developing countries
in trade policy negotiations. Countries that suffer from involution may be wary of import
competition and preference erosion and therefore lean towards groupings like the G33.
Countries with unbalanced growth tend to prioritize the export interests of large growers, and
therefore align with groupings like the G20. Countries with balanced growth may wish to
retain room for supportive farm policies, but the successful development of their industry and
services and the decreased importance of agriculture as a starter of growth can also make
other interests more prominent. These countries may therefore take an intermediate position.
The implementation plan for the project ‘agricultural trade policies and development’
mentioned Bolivia and Kenya as candidates for case studies to deepen the understanding of
the problematic patterns of unbalanced growth and involution. Rather than simply mirroring
the above descriptions, these countries have fallen back into these patterns after some decades
in which they seemed to break away from them. This provides a suitable vantage point for
studying how these patterns actually work.
Section 4 explores Bolivia as a possible case for studying the pattern of unbalanced
growth. In this country, the conquest by the Spanish led to a dual structure with estate farms
(haciendas) in the valleys and Indian agricultural communities (ayllus) in the highlands. The
haciendas produced food for the mines that were Bolivia’s primary export enterprises.
Sluggish demand for silver in Europe during its stagnation phase between 1650 and 1750 led
to a decline in mining activity and entailed a shrinking in the haciendas and an increase in the
ayllu communities. The phase of economic expansion in Europe after 1750 reversed this
development. The struggle for independence from Spain originated in the mining and
hacienda elites whose resurgence entailed a new encroachment on ayllu lands which,
however, was slowed by popular rebellions. The Chaco War with Paraguay (1932-35)
catalyzed a popular movement. This led to a National Revolution in 1952 that ended the
dominance of the mining barons and entailed an ambitious land reform that gave hacienda
lands to the hacienda workers but had no impact on ayllu communities. In 1981, a broad
coalition of these workers, ayllu peasants and urban resistance groups broke a new military
dictatorship paving the way for a democratically elected progressive government that
embarked on a broad reform program. However, this stumbled on the simultaneous
4
international depression, leaving a debt crisis that made Bolivia the first country that had to
accept a structural adjustment plan and a liberalization of its economic policies. Andean
agriculture increasingly evolved into a small-scaled, semi-subsistence pluri-activity sector. Its
share in urban markets was eaten into by cheap imports from Northern and neighbouring
countries, while its modernization was slowed by traditional wealth-sharing institutions and a
tax regime that discouraged a transition from the informal to the formal economy.
Nevertheless, Andean farmers have some advantage in providing nearby cities with perishable
horticultural and animal products, and the donor-supported expansion of dairy production has
made great strides. However, a much more dynamic development has started in the Eastern
lowlands, where forest is cleared for a rapidly expanding production of soybeans and cereals
for export. This development is organized and supported by large companies and World Bank
aid, and involves large landowners (including many immigrants from Brazil and other
countries) as well as smallholder settlers coming from the Andean region. In this way, the
original duality of ayllus versus haciendas, which was moderated by the land reform, has
reappeared at a larger spatial scale. This new duality puts its stamp on the representation of
agricultural interests, also regarding international trade negotiations. Until recently, the
dominance of large growers and of agro-industrial corporations in the East, many of which
are branches of international corporations, pushed Bolivia into the camp of the Cairns Group
and the G20. This went against the rationale of the Andean Community of Bolivia, with
Colombia, Equador and Peru, whose system of variable external tariffs gives some protection
against low and unstable world market prices. The coming of the new Morales government
might change the balance however, as is indicated by the Bolivia’s entry into the G33 in mid
2006.
Section 5 explores Kenya as a possible case for studying the involutionary pattern.
The settlement of European farmers in this country seemed to initiate a pattern of unbalanced
growth. However, starting three centuries later than in tropical America it was restricted by
the recurrent falls in international agricultural prices in the 20th century. By the 1950s, a
flourishing settler society had nevertheless developed. However, it was overwhelmed by
social tensions that were caused by unsustainable development in the indigenous smallholder
sector, which the colonial government had not sufficiently supported. Decolonization was
coupled to large-scale land reform and the extension to smallholders of facilities that had
served the settlers. In the 1960s-70s, the weight of petty-capitalist black farmers in the ruling
KANU party limited the fiscal exploitation of agriculture, and agricultural and GDP growth
were rapid compared to other countries in Sub-Saharan Africa. Experts who blamed slow
growth in the region on internal socio-political factors saw Kenya as the exception that
confirmed the rule. However, this positive development did not last. Smallholders were not
shielded from price declines in world markets. The squeeze on their incomes swelled the
exodus of rural youth to the public sector causing a galloping increase in government
expenditure and foreign debts. The ensuing fiscal crisis induced quality decline in government
services and increased exploitation of farmers by (para)statal bureaucracies. As a result,
Kenya fell in the same poverty traps that were troubling other African countries. International
shocks precipitated the decrease in economic growth after the 1970s. Maize yields subsided
and falling international prices caused a decline in the flourishing coffee sector. Tea prices
remained more stable, and in horticulture and dairying the absence or ending of bureaucratic
intervention created room for private initiative. However, the development of these sectors
was curbed by modest prices and lack of infrastructure, while the flourishing export
horticulture remained a small enclave in the rest of the sector. The overall economic
stagnation sowed distrust which undermined social capital. It exacerbated political fights over
the spoils of office that assumed ethnic-clientelist forms (especially Kikuyus versus
Kalenjins). Calls for reform of the one-party system from groups that missed out in this
struggle interacted with calls for economic and political liberalization from international
donors. In the early 1990s, it forced the KANU government to accept multi-party elections
and far-reaching macro-economic and trade liberalization. However, it did not achieve a
resurgence of economic growth, and the government resisted a retrenchment of the public
sector that was vital for its power position. In 2002, KANU was defeated by a new coalition
5
but under the new government the situation has not strongly changed. The position of Kenya
in trade policy negotiations reflects concern about its export earnings as well as fear for the
consequences of far-fetched liberalization. In the Doha Round, where Kenyan representatives
could express themselves relatively free from donor pressure, they denounced the dumping by
developed countries, including what they saw as disguised dumping by direct payments.
Kenya refused to accept further commitments to reduce their own tariffs as long as this
dumping would not be ended. It also asked for measures to compensate the preference erosion
that would ensue from MFN tariff reduction in developed countries. Besides, Kenya played a
leading role in an initiative of African countries that sought to create room for unilateral
supply management in tropical export crops. In addition to the WTO negotiations, Kenya is
involved in negotiations on an Economic Partnership Agreement between the EU and a group
of Eastern and Southern African countries. This agreement threatens to disturb emerging
regional trade blocks and may force Kenya to reduce its room for tariff protection.
Nevertheless, Kenya is under considerable pressure to go along with it for fear that, without
an agreement with the EU, its horticultural exports would be threatened.
The report ends with an outline for further research (Section 6). After a definite selection of
country cases, interviews should be held and data gathered on the spot to supplement the desk
studies in preceding sections. After this, key aspects should be identified for in-depth study.
The vantage point for a Bolivia case study could be the trade relations with
neighbouring countries, especially Brazil, and on the position of Bolivia in the Andean
Customs Union and the MERCOSUR. The focus would be on the historical process of
agricultural specialization in Bolivia and Brazil and the structure and dynamics of interest
articulation and policy consultation in trade negotiations. If so desired, Brazil could be
involved in this study as a case country.
Central in a Kenya case study would be the interaction between population growth,
soil degradation, and political markets, that leads to a low-level equilibrium in which trade
reforms have outcomes that are not foreseen by standard models. A relevant vantage point
could be the effects that a European Partnership Agreement would have in Kenya. A Kenya
case study should also look for quantifiable longitudinal data to corroborate the partly
anecdotal information in Section 5.
A parallel activity can consider the consequences of that the results of these study
have for model assessments of the effects of trade reforms. Although models are by necessity
reductionistic, real-world features that strongly influence the outcomes should be included.
Features like poor infrastructures and market imperfections that lead to incomplete price
transmission might be incorporated in existing trade models, but including dynamic
mechanisms hinged on investment and external effects may prove more difficult.
Finally, insights from these activities should be combined to refine the description of
regional patterns, explain the choices that developing countries make in trade policy
negotiations, and make suggestions for the improvement of trade models. If important
features cannot be incorporated in trade models, maybe a simple heuristic can be developed to
‘translate’ the outcomes of trade models to developing country realities.
6
1. Introduction
Dutch policy makers who are involved in agricultural trade policy and development have
been faced with two confusing experiences. First, at the WTO negotiation tables, the simple
opposition of developed and developing countries has given way to a situation where the
latter have organized in different groups (G20, G33, African Group, G90 etc.) with partly
conflicting positions. Second, model assessments of the impact of agricultural trade
liberalization prove more problematic than they seemed to be. Strong claims about the
benefits for developing countries have been downsized (compare e.g. World Bank 2003 with
Anderson & Martin 2005), and some studies argue that the poorest countries might lose rather
than gain (e.g. Panagariya 2005; Poliaski 2006; Yu forthcoming).
The WTO negotiations seem now to have arrived at a temporary standstill. However,
similar experiences are likely to appear in other trade policy negotiations, like the bilateral
negotiations that are now being held on Economic Partnership Agreements between the EU
and groups of ACP countries.
The implementation plan for the BO-IC project ‘Agricultural trade policies and
development’ envisaged two case studies that would address these experiences. This report
lays the foundation of these activities. They would have a twofold aim:
- to understand the diverging political-economic dynamics in which different developing
countries are involved and that influence the position that they take in trade policy
negotiations;
- to examine the implications of these diverging dynamics for economic models on which
ex ante assessments of the impact of trade policy reforms are based.
Some observations may clarify these issues. Current trade models have two kinds of
limitations (also cf. FAO 2006). To begin with, there are complications like price
transmission (changes in world market prices may not fully impact on domestic prices) and
distribution (within each country there are gainers and losers). Including these aspects poses
difficult challenges to modelers, but at least they can be assumed within the partial or general
equilibrium framework of existing trade models. Thus the question of distribution of gains
and losses is now being answered by coupling trade models to more micro-oriented household
models (Hertel & Winter 2006). However, there are also dynamic complications. Trade policy
reforms may trigger virtuous spirals that stimulate economic growth or strengthen vicious
cycles so that countries are trapped in decline. Such mechanisms are much more difficult to
include in the static framework of equilibrium models. Nevertheless, they may have vital
effects on the impact of trade policy reforms and even change the sign of the outcomes.
Therefore, such mechanisms cannot be ignored, no matter how difficult it is to integrate them
into existing models. If it were to appear that crucial mechanisms cannot be incorporated in
such models, maybe a heuristic or checklist with a limited number of key variables could be
developed to help find the information that would be needed for an adequate translation of
trade model outcomes into domestic impacts.
The dynamics in which a country is involved also influences its stance in trade policy
negotiations. One reason is that these dynamics determine the outcome that trade policy
reform will have in a country. Another reason is that the political evolution in a country is
itself at least partly an endogenous aspect of the broader dynamics in which it is involved.
Governance is often seen as a non-economic factor that is rooted in the history or the culture
of a country, and that influences its economic development as an exogenous force. In reality,
there is a close interaction between the economic evolution and the political evolution in a
country. For example, if the private economy in a country is stagnant, a political market based
on the doling out of public sector jobs is difficult to escape and the interest of the public
sector middle class may become an important consideration in trade policy issues.
The structure of this report is as follows. Section 2 surveys mechanisms that have
been identified in the economic literature and that can cause economies to deviate from the
7
behaviour that is assumed in standard trade models. Section 3 tries to discern three kinds of
political-economic dynamics that are found in different parts of the developing world and in
which these mechanisms play different roles. The following sections explore two country
cases that may shed more light on two of these dynamic regimes. Section 4 explores Bolivia
which was mentioned in the implementation plan as a possible case for the dynamics of
unbalanced growth. Section 5 explores Kenya which was mentioned as a possible case for the
dynamics of involution.1 These countries are suitable candidates for studying these respective
dynamics because they evolved in accordance with these regimes even though they had some
important characteristics that seemed to deviate from them. Section 6 discusses some
preliminary consequences that the case studies might have for trade models. Section 7
concludes with an outline for further research.
1
The implementation plan mentioned Kenya and Uganda. This latter country was left out limit the size
of the study, but a case study with Kenya should include the relations of this country with its
neighbours, as well with the East African Community and the COMESA, of which Uganda also is a
member.
8
2. Institutional and dynamic approaches for
analyzing agricultural trade policies and development
In this chapter we survey theories about dynamic and institutional issues that affect the
relation between agricultural trade policies and development. We highlight mechanisms that
function in the world economy and affect international agricultural markets and relative price
formation, and other mechanisms that function in developing countries themselves and shape
the conditions for agricultural development and poverty reduction.
2.1 Mechanisms that influence world market prices
Market power
Agriculture is often characterized by a large number of small family farms or peasant farms
and as such is a prime example of the full competition regime: there are a large number of
suppliers, which supply a homogeneous product in a transparent market. However, when
looking to the full supply chain it appears that upstream and downstream industries
(agribusiness and retailers) are often quite concentrated. Irrespective of the market driven
globalization process, transnational corporations have managed to considerably increase their
influence over agricultural production, both in developed and developing countries (Madely,
1999). These corporations are concentrated at the global level, but often they are also
regionally dispersed so that they have an especially strong position in specific countries are
regions. This latter implies that, even if there are more than one downstream firms in the
market, for an individual farmer there might be hardly alternative options since in the region
where he lives only one firm is relevant for doing business and going to alternative firms is no
option due to the high transportation distances and costs involved in transporting the farmer’s
bulky product. Upstream and downstream industries are likely to be able to exploit their
market power at the cost of farmers as well as consumers. As such the margin between
producer prices on the one hand and consumer or retail prices on the other hand is likely to be
not fixed, but endogenous.
The studies analyzing market imperfections and concentration in agriculture (see
among others Requillart and Bouamra, 2006, Rao and Servaas, 2002, McCorriston, 1996,
Perloff, 1992 and Schroeter and Azzam, 1992) nearly all put emphasize to the need to take a
price transmission elasticity between farm prices and consumer prices into account. As a
number of studies further show, even small values of the elasticities of substitution between
the agricultural and non-agricultural inputs used for final consumer products, may
considerably influence the distributional impacts of exogenous shocks to the food chain (see
for example Alston and Scobie, 1983 and Lemieux and Wohlgenant, 1989). Not only
domestic producer and consumer prices might diverge. As Rao and Servaas (2002) document,
the increased trade flows have not been accompanied by relative (external) price convergence
between developed and developing economies. This can be due to a host of factors, among
which the ‘fallacy of composition’, implicit in any global imposition of trade liberalization.
Agricultural trade between North and South might at a more refined level, which is often not
captured by global trade models, be complementary rather than competitive and not
necessarily confined to primary products as such.
Dynamic disequilibrium
A dynamic disequilibrium between sectors exists when the supply increasing forces involved
in economic growth dominate the equilibrating forces in a sector, so that the prices of its
products chronically deviate from the equilibrium prices that would emerge in a static
situation.
9
An intuition that agricultural markets were prone to dynamic disequilibrium was
found with economists of the German Historical School and the American Institutional
School already before WWII, but the theory was elaborated by agricultural economists in the
1940s-70s. The foundations were laid in Schultz’ Agriculture in an unstable economy (1945).
Schultz’ point of departure was the theory of 19th century classical economists that population
growth raised agricultural prices because it required the reclamation of less productive land.
Schultz reformulated this theory as a rightward shift in the supply function that lagged behind
the ditto shift in the demand function. He then postulated that from around 1900, the effects of
demo-economic growth had changed and reversed this relationship. Decline in population
growth, saturation of demand, new reclamation, artificial fertilizer and high-yielding seeds
would have curbed the increase in demand and accelerated that in supply, turning scarcity of
food into price depressing overabundance.
To this theory of the changed impact of macro-economic developments on
agricultural markets, Cochrane (1959) added a reinforcing feedback mechanism. High public
and private investment in farm research would lock farmers into a technical treadmill. The
small-scaled structure of agriculture made farmers price takers, whose only possibility for
defending their incomes against declining output prices was to adopt innovations. As these
innovations were production increasing, however, the aggregate effect was to reproduce the
existing oversupply.
Both Schultz’s and Cochrane’s theory begged the question why oversupply was not
corrected by a sufficient outflow of agricultural workers. In the 1930s, such outflow had been
hampered by widespread non-farm unemployment, but why did the problem persist during
postwar decades of high growth and near full employment? Johnson (1958; also Johnson &
Quance 1972) and Hathaway (1964) looked for the answer in sunk costs. Once farmers have
invested in agriculture, the salvage value of their assets declines. It makes it unattractive for
them to quit farming even if the returns to their investment are too low going by the
purchasing price of their assets. Similar problems exist in other sectors too, but in agriculture,
the labour of the farmer and his family member likewise functions as a fixed asset.
Although this could explain the low outflow of established farmers, it might still be
asked why the oversupply situation was not corrected by a diminished inflow of new starters
in the farm sector. Tweeten (1969) mentioned various factors that could explain this. One was
imperfections in non-farm labour markets. This linked in with what subsequently became
known as ‘efficiency wage theory’: information problems of non-farm employers may make it
rational for them to pay higher than market-clearing wages, which can cause unemployment,
age discrimination and other obstacles for farm workers who want to change jobs (e.g.,
Akerlof and Yellen 1986). Another factor was a subjective preference for the farm way of
life. Indeed, farmers often express predilections for non-pecuniary aspects of their occupation
like ‘being their own boss’ (e.g. Gasson, 1973; Young, 1984; Errington & Tranter, 1991).
This begged the question whether an expressed preference for farming reflects an autonomous
preference or a psychological adaptation to a situation with low incomes (Gasson & Errington
1993; Tafertshofer 1975).1
1
In what was meant as an obituary paper, Gardner (1992) surveyed the literature that had followed
Schultz’s vision of a dynamic disequilibrium in farming. He found that the theory was neither finished
nor refuted, but that agricultural economists had lost their interest in it also because the problem itself
would have vanished. Incomes in agriculture would no longer be lower than those in other sectors.
Although this conclusion was widely accepted by agricultural economists in the 1990s, there remains
something satisfactory about it. To demonstrate that the farm income problem had ceased to exist,
Gardner cited farm household income statistics that included off-farm incomes and were not corrected
for sectoral differences in working hours per household. Denials of the farm income problem often
draw on statistics for total income of farm households (e.g. Hill 1996, 2000; OECD 2003). This may be
correct for the assessment of poverty, but not for the farm/non-farm difference in factor returns. The
statistics included income support, whereas the theory of Schultz and others considers farm income
under free market conditions. Besides, the fact that farmers, unlike many non-agricultural workers, had
to invest part of their disposable income to sustain their business was ignored. A minority of
agricultural economists adheres too the framework of Schultz and his followers. This current includes
10
Dynamic disequilibrium has serious implications for trade models and policies. The
statistical data on market volumes and prices that are used for calibrating trade models like
GTAP are seen as reflecting an equilibrium situation. If they really pertain to a situation of
disequilibrium, the power of the model to predict the changes caused by an alteration of trade
policies is compromised.1
Endogenous price fluctuations
In an application of spectral analysis to identify agrarian cycles in Germany, Bauernfeind and
Woitek (1996) analyse time series data of 330 years of rye prices in Germany, and found the
presence of cyclical characteristics of grain prices in Nuremberg for the period considered.
Among these cycles are a) short term movements due to seasonal fluctuations, b) medium
term cycles of about 3-15 years and c) long term trends connected to population changes.
They conclude that there is strong evidence for the existence of robust cyclical structure in the
rye price and the supply of about 13-8 years, and these cycles run anticyclically. This means
that if the cycle in the rye prices reaches it maximum, the cycle in the supply reaches about its
minimum, and vice versa (Bauernfeind and Woitek, 1996). The authors concentrated on the
medium term cycle, which according to Iacobussi (2003) is associated with the business cycle
of the local economy. As such this illustrates that agricultural prices at least partly reflect the
situation and dynamics in the local economy.
Historical data of US and UK wheat prices reflect clear cyclical patterns (Graph 1).
Also, the cycles in the wheat prices for the US and the UK reflect clear similarities. This
indicates that the price fluctuations in agricultural markets not only reflect changes in the
local economy, but also reflect world market conditions.
Wheat Prices
Gaph 1. United States and England & Wales Wheat Prices
300
200
100
0
1771
1791
1811
1831
1851
EWWP
1871
1891
1911
1931
1951
1971
USWP
As graph 1 further illustrates, the cyclicality in prices is not always the same. Since
world war II prices show hardly cyclical movements anymore, although they are still subject
to all kind of shocks. This reduction in price volatility is likely to be due to the dampening
effect of both macro-economic (Keynesian) and agricultural (price stabilization) policies.
Graph 2 shows hwo price fluctuations fit in with movements in yield (and supply). Prices and
yields show often a reversed pattern: high prices go with low yields and low prices go with
high yields. The cyclicality of prices does not exclude the presence of long-run trends. In
Berthelot (2001) and Ray et al. (2003), and in the Netherlands, Jongeneel, Koning (1994) and Van
Bruchem. Haagsma and Koning (2002; 2005) use psychological dissonance theory to look further into
the question of the autonomy or non-autonomy of expressed preference for farming. In their model,
farmer attempts to sooth their bad feeling about having to accept a low remuneration can give rise to an
occupational preference norm.
1
Moreover, the interpretation of such changes is affected. In equilibrium models, trade liberalization
always leads to potential Pareto improvement. This is why such models always show net aggregate
benefits of liberalization. If the real situation is one of disequilibrium, this can no longer be taken for
granted. Rather than trade liberalization, potential Pareto improvement would require policies like a
rationing of the supply of agricultural products.
11
particular since the 1870s wheat prices follow a downward trend. This trend is due to the
strong changes in technology and autonomies yield growth, which induce a supply growth
which exceeds the growth of demand.
Graph 2. Illinois Yield and Wheat Production 1866-1999
7.00
2,500
6.00
4.00
1,500
3.00
1,000
2.00
500
1.00
0.00
1866
0
1876
1886
1896
1906
1916
1926
1936
Years
Yield
1946
1956
1966
1976
1986
1996
Production
Summarizing, from the literature analyzing price fluctuations it becomes clear that
local agricultural prices are influenced by what happens in the rest of the local economy (local
business cycle), as well as by world market conditions. This codetermination of prices by
internal and external factors implies that the price transmission process which translates world
market price signals into price signal in the local economy can be quite complex (FAO,
2006). This might be in particular the case if for example trade liberalization affects the local
economy and local agriculture in different ways. Moreover, agricultural prices show cyclical
patterns, derived from a refined dynamics, which exists in the real world, but is seldom
captured by the rather static neoclassical models, irrespective whether they are from a partial
or general equilibrium nature.
Short-run cycles are already known for long in agriculture (e.g. the famous pig cycle)
and still relevant (for example in the beef market). The occurrence of such cycles is linked to
the process of expectations formation. As Muth (1964) showed in a seminal article, under
rational expectations price cyclicality should not occur. Cyclical price behaviour is only
possible when farmers do not learn from history and attach to non-rational expectation1. In
reality expectations have often a myopic character. This may lead to undershooting or
overshooting, in particular of investments including long time lags (like those in plant
breeding research with time lags of 6 till 10 years) (Diaz, 2006).
Spatial concentration
Although prominent in business parlance, competitiveness is not a well established concept in
economic theory. In the classical theory of international trade comparative advantage, rather
than competitiveness is the crucial concept. The idea of comparative advantage, which
originated from David Ricardo, is central in most international trade models. Reduction of
trade distortions (like tariffs, export subsidies and export taxes) should according to this
principle be trade enhancing. However, as the new trade theory has made clear (see among
others the various contributions of Krugman2) this need not to be a linear process. The new
theory emphasizes the importance of increasing returns to scale. The logic of increasing
returns underscores the importance of first mover-advantages. As a consequence the location
of production and development of trade will reflect historical and incidental factors. Their
1
Examples are naïve expectations, in which the price a farmer expects for this year is simply set equal
the price of last year. A more advanced way of expectations formation is the partial adjustment
hypothesis. When expectations follow a partial adjustment scheme farmers rely not simply on past
prices, but also try to learn from them, i.e. revise their expectations based on the prediction errors they
made in the past. The idea of rational expectations was broadly tested in the macroeconomic sphere
(Lucas, Sargent and Walace) but not confirmed by the obtained empirical results.
2
See for example Krugman (1996) and Krugman and Obstfeld (2006).
12
Thousands of tons
Tons per hectare
2,000
5.00
interplay might create self-enforcing scale economies, which explain why in certain places
production expands, whereas in others it does not develop, irrespective of the favourable
conditions there might be. An initial lack of scale can create a disadvantage that creates a
bottleneck for gathering the fruits from improved economic conditions1.
Material flows and economic ascent
While Krugman tries to improve mainstream economic modeling, other economic
geographers stress the importance of real space and take a more historic look at how
economic activities are concentrated in specific countries or locations (Goodacre 2006).
Bunker concentrates on the scarcity of raw materials for industrial development. While
technological development induces to industries with an increasing scale of production, the
necessary raw materials have to be ‘sourced’ in an increasing geographical scale. The
reduction of transport and transaction costs between countries and continents are crucial for
countries to ‘materialize’ the economies of scale in production. For becoming an economic
hegemony (‘economic ascent’), it is therefore essential to find ways to reduce these costs for
you industries (Bunker and Ciccantell 2003).
The rising economies of China and India are expected to outweigh the impact of US
economic performance in world price setting. Agricultural price fluctuations are increasingly
linked with industrial growth and economic development in these.
Unlike traditional economic analysis of anonymous ‘abstract’ markets, but also in
contrast with analysis that focus on the dominance of global agribusiness, this school of
thought brings in the importance of states in creating conditions for economic growth and in
conscious strategic thinking about control of essential resources by the use of political or
military pressure. Trade negotiations are in this perspective more than technical policy
moments for further trade liberalization, but also moments for the strategic use of trade
interests to negotiate improved access to these ‘material flows’, like petrol, mineral resources,
water, etc. Trade policy dynamics may appear non-rational from a market economic
perspective, but understandable when these interests related with non-agricultural sectors are
considered. The need for a continuous flow of material resources to ‘keep the economy
growing’ is codified in military and political alliances between countries, but increasingly
also in bilateral or regional trade agreements.
2.2 Mechanisms that influence agricultural development in lowincome countries
Linkage theories
‘Linkages’ is development economics jargon for the positive effects that agricultural growth
may have on non-farm development. It is connected with the intuition of many experts that in
lower-income countries, agricultural growth is needed as a starter motor of economic
development. The concept goes back to a seminal paper by Johnston and Mellor (1961). This
posited that agricultural growth was needed to provide the savings, labour, and food required
for the development of other sectors. Besides, farm growth would have a more direct
stimulating effect by providing opportunities for upstream and downstream activities in the
agrifood chain. In subsequent years, much research was done on positive effects of
agricultural growth on non-farm development. This found the effect on rural consumer
demand for non-farm products – which Johnston and Mellor had not emphasized – to be
especially important (a.o. Block & Timmer 1994; Delgado et al. 1999; Hazell & Roell 1983).
Meanwhile, considerable empirical support accumulated for the general thesis. At the
macro-level, Kuznet’s (1966) historical-statistical analysis showed that, in developed
countries, the onset of industrialisation had almost always coincided with economic
1
The developments in the new trade theory also lead to a revised geographical economics in which the
increasing returns as well as spatial and locational conditions of economic activity are taken into
account (see Brakman et al (2001) for a survey and discussion of the main ideas).
13
revolution in the agricultural sector. At the micro-level, studies like Liedholm et. al (1994)
showed agricultural growth to be a major factor explaining the growth of rural non-farm
enterprises in developing countries. Additional support came from studies on export and
growth, which pointed to the relative importance of domestic demand in early phases of
modern economic development (e.g. Balassa 1978; Heller & Porter 1978; Urata 1989). In
economies where a majority of the population was still rural, increases in domestic demand
were clearly dependent on agricultural growth.
After 1980, however, many economists began to doubt the importance of domestic
demand. In a globalized economy, export demand should be able to take over its role as a
booster of growth (a.o. Badiane 2004; see also remarks in Timmer 1988). This sounds logical,
but empirical developments give little support for this hypothesis. In the Asian tigers,
successful industrialization was once more connected to agricultural growth (e.g. Francks et
al. 1999). Timmer (1995) suggested that the latter might have important external effects on
managerial skills. We suggest that effects of agricultural development on the social capital for
non-farm development might also play a role. There is evidence that agriculture is less
sensitive to contract breach than trade and manufacturing are (Fafchamps 2004). Successful
agricultural development might strengthen reciprocity norms that by occupational mobility
extend to trade and manufacturing where they lower the distrust and transaction costs for
which these sectors are more sensitive.
While agricultural growth may be important for non-farm development, on the other
hand, expansion of non-farm employment is vital for relieving agriculture from the crowding
of people that could otherwise impede innovations that require increases in scale or a larger
financial capacity.1 It means that linkage effects on non-farm development may become selfreinforcing, because they in their turn create the conditions for a new phase of agricultural
growth. Non market mediated linkage effects can make a pro-agricultural bias in trade
policies desirable in early phases of modern economic growth. A premature shift of too many
people out of agriculture could lead to underdevelopment of skills or social capital becoming
a drag on non-farm growth, even in countries where factor endowments indicate a
comparative advantage in non-farm sectors.
Endogenous growth
Following along the path pioneered by Romer (1986) and Lucas (1988) endogenous growth
theory has led to a resurgence of interest in the determinants in long-term growth. In
endogenous growth models, the diminishing returns to capital that were assumed by classical
growth theory can be overcome by positive externalities associated with investment and
capital formation. As a consequence these models leave open the possibility of sustained
growth, at least for cases in which investments generate sufficiently strong external
economies. As such this theory emphasizes the importance of sufficient and adequate
investments in capital, in particular in developing countries. Moreover, they imply that when
the capital build-up gets a certain momentum it can create a continuous increase productivity
growth. International trade and the opening up of trade possibilities (market access) can
enhance the role and importance of externalities associated with investments in human and
physical capital (World Bank, 1993). Moreover intensified trade relationships might facilitate
the transfer of knowledge between countries (Pack, 1994).
Endogenous growth theory emphasizes the importance of the long term dynamics
(investments and associated externalities). Whereas investments might be related to changes
in current market conditions, their (full) impact will be realized only after a certain period of
time. Moreover, not only (incidental) changes in short-term market conditions are relevant,
1
This is so where property structures preclude a mass eviction of a rural underclass along Latin
American lines (see Section 3).
14
but also the time path and consistency in the direction of these changes matters (investment
behavior is sensitive to uncertainty and erratic policy behaviour)1.
Poverty traps
Poverty traps can be seen as the opposite of endogenous growth. They arise by reinforcing
feedback mechanisms that hamper growth and cause sections of the population to remain
poor. The idea of ‘vicious cycles’ that would reproduce poverty and stagnation has long been
around in development thinking. A systematic elaboration was offered in Gynnar Myrdal’s
Asian Drama (1968). Several poverty traps have been identified in the literature. These
include:
- Resource degradation trap. The notion of a resource degradation trap was inherent in the
classical study of ‘agricultural involution’ in Java by anthropologist Geertz (1963), who
associated it with a culture of poverty sharing. More recently, the idea of a vicious cycle
of poverty and soil degradation was taken up by economists. A group of World Bank
highlighted population growth as the mediating factor (Cleaver & Schreiber 1994; Lele &
Stone 1989). In their view, poverty caused population growth to remain high (children as
old age insurance). This raised the pressure of population on the land causing soil
degradation, which led to continued poverty. However, other researchers found that rapid
population growth did not always entail soil degradation (Tiffen et al. 1994), while in
other situations poverty induced soil degradation even where population stagnated or
declined (e.g. Amanor 1994). In line with these findings, some economists emphasized
high discount rates rather than population growth as the intervening variable. Poverty
induces farmers to give priority to short term survival. As a consequence, they discount
the future and underinvest in sustainable land management (Barbier 1990). This can cause
an inter-generational tragedy of the commons even if the land is privately inherited
(Savadogo, forthcoming). Soil degradation traps can be stronger where soil-crop systems
are dual equilibrium systems (Breman 1997; van Koppel et al. 1997). For example, once
soils are degraded, high leaching and bad rooting may reduce the nutrient recovery rate of
plants, which raises the investment in fertilizer needed for regenerating the soil.
- Low chain investment trap. According to Kydd and Dorward (2004), investment in
agricultural supply chains in low income countries involve high co-ordination costs
because markets are thin. Farmers, traders and processors run high risks that their
investment does not pay off because complementary investments by other agents are
absent. In this situation, new chain investment needed for successful intensification of
agriculture may fail to materialize because marginal production-cum-coordination costs
may exceed marginal returns, even if a jump to a higher investment level would allow
room for profit. As consequence, markets remain thin and coordination costs high, and
the economy is locked into semi-subsistence.
- Malnutrition trap. According to many nutrionists (e.g. ACC/SCN 2000) and development
economists like Dasgupta (1993), malnutrition affect the capabilities of humans, increases
disease and mortality, and reduces the health prospects of newborn. These effects reduce
labour productivity, the number of working years per individual, and the returns to
investment in education, while they raise the costs of health care. In their turn, this
hampers economic growth and reduces the chances of those affected to escape from their
situation, so that malnutrition tends to become self-reproducing.
- Commodity trap. According to UNCTAD (2002), least developed countries that are
specialized in primary commodity exports are locked into a national poverty trap. The
unstable and declining prices of these commodities squeeze the room for private and
public investment in export diversification, which diminishes the possibilities to diversify
into more remunerative export activities.
1
It is not necessary to adhere to endogenous growth theory in order to explain why some countries
experience a growth miracle. Also the modern classical growth theories can account for this (Parente,
2001).
15
Specific poverty traps like the above may reinforce each other. They may also interact with
socio-political traps. Bad governance and social capital problems have often been seen as
drags on development that are rooted in certain cultures. However, if agricultural growth
breeds social capital, as has been suggested above, mechanisms that cause agriculture to
stagnate might in their turn slam a low social capital trap. (Poverty-induced high individual
discount rates may make individuals opt for non-cooperative strategies that give higher
immediate pay-offs but increase distrust.) In this way, an encompassing unsustainability spiral
may develop with effects on natural resources, poverty, health as well as culture and
governance (Rabbinge 1997, 2006).
Poverty traps have major implications for the relation between trade policy and
development. Heavy taxation of farm exports may not just retard growth but push the
economy into a low level equilibrium from which it can not easily escape. Removal of import
restrictions may also have perverse effects. Rather than an efficient reallocation of production
factors, the resulting reduction of farm incomes might have effects like environmental
degradation and increase in corruption. As a consequence, positive effects of trade
liberalization might be smaller than predicted by standard trade models, or even turn out to be
negative.
16
3. Regional patterns
Above we have surveyed theories about different mechanisms that may affect the relation
between agricultural trade policies and development leading to outcomes that deviate from the
standard model. However, these mechanisms are not randomly spread over the developing
world. They form patterns that differ from one region to another, and that are linked to
different economic-political regimes that have evolved in the world. These regimes also help
to explain the different positions and blocks that have appeared in international trade
negotiations.
Any attempt to characterize regional regimes abstracts from the heterogeneity within
regions themselves. There are wide differences between countries within the same region, and
even within countries themselves. Nevertheless, there are clear regional patterns. Kenya has
much more in common with, say, Ghana, than with Bangladesh or Brazil. This makes it
useful to distinguish a few ideal-typical regimes. Below we characterize three such ideal
types: balanced growth (mainly in East and South Asia), unbalanced growth (mainly in Latin
America but also in, e.g., South Africa), and involution (mainly in the rest of Sub-Saharan
Africa).
3.1 Balanced growth
This regime is characterized by developmental states that achieve an economic revolution in
agriculture which paves the way for successful industrialization. Central mechanisms in it are
endogenous growth effects and linkage effects of agricultural growth on non-farm
development. The regime is typical for areas with a long history of population growth,
agricultural intensification, economic differentiation and state formation. These are found in
South Asia, East Asia and Java (but to a lesser extent in the rest of Southeast Asia), where the
evolution of intensive irrigated wheat and rice systems interacted with the development of
high population densities. Industries and trade, class differentiation, individual property
rights, state structures, and ascetic-commercial cultures all evolved at an early date. In the 14th
century, China was more developed than Europe. When Europeans arrived in these areas in
the 16th century, their interference remained long limited to the establishment of trading posts
on the shores. When they colonized parts of these regions, they took control of the
commanding heights, but below these, the existing societies remained largely intact.
Pressured by population growth and aided by the raising effect of this growth on agricultural
prices, farmers continued to intensify their production. Price rises in Europe and decreasing
shipping costs stimulated the development of tropical export crops on indigenous farms and
European owned plantations.
After 1875, the Transport Revolution and a new phase of the Industrial Revolution in
Europe and the US caused the global regime change that according to Schultz (1945) broke
the age-old relation between population growth and agricultural prices and led to recurrent
price falls in agricultural world markets (see above under dynamic disequilibrium). Western
Europe and white settler countries resorted to agricultural protection, which allowed farm
progress to continue behind high tariff walls (Koning 1994). Asia’s indigenous socio-political
structures favoured a similar response. An ascetic-commercial culture and a long process of
state formation had fostered a political middle class with an open eye for long-term interests.
Besides, differentiated economies with property rights in rem rather than property rights in
people (cf. North & Thomas 1973) stimulated a class-based expression of farmer interests.
These characteristics were the pillars for Asia’s ‘developmental states’ (Johnson 1987). These
sooner or later started to support farm incomes responding to open or latent farmer pressure
and perceived needs of national development. In the Japanese empire (including Korea and
Taiwan), agricultural development was supported from the Interbellum. In Japan, this enabled
17
a powerful linkage effect: rural incomes fuelled the domestic demand for simple manufactures
that were the core business of the country’s emerging industry (Ohkawa & Rosovsky 1961;
Ohkawa & Shinohara 1979). After WWII, this pattern was repeated in South Korea and
Taiwan (Francks et al. 1999; Park & Johnston 1995). Until the mid-1950s, farmers in these
countries benefited from massive American aid, large-scale redistribution of wealth by land
reform, and high post-war world market prices. It allowed increases in farm production and
farm incomes that became the driving force behind the development of import substitution
industries. After the Korean War, international agricultural prices declined and agricultural
development stagnated, entailing a slowdown of industrial growth. This was one of the factors
that prompted the governments of both countries to stimulate industrial exports, but the
recovery of industrial growth in the 1960s owed as much to a new rise in rural incomes. In
Taiwan, this was mainly due to the efficient investment of large amounts of American aid into
agricultural infrastructure, research and extension under the aegis of the Sino-American Joint
Commission on Rural Reconstruction (Thorbecke 1979). In South Korea, it was also due to
the introduction of fertilizer subsidies, import protection, and a strong increase in rice prices
paid by the government. This caused a significant improvement of the terms of trade for
farmers in the domestic economy.1 When around 1970, agricultural growth slowed down
again, both countries provided positive and increasing protection to their farmers. This was
followed by new increases in farm output and incomes, and may well have secured that
agriculture’s contribution to the domestic demand pull for industrial growth continued, even if
the relative importance of this contribution declined (cf. Timmer 1995).2 In communist China,
agricultural growth, although stimulated by large-scale land reform and conscious
government planning, was handicapped by a policy model that kept agricultural prices low to
favour forced industrialization. A real leap forward in agricultural growth, and its accelerating
effect on non-farm development, had to wait for the liberal reforms of the 1980s, which in this
case meant an improvement of price ratios for farmers.
Meanwhile, in countries that had been colonised by European powers, colonial
governments had refused to give farmers the protection that farmers were given in the
colonial mother countries. As a consequence, unfavourable price ratios discouraged farmers
from realising the investment in sustainable land management that was needed to make
population growth sustainable. As a consequence, in many areas, farmers were pushed in a
trap of poverty and soil degradation, which hampered economic development. Classical
publications about poverty traps in developing countries like Geertz (1963) and Myrdal
(1968) fitted in this context. Independence brought a turnabout. Myrdal called his magnus
opus Asian Drama because he saw the political classes of the new states as a dramatic hero
that aggressively pursued economic growth and progress. Ascetic-commercial Asian cultures
produced post-colonial governments that were sensitive to longer-term objectives of national
development. Also, these governments were more open to the demands of farmer movements
than their colonial precursors had been. Several governments have consciously supported and
protected their farmers, as is exemplified by the systematic stabilisation of rice prices by the
state logistics agency Bulog in Indonesia (Dawe 2001; Timmer 2002). These policies allowed
an accelerated agricultural development that, together with high-yielding rice and wheat
varieties produced by international research institutions, led to the Green Revolution,3 and
1
This was so even if in real terms protection remained negative because of the overvaluation of the
currency (Moon & Kang 1991).
2
Some economists assert that rapid growth was only possible because an advanced industrialisation
made it possible to bear the burden (e.g. Anderson et al. 1996), but this is unlikely. Especially in SouthKorea, agricultural protection started when heavy industry was still in its infancy (Francks et al. 1999).
Finally, that protection has frozen agricultural structures is an exaggeration. Especially Taiwan is a
paragon of successful agricultural diversification. It is true that protection started in rice and, in South
Korea, was coupled to government efforts to introduce a new high yielding rice variety. However, the
policy was soon extended to other farm products. Only feeds were less protected, to moderate the costs
for domestic livestock producers.
3
See data in Dorward et al. (2001) on the role of stabilizing or supporting price policies in green
revolutions.
18
became an engine of successful industrialisation and economic growth. Since the 1960s, the
relative incidence of hunger and food insecurity has strongly decreased. Like in West Europe,
agricultural development involves the displacement of many small farmers and farm
labourers, but by and large, these can be absorbed by the growing non-farm sectors in the
countryside and in the cities. The loss of traditional farming livelihoods, although it entails
hardship, does not lead to the widespread distress that is seen in some other regions.1
The above economic-political configuration goes far to explain the current position of
East and South Asian countries and Indonesia in agricultural trade negotiations. There is
considerable opposition against the dismantling of protectionist policies that are seen as vital
for food security, rural welfare and balanced national development. Hence the reluctance of
Japan or Korea to reduce their farm tariffs, and Indonesia’s leadership of the G33 that defends
the right of developing countries to protect ‘special products’. On the other hand, although
agricultural growth was important as a starter of modern industrialization, the success of the
latter has made many countries less dependent on agriculture and increased their willingness
to make agricultural concessions if this helps to expand their exports of manufactures and
services.
3.2 Unbalanced growth
This regime is characterized by extreme inequality, marginalization of the rural underclass,
and economic disarticulation. There is agricultural growth, but its non-inclusiveness limits its
linkage effects on non-farm activities. Endogenous growth and poverty traps co-exist in
national development. This regime is typical for regions where material flows and political
conditions led to a history of large farm entrepreneurs exploiting a mass of rightless
agricultural workers. In the Americas, Oceania and Cape Colony, European conquerors ran
over peoples who were an easy pray for their arms and diseases (Diamond 1998). In the
temperate parts of these regions, the evolution of farming systems and societies followed the
West European model, but in the (sub)tropical Americas, the high demand for tropical luxury
products in Europe or for staple foods for the Andean mining economy stimulated the
development of large estates or plantations. (In the Spanish areas, large farms partly evolved
out of the encomienda system of large military estates that the conquistadores introduced as a
control structure following the model of the reconquista of Moorish lands in Spain.) Because
Eurasian diseases decimated the indigenous population and the abundance of land allowed
workers to settle as independent peasants, large farms struggled with labour shortages. To
solve these, planters imported African slaves or recruited indentured servants (long-term
contract workers) among poor people in Europe or Asia. It created a social divide between
well-to-do planter elites and rightless masses of plantation workers. This encouraged
aristocratic (or ‘oligarchic’) political structures and set its stamp on economic development.
Comparative advantage in export crops stimulated imports rather than domestic production of
industrial goods, and the social divide restricted the demand for middle class consumption
goods that could drive domestic industrialisation (Johnston & Kilby 1975).
When international agricultural prices declined after 1875, aristocratic rule and
industrial underdevelopment allowed the agrarian elites in the latifundio societies to shift the
burden to the rural poor. Large farms survived by the establishment of repressive labour
control systems or the mass eviction (‘marginalisation’) of workers with precarious rights to
the land that they tilled. Oppressive labour conditions or extensive development coupled to
mass eviction of workers allowed estates and plantations to reduce production costs and to
survive in the face of low output prices. In South Africa, the southward migration of Bantus
1
Alongside the green revolution areas, there are other areas where less favourable ecological
conditions or remoteness of markets have hampered rapid farm progress. These areas suffer when
output prices adjust to the decreased costs in the green revolution areas, and stay behind in employment
and incomes. Nevertheless, they still benefit from successful national development that allows people
to migrate and find jobs in other areas within the region.
19
and the northward migration of white settlers using the disruption that the Mfekane caused
among Bantu populations allowed a similar response (Beinart et al. 1986).1
The juxtaposition of extensively cultivated latifundios and marginalised masses of
rural poor generated social tensions that made the latifundio societies hover between
revolution and counterrevolutionary repression. Land reform became a crucial issue. Mass
eviction caused forced migration of people to the cities or to less-favoured areas like the
higher ranges of the Andes or the Amazone forest. Especially in Latin America, the exportand-low-cost orientation of ruling oligarchies made them prone to import cheap food from
other countries. The low rent from food production stood in sharp contrast to the high rents
form illegal productions like coca or marihuana. Food production areas were struck by a
spiral of population pressure, poverty and soil degradation. These developments bred
unbalanced economic growth and reproduced gross inequalities also in the cities (Janvry
1981; Johnston & Kilby 1975).
The above explanation largely explains the position of Latin American countries and
South Africa in agricultural trade negotiations. The continued influence of export oriented
agrarian elites and the weight of large farms in the national economies induce governments to
favour global liberalization of agricultural trade. This is true for right-wing oligarchic regimes
(Pinochet, Videla) and for populist counter-regimes (Lula) alike. For the latter, the demand of
agricultural liberalization serves also to create exchange money for the continued protection
of import substitution industries. These various considerations are behind the support of these
countries for the G20.2
3.3 Involution
This regime is characterized by a complex of poverty traps that lead to rural stagnation and an
absence of linkage effects that could stimulate non-farm activities. A flight from the land
leads to a political market based on doling out public sector jobs and to an inflated
bureaucracy, the expenses of which deepen the malaise in the private economy. This regime is
typical for areas where rather undifferentiated traditional farm economies with fluid
‘personalist’ socio-political structures have persisted (cf. Goody 1976).
The ‘scramble for Africa’ coincided with the decline in international agricultural
prices. This limited the establishment of European-owned farms and plantations, leaving the
existing local societies and farming systems largely intact. Decades with more favourable
world market prices induced investment by petty-capitalist farmers (Hill 1963; Iliffe 1983;
Munro 1976), but these developments were thwarted because colonial governments refused to
support black smallholder farmers against new price falls. Unlike in South and East Asia,
relative abundance of land for some time allowed an escape by new reclamation and
horizontal expansion of subsistence farming. However, in those areas where the confiscation
of land for white settlers had closed this safety valve, a soil degradation trap already appeared
around 1900 (Bundy 1972; Huijzendveld 1997).
Figure 1: Developments in African agriculture and the international price evolution
(real prices in England, 1867-77 = 100)
1
In the Cape Colony, the impossibility to grow tropical crops had until then favoured an evolution like
in the temperate Americas and Oceania.
2
It should be noted that these considerations may be opposite to those of G20 members India and
China. While the latter want in fact to protect their agriculture but are willing to make concessions in
order to increase their industrial exports, many Latin American governments have a real preference for
agricultural free trade but want to protect their industrial sectors.
20
Developments in the large farm sector
160
Rise of
indigenous
plantations
Plantations, white settlers,
confiscation of black lands,
squatter eviction
120
Scramble
80
Decline of indigenous
plantations
40
Disinvestment, squatter system,
outcropping, withdrawal into trade
0
1800
1825
1850
1875
Wheat prices
1900
1925
1950
Cane sugar, coffee & tea prices
Developments in the smallholder sector
Rise of petty-capitalist black farmers
160
Food crops
(South Africa)
120
Cocoa (West Africa)
cotton (Uganda)
wattle (Kenya)
coffee (Tanzania)
food crops (mining areas)
Food & cash crops
throughout the
region
80
Involution near the white belts
40
Widespread erosion alarm
0
1800
1825
1850
Wheat prices
1875
1900
1925
1950
Cane sugar, coffee & tea prices
Source of prices: Mitchell (1990).
Population growth gradually closed the safety valve in other areas too, and the fall in
international agricultural prices around 1930 led to widespread alarm about the increase in soil
degradation (Koning & Smaling 2005). Colonial governments failed to protect African
smallholders (Munro 1976). The population-environmental vicious cycle deepened and
generated cultural cycles of conflict and distrust in local communities (cf. Berry 1993).
Nevertheless, WWII and its aftermath saw a new recovery in international agricultural prices
which led to new investment by petty-capitalist smallholders. In the 1960s, per capita incomes
in Sub-Sahara Africa were higher than in Southern Asia.
The big divergence came with decolonisation. Whereas post-colonial Asia had strong
21
farmer movements and nationalist governments that were responsive to their demands, postcolonial Africa had neither of these. Traditional African societies had been characterised by
egalitarian inheritance norms, property rights in people rather than material assets, and fluid
and personalist local political structures. The interaction with the emerging world economy
century had reproduced rather than changed these internal characteristics. So the societies that
colonial powers left behind had clientelist socio-political relations rather than class-based
interest organisations (Bayart 1989; Goody 1976). Politicians were obliged to remunerate
supporters with public sector jobs, and farmers were too weakly organised to prevent footing
the bill. As a result, the colonial policy of taxing rather than supporting agriculture was not
reversed like in Asia, but exacerbated. Agriculture was milked dry to pay the expenses of
expanding bureaucracies, while food was kept cheap to benefit their employees. As a
consequence, farm-gate prices ratios worsened compared to the terms of trade in world
markets (Bates 1981).
This anti-agrarian policy bias got serious effects when world market prices collapsed
once again after the 1970s. The petty-capitalist growth of the 1950s-60s gave way to
involution at an even larger scale than in the 1930s. It caused a flight out of agriculture, but as
rural malaise generated no markets or social capital for non-farm activities, this was not
absorbed by robust non-agricultural growth. Instead, it led to a proliferation of marginal
activities and increased jostling for jobs in the public sector. Meanwhile, falling export
earnings and economic stagnation made the expansion of bureaucracies bog down into fiscal
crisis. Foreign lending gave briefly respite, but the ensuing debt crisis soon forced
governments to accept the conditions imposed by international donors. These were met, first
by cuts on public services, then by reductions in public sector wages, and only in the last
place by public sector retrenchment. While farmers suffered from the neglect of roads and
other public services, the decrease in urban earnings (sometimes exacerbated by the closure of
mines due to falling mineral prices) also affected them. The flow of urban savings to the
villages gave way to a reverse subsidizing of urban livelihoods by rural activities. In some
places a return migration began to increase the crowding in rural areas (Bruijn et al. 2001).
In the cities, unemployment heightened the importance of faction and origin for
finding positions and sustaining social safety networks. Urban populations remained
patchworks of immigrant groups from certain native areas who maintained strong
relationships internally and with their home villages. Civil organisations became democracy
undermining vehicles of competing immigrant networks (Ikelegbe 2001; Patterson 1998). Bad
governance, corruption, and violent conflict became rampant.
Again, the above explanation largely explains the position of Sub-Saharan African
countries (except South Africa) in international trade negotiations. Not surprisingly, the
African Group and the G33 (to which many of these countries belong) are wary of the erosion
of effect that OECD liberalization will have on their trade preferences, demand the right to
protect their own farmers, and urge for new international arrangements to support the prices
of tropical export crops. Indeed, with the exception of tariff escalation and cotton subsidies in
OECD countries (hence the West African cotton initiative), these countries can expect few
benefits from agricultural trade liberalization. Nevertheless, their governments are seldom
vigorous defenders of protective farm policies. Many are more concerned about staying in
power for a few more years than about long-term national development, and they fear the
reaction of the urban public sector middle class to rising food prices. Similar short term
considerations make them ready to trade other priorities for trade related technical assistance
which they hope will help to pay a few more officials. However, both because of this
opportunistic attitudes and because the real interest of the country may not fit the liberal
donor paradigm, the outcomes of such assistance may be quite disappointing from the donors
point of view (Hospes & Koning 2005).
22
4. Case proposal 1: Bolivia
4.1 Introduction
As argumented in the former, Latin America is characterized by the historical emergence of a
agricultural structure that can be labelled as ‘unbalanced growth’. Bolivia’s agricultural
structure is a clear example of this. Bolivia is the poorest country in South America with
Gross National Income (GNI) per capita at US$960 per annum. Over 60% of Bolivians live
below the poverty line and 30% live on less than US$ 1 per day. The majority of Bolivians
are indigenous (mainly Aymara and Quechua), accounting for at least 60-70% of the
population and for an even higher proportion of the rural population. The indigenous
population constitutes the vast majority of the poor and extremely poor in Bolivia, and
exclusion and discrimination remain widespread.
Bolivia is a country placed geographically and politically between the Comunidad
Andina de Naciones (CAN) and the Mercado Común del Sur (MERCOSUR). It has been the
first country where structural adjustment programmes where implemented in 1985 and
agricultural policies have been shaped accordingly in the preceding periods. Most producer
support instruments in agriculture (tariffs, price regulation, credit subsidies) have been
discontinued from 1985 and, with the exception of policies to control coca production, only a
limited number of ‘new instruments’ for agricultural development and innovation have been
introduced beyond pilot experiment level.
In the eastern areas (border with Brazil) and tropical lowlands of the Oriente, in this
paper referred to as ‘Lowlands’, the main crops are soybeans, sugar, maize, sunflowers and
tropical wood, grown for the domestic and foreign market. In the Andean Region the major
crops are tubers and cereals and agriculture has only developed slowly at annual averages of
1.8 per cent between 1993 and 2003. Labour in this area has a per capita income of less than
US$780 and poverty affects 64.5 per cent of the population. In the tropical humid zone,
agricultural production grew annually by 5 per cent between 1993 and 2003, per capita
income exceeds US$1,100 and the rate of poverty is 48 per cent. (WTO 2005)
Bolivia’s agrarian restructuring is a typical example for global agrarian restructuring
processes in developing countries, and an illustration of expected outcomes of further
deregulation and trade promotion through WTO and related policy processes. Evolving
political dynamics in Bolivia from 1999-2006 will shed more light on interests and policy
advocacy processes in WTO and identify the structural mechanisms that underlie these
processes, through Bolivia’s changing levels of participation in alliances like Cairns Group,
G20 and G33.
4.2 Genesis of Bolivia’s unbalanced agricultural growth
The emergence of a bipolar agrarian structure.
Gradual colonial occupation of Bolivia from 1535 has lead to the imposition of land property
rights and modes of agrarian development, typical for the agrarian structure that had emerged
in South East Spain during the 14th and 15th century, where large landholdings were titled by
the Spanish Crown to loyal military officers as reward for their support in fighting the Mores.
The first conquistadores were rewarded with entitlements to land in the fertile valleys of the
Andes, and had to establish effective control of that area by force and by negotiation with the
Indian villages already settled on those lands. This controlled system of exploitation of the
indigenous population was named the ‘encomienda’ system. Communal tax paying, forced
23
labour recruitment for the mining sector, and bounded labour obligations were organized in
different forms and effectively enforced by military power.
The colonial economy was centred on mining, especially on the extraction of metals
for use in Europe: especially silver and gold to increase monetary circulation. These precious
metals financed the continuous fiscal deficit of Spain due to continuous warfare with other
European States, and made it possible for the nobility, clergy and urban population in Spain to
import luxury consumption items from neighbouring countries (e.g. the Netherlands) boosting
their respective economies.
From 1572-1576 the Spanish crown reformed the forms of land tenure and labour
exploitation introducing several legal codes. To pacify the region, modernize land
exploitation and widen the tax base for the Spanish crown, a dual structure of property was
established with two dominant land tenure systems: Privately owned “Haciendas” in the
valleys, and self-governing “Ayllus” in the Highlands. The essence of the pre-colonial Ayllu,
with integration of different spatially separated agro-ecologicial zones (Highlands, Valleys,
Tropical area), was replaced by a system of geographically defined areas. The Ayllus were
generally reduced to their nucleus in the Highlands and lost their ‘colonies’ in the valleys.
Both Hacienda and Ayllu1 provided food for the domestic market and (with increasing
efficiency in transport) also export commodities for the international market. The co-existence
of these two property rights systems during he Colonial period may be termed as the ‘colonial
pact’ (Klein 1982).
The provision of labour power for the mines was organized through the “mit’a”, the
obligation of villages, established already by the Inca’s, to deliver a specified number of
workers on a regular basis as a tribute to the ruling class. The indigenous population was
differentiated in several social classes: the persons with collective land titles in their ayllu
(‘originarios’), persons with private landholdings (‘kurakas’), people living in the ayllu
without legal entitlements to land (‘forasteros’) and the indigenous families that virtually
belonged to the hacienda, as bound labourers (‘yanaconos’ or ‘colonos’). Due to the rise of
mining metropolis Potosí, the provisioning of food by the valleys (Chuquisaca, Cochabamba,
Tarija and Tucuman (Northern Argentina) resulted in a dynamic agricultural sector, geared to
surplus generation and marketing farm output.
Mid 18th century the ‘silver boom’ came to an end. The urban population declined
sharply, Potosí declined from being the world’s most populated city with 150.000 inhabitants
in 1600 to only 30.000 in 1750. Oruro decreased from 80.000 to 20.000 in the same time
lapse.This declining urban population had severe consequences for agriculture. Markets
shrunk, and haciendas (especially around Cochabamba) were increasingly fragmented and
rented to small holders. The decline of hacienda profitability opened up access to land by
individuals, but also led to the gradual extension of collective lands used by the indigenous
communities that benefited from reduced mit’a obligations and associated demographic
growth.
The struggle for Independence in the beginnings of the 19th century was largely
motivated by the refusal of the domestic private sector to function as a tax base for overseas
economic growth. The driving forces for the nationalistic sentiments that lead to
Independence did not emerge from the indigenous population but from families that benefited
from the ‘colonial pact’. During the 18th century mineral prices had risen sharply and the
mining sector regained its dominance in shaping national politics. The hacienda system
regained profitability due to increased demand for food in the mining areas. Late 19th century,
the investments opportunities in mining became increasingly concentrated in international
companies, making access to land one of the outlets for capital accumulated by the Bolivian
entrepreneurs. Improved internal (railways) and transatlantic transport facilities (steam
shipping) triggered investment opportunities for the production of agrarian surplus for the
world market.
Both ‘Hacienda’ and ‘Ayllu’ land property systems are generalisations and abstraction from a more
complex and dynamic reality where communal land titles and private landholding have always been
deeply intertwined (Klein 1993).
1
24
To open up the land market for private investment, several legal and political intents
were made to abolish the land titles of the Ayllu’s, however with limited ‘success’ due to
several localized indigenous rebellions (Langer 1989). The indigenous villages where loosing
in also on individual indigenous small holders that were not born in any ayllu and that had
worked as tenants or sharecroppers on haciendas and were forced to give back the use of the
land to the hacendado. They were ideologically backed up by the state in their intents to get
access to land as private property and served as example to legitimate the abolition of the
ayllu as land property system. However, as mining families strengthened their position as the
ruling class in the 20th century due to recovering mineral prices, the coexistence of two
different land tenure systems was politically ‘accepted’ (though continuously contested) as a
necessity for internal social stability.
The apartheid inherent to these disarticulated and cultural different social worlds with
its instrinsic injustice and subordination became clear for many ‘enlightened’ intellectuals
during the Chaco War in the ninety thirties. Obligatory military service by all young
inhabitants had been replaced the old system of provision of soldiers through hiring, and this
lead to a change in awareness and the emergence of a national identity. The Chaco War
resulted in the massacre of young people of rivalling countries (Bolivia and Paraguay),
financed by the associated oil industries striving for gas and petrol reserves. It was the crucial
event that changed the political landscape in Bolivia: from a dual economy politically
dominated by the mining oligarchy, to an economy lead by groups articulated with the
national economy.
The defeat in the Chaco War paved the way for the National Revolution in 1952,
when workers, intellectuals and peasant succeeded in replacing the political dominant class of
mining barons. Foreign investments in mining were nationalized and a drastic land reform
ended the hacienda system to the benefit of the former ‘colonos’ that lived and worked on it.
Nearly all haciendas in the Andean valleys have been expropriated through the land reform. A
strong peasant organisation emerged in a system of village syndicates that proved a loyal
support base to the respective democratic or autocratic governments, as long as these
respected their access to (collective property) land, generally referred to as the MilitaryPeasant Pact (1960-1982).
During the seventies, the ‘orginarios’ organized in Ayllu’s, who never did benefit
directly from any land reform, joined with urban resistance groups and with the organised
indigenous peasantry of land reform beneficiaries, and effectively could break down the
military dictatorship in 1981. A democratic and progressive government came to office from
1982-1985. This UDP government hung on to the expectations of the popular sectors for a
mayor increase in economic welfare, but could not handle the increasingly adverse
international economic context of falling mineral prices and a widening fiscal deficit. The
international debt-crisis struck Bolivia in the heart and resulted in a breakdown of the
domestic economy (hyperinflation) and the resignation of president Hernando Siles. The 1985
economic bankruptcy and de-legitimated ‘popular’ political projects, and gave way to a series
of governments that combined populist discourse with ‘Washington Consensus’ economic
recipes (1985-2003) and the end of an era of ‘state capitalism’.
However these coalition governments did not resolve the basic contradictions in the
Bolivian agrarian structure, where large parts of the population still remained excluded from
development. Land reform in the Amazon Basin stagnated, by half-hearted policy
implementation by governments that stressed the need for legal formalisation of the status quo
(to make land fit as collateral for loans) and did not get into serious land redistribution from
latifundistas to land poor households. Meanwhile the 1953 land reform in the Andean Valleys
favoured the fragmentation of landholdings (‘minifundismo’) and the creation of a class of
land-poor pluri-activity households that use agriculture primarily as safety-net and as food
security ‘base’ for risk in non-farm activities (migration, commerce, education, etc.). This
group of peasants (‘campesinos’) suffered the effects of both economic concentration in urban
areas and the gradual impoverishment of rural areas. World Bank (2005:13) indicates that real
income average between 1950 and 2000 fell slightly, while by comparison over this period
real incomes rose by 75% in Argentina, 200 % in Chile and 350% in Brasil. The urban
25
economy rose with an informal and intermediary sector as its main sector of (precarious)
employment generation. This informal intermediary sector became is dominated by a new
class of ‘indigenous bourgeoisie’ (cholo’s ). The rise of this cholo economy challenged the
traditional dichotomy of the urban mestizo versus the rural indigenous, and discursively
articulated the protests against the ‘corrupt white politicians’ by re-constructing and
emphasizing the pre-colonial indigenous identity. Their increasing economic power and the
increasing political democratization and proliferation of political parties, motivated the rise of
indigenous political leadership and indigenous political projects. The contradiction between a
stagnating domestic economy and a rising foreign dominion of the former state enterprises in
mining and service provision, created outbursts of popular discontent (2000-2004) and
accentuated the dichotomy between the state as abusive and corrupt versus a popular mass
movement as democratic and reliable, in a sequence of popular rebellions that forced
presidents out of office. It resulted by 2006 in a government of popular sectors (dominated by
MAS) that, like the UDP government, faces high expectations from social movements, and,
unlike the 1985 UDP Government, starts in a context of relative economic stability and high
export commodity prices.
Spatial effects of specialisation in Bolivia’s agricultural sector
The effective opening up of the Bolivian economy from 1985 and the weakening of state
enterprises speeded up the alignment of Bolivian agricultural production with global
tendencies towards specialisation according to comparative costs. Domestic food supply had
largely been depended on local production, but gradually became influenced by imports from
areas with lesser net production costs. The process has lead to a more accentuated
specialisation of the agricultural sector in Bolivia in the world market, and to a more
accentuated specialisation between agricultural regions inside the country (Perez 2002).
In the Andean Region, geographical conditions influence production costs in a way that bulk
production for large scale processing industries is not feasible. Production for niche market
production (organic, fair trade, quality seeds, local branding) is a tempting strategy for
organised producers but remain limited as a proportion of total marketed output. Horticulture
and dairy appear as the most dynamic sectors in the Andean Region, related to their character
of being perishable and involving relatively high transportation and handling costs. For most
Andean smallholder produce (wheat, potatoes, maize) competition with products form outside
regions has been growing. Surplus dumping from northern countries and low cost bulk
production from neighbouring Argentina have resulted in a ‘shrinking’ local market for
traditional peasant production (Prudencio and Ton, 2004).
At the same time the comparative advantages of the Lowlands for low cost protein
production (meat and soybeans) and enabling credit policies for agroindustrial development,
caused an impressive growth of the agricultural frontier around boom-city Santa Cruz,
especially from 1990 onwards. After sugar and cotton in the seventies, soy bean production is
currently the main engine of agricultural growth. The agricultural system of soy production is
composed of soy as a summer crop and cereals (wheat, sorghum) or sunflower as a winter
crop. This second crop is largely determined by climate (humidity) and prices, causing a
rather dynamic agricultural system.
We may summarize the key differences in the dominant agricultural structure in both
areas:
CHARACTERISTIC
Dominant agricultural system
Markets
Dynamism
ANDEAN REGION
Diversified small holders
Self consumption and
domestic food market
No major technological
changes in the agricultural
systems, geared to risk
reduction through
LOWLANDS
Commercial farming
international and domestic
food markets
Rapid technological
innovations and introduction
of new crops and varieties in
the agricultural system,
26
diversification and pluriactivity
Use of natural resources
Influence of market signals
Link with input markets
Link with agroindustry
Linkages with national
economy
Intensive land use
Slow response
Limited
Small scale processing
Social safety net and food
provisioning
geared to the externalization
of financial risks to the
banking system
Extensive land use
Quick response
Highly input intensive
Contract agriculture
Foreign exchange generation
and production of raw
material for agroindustry
Specialisation processes are inherent to increased regional integration and globalisation. Scale
advantages and processes of clustering tend to concentrate industries in specific locations and,
when markets and economies become increasingly integrated, this concentration is likely to
happen not only within countries, but also between countries, shifting economic growth poles
to specific countries and leaving other countries behind (Giordano et al 2005). While this
process is especially analyzed for manufacturing and urban growth (Fujita, Krugman, and
Venables 1999), the same tendencies do also apply to agricultural specialisations processes.
We will analyse in more detail two sectors that have been influenced by these spatial
concentration tendencies: soybean and dairy. These two sectors, representing both poles of the
Bolivian agrarian structure, highlight some institutional dynamics that can explain the poor
performance of the Bolivian ‘unbalanced growth’ configuration to resolve the problem of
poverty and ecological sustainability. In the last paragraph we will indicate the logic that
these ‘dynamics in the real economy’ have in the alignment to advocacy groups during the
WTO Doha Round negotiations.
Soybean production. From the late eighties Bolivia assisted by huge World Bank loans in the
‘Eastern Lowlands Project’ created the basic conditions for the emergence of the integrated
soy cluster (Brenes et al 1999). The project created the productive infrastructure for increased
agricultural production in the Amazon plains. Forest clearing and the advance agricultural
frontier are increasing rapidly with a land use characterized as productive, high-value and
agroindustral. Hecht (2005) analysis this as a qualitatively new ‘logic of land occupation’
compared with preceding decades, when timber extraction or rent seeking investment
explained most of the dynamics related with Amazon forest destruction (Hecht and Cockburn
1989). During the eighties soy production growth was restricted by contradictory stimuli from
the economic policy, combining subsidized credit with sharply overvalued official exchange
rates that punished exports. Immediately after the 1985 devaluation and removal of price
controls, soybean production rose and Bolivia started to be a net-exporter (Kaimowitz et al
1999). The average annual growth rate of soybean production between 1983 and 2000 is
estimated in 22% (Pardo and Gudynas 2005). Infrastructural improvements in the Expansion
Zone developed in the World Bank Eastern Lowland Project 1990-1995, fostered soybean
production on high quality upland soils of former low density forests These soils have, in
contrast to the general soil quality in the Amazon Basin, an excellent soil chemistry though
high vulnerability to physical erosion. A decisive impulse for the soy boom during the 90s is
assumed to be the availability of cheap money derived from coca-cocaine trade to invest in
landed property and cattle and soybean cultivation. Basic infrastructure and cheap credit
availability motivated the influx of large non-Bolivian landowners from Brazil,
Canada/Mexico (Mennonites) and Japan. Most of the soy crop is now grown by foreign
producers and firms, with a fast growing Brazilian influx as major driver (Hecht 1995).
Minimal tillage and the use of transgenic varieties resistant to glifosate sprays
(Roundup Ready) is an increasing, though not yet the dominant, technological package in
Bolivian soy production, estimated to comprise 20-30% of the total crop (Pardo and Gudynas
2005). A major agro-ecological problem caused by this minimum-tillage system is soil
27
compacting as a consequence of machinery use. Soil compactation leads to decreasing water
infiltration capacity of the soil, causing increased water erosion immediately after heavy rains
and drought risks in the time between rains. However, former high tillage systems have
undoubtedly proven to be more erosion sensitive. The first Mennonites colonies have been
abandoned, after being degraded through erosion and desertification. Agro-ecological damage
of soy monoculture (compacting, intensive glifosate spraying and transgenic contamination
by RR soy varieties), seems however secondary when we look at the severe ecological and
biodiversity loss due to the practice of forest clearing.
Soy cultivation is generally considered to be the driver force of Amazon forest
destruction. As the most of this destruction are in more open wood landscapes; forest types
that have received less attention in national land use planners (Hecht 2005). They are referred
to as ‘monte’ and not seen as a ‘real’ forest, typically the dense rainforest. Environmental
organisations did not prioritize on these types of forests in global campaigns, and have only
recently reconsidered its biodiversity, placing the Bolivian Amazon forest higher on the list of
most endangered ecosystems. It is estimated that more than 2 million hectares of Bolivian
lowland forests have now been cut. New landholdings establish themselves typically inside
the forested areas, clearing the land with bulldozers laying down the forest by chain-scraping
the land. The resulting immense rectangles of land, separated by small vegetation rows to
reduce wind erosion, are clearly detectable on aerial photos. Annual forest clearing from the
late 1980s onwards is estimated an astonishing 123.000 has/year (Steiniger et al 2001).
Soy expansion in the Bolivian Amazon Forests (Pailón Area, east of the Rio Grande)
Source: http://maps.google.com, accessed August 2006
Soybean interests dominate Bolivian trade policies and soy processing is dominated by
international companies. The biggest soy processing facilities is owned by Archer Daniels
Midland (Sociedad Aceitera del Oriente). The fastest grower is Gravetal-Bolivia with
Colombian investors as shareholders. Cargill is present with the company Cargill –Boliva.
Exports of soy products moved more than 400 million USD in 2005. Most of these
exports are to countries that are part of the Comunidad Andina de Naciones, the Andean
customs union1. Bolivian soy exports benefit from the flexible tariff rate protection in the
1
Till 2005 full members were Bolivia, Peru, Ecuador, Colombia and Venezuala. Venezuela decided to
leave the custom union in 2006 in response to the bilateral FTAs between US and individual CAN
28
CAN that shields Bolivian exports against competing producing areas, the Sistema Andina de
Franja de precios (SAFP). SAFP stabilizes internal prices by lowering tariffs when world
prices rise above the five year average, and increasing tariffs when world prices fall below
that reference price. The system was introduced in 1994 by CAN Decision 371 and covers 13
product groups including soy beans and soy oil1.
Short term effects of partial market liberalisation of Andean countries through
bilateral Free Trade Agreements with US, are presented as remarkably negative (Pardo and
Gudynas 2005). The Colombia-US FTA is said to lower soy exports of Bolivia to Colombia
with 100 million as a result of the duty free quota for US soy imports to this country. The
applied tariff for soy imports from the US will change from 24% in 2006 to general quota free
access in 2016. Effects on Bolivian exports will be significant, though restricted to only part
of the market. Till 2016 a tariff free quota will be in place for US soy oil that increases
gradually from 31.200 tons in 2007 to 42.699 tons in 2015, while Bolivian exports of soy oil
in 2004 are registered on 87.500 (CAN, http://www.comunidadandina.org).
More than half of the Bolivian exports to Colombia are done by the company
Gravetal Bolivia S.A. This company, owned by a Colombian investment group, started
operation in 1994 on the border with Brazil and started exporting soy products to Colombia in
1999. Large volumes of Brazilian and Paraguayan soybeans are temporally imported by the
company Gravetal Bolivia S.A. into Bolivia and re-exported to Colombia after processing,
Gravetal increased its processing capacity from 800 tons/day tot 2.200 tons/day in 2005
(http://www.gravetal.com.bo). Bolivia S.A. is the number 6 major importing firm in Bolivia
after some mining companies, importing 121.000 tons of soybeans with a value of 25 mln
USD in 2005 (Flores 2006), and makes Gravetal the biggest importer of agricultural products.
Their interests related with the tariff-free re-export of Brazilian soy are a crucial in
understanding the dynamics of current trade negotiations and the contradictory policy stands
of Bolivian governments during the MERCOSUR-CAN negotiation late 2003.
Dairy production. Dairy production in Bolivia started in1972 as part of the prevailing import
substitution strategy, and with ample support from international donors. Processing plants
were located in the major cities La Paz, Cochabamba, Santa Cruz, and complemented with
smaller plants in high potential dairy areas, around Sucre and (in 1978) Tarija. Initial
imported milk powder processing was gradually being replaced by local smallholder dairy
production delivered to the processing plants. Dairy production was triggered by several
investments subsidies and donations in (quality) cows and basic farm infrastructure. Local
producer associations were set up to deliver services in production with a 2% levy on milk
delivered by the producers to the plant. In the 1985, part of the structural adjustment
programme, the plants were decentralised to the departmental level and from 1994 all the
plants were privatised. The plants in La Paz and Cochabamba were merged in ‘PIl-Andina’
that was subsequently sold to the Peruvian company Gloria S.A., with reduced participation
of milk producers as minority shareholders. In 1999 the same company acquired also the
Santa Cruz plant that merged fully into Pil-Andina in 2004, establishing a virtual monopoly
situation in pasteurized fresh milk production in Bolivia’s major cities.
Milk production in the Andean Region is dominated by smallholders, with relatively
high production levels on with irrigated feedstock production. In the Andean valleys average
production/cow/day is around 12-13 litres, while in Lowland (Yapacaní) the production level
is 5-8 lts/cow/dia (Valderama 2004). Production volumes per farm unit in the Lowlands are
significantly higher due to the bigger herd size. Around Sucre the average dairy producer has
member countries. It coincises with its aspiration to join the MERCOSUR as a full member. Chile rejoined the CAN as an associated member in 2006
1
Only Ecuador, Colombia and Venezuela use the SAFP. Bolivia does not use variable tariffs, Peru uses
a similar system with an other product basket and tariff base, and Chile used a price band system for
only three products, but decided to stop using the variable tariff rate system due to WTO arbitration
(WTO dispute settlement DS207: Argentina against Chile).
29
2 or 3 cows in production on an irrigated area of 0.5-1.5 has, while in the Yapacaní area it is
around 40 animals on a average 50 has.
Domestic milk production rose sharply, outweighing population growth, and became
increasingly concentrated in the Lowlands area’s around Santa Cruz. However, impressive
production growth was also realized in the Andean Region, especially in Oruro and La Paz.
with rocket high annual growth rate of the volume of production: 21.4% in the La Paz area
and 37.5% for the Oruro area (Rojas 2004). The number of households rose 4.2% and 11.1%
respectively, indicating an ongoing specialisation process. In the Andean Region, women are
responsible for most of the daily care to the cows, while the men concentrate on the
agricultural labour for feed production and are typically engaged in off-farm economic
activities. This growth of production was accompanied with the establishment of several
small processing units and an increase in artisan cheese production. Most of these small and
medium plants are privately owned, some have been established by producer organisations in
alliance with development agencies.
Gloria S.A. is gradually concentrating production capacity in Santa Cruz, preferring
the provision of raw milk from medium and large holdings. The Santa Cruz plant grew in
processing capacity from 120.000 in 1999 to 250.000 in 2005, and with investments in
progress
to
increase
capacity
to
380.000
(PIL-Andina
2006,
http://www.pilandina.com.bo).The international character of the holding company has
induced to an increasing international trade of dairy products in and out of Bolivia. Till 2000
imports of milk powder were increasing fast and doubled in five year period. Pil-Andina is the
number 10 importing firm, with a total import value of 20 mln USD in 2005 (Flores 2006).
After 2000 Gloria S.A. began to become also a major agricultural exporter. It started
supplying its processing plants in Peru with semi-processed Bolivian milk products and
increasing domestic production substituted imported milk powder.
importaciones y exportaciones de
productos lácteos (kgs)
18,000,000
16,000,000
14,000,000
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
0
importaciones (kgs)
exportaciones (kgs)
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Source: Prudencio and Ton (2004), based on INE, http://www.ine.gov.bo
Exports are exclusively to Peru. An estimated 50% of imports come from Argentina and
another half from ‘the world market’ (e.g. New Zealand, USA, Ukraine, the Netherlands,
UK). This situation of a company that imports milk powder from outside the CAN and
exports milk powder to the CAN induces to think about tariff perforation (‘triangulación’).
Imports enter with the Bolivian flat rate of 10% but trade agreements with Chile (ACE 22)
and MERCOSUR (ACE 36) have resulted in the elimination of tariffs for imports form these
countries. Through its inter-company transactions Gloria S.A. is able to transfer benefits from
these trade preferences to processing plants in Peru, as the Peruvian processing plants have to
import milk powder from Chile and Argentina at a varying tariff rate between 25 and 50%.
30
4.3 Interest representation in agriculture
The organization and political representation of producers between the Andean Region and
the Lowlands differ sharply. The three dominant pressure groups in the Lowlands are
commercial agricultural producers, smallholders settlers and indigenous people. Within these
categories are important differences (e.g. between Bolivian, Brazilian, Mennonite, Russian
large landholders; between the different indigenous groups/nations; between Bolivian and
Japanese small and medium sized colonists), but more striking are the differences between
these three groups. Cultural differences are large and have produced different political logics
of leadership and representation. Varying alliances between these three groups on different
issues, give the Lowlands a high level of political complexity.
The main issues that dominate the agricultural policy agenda in the Lowlands are: credit
policies, property rights and agricultural research for crop development. These issues are
directly related to the ‘logic’ of the institutional organisations of the agricultural commodity
chains of the commercial farmers in the Lowlands: dependant on input pre-financing by the
agroindustry, land extensive monocropping and based on farmer management skills and
external crop technical craftsmanship.
In the Andean Region the main political organizations of the peasantry are the village
based structures of the village union - sindicatos campesinos- organized in Land Reform
areas of the Valleys and ayllu’s in the non-reform High Lands. The unions are organized by
CSUTCB in village, provincial, departmental and national representative branches. Ayllu’s
comprise different villages and are organized by CONAMAQ in larger territorial units, not
necessarily related with the Bolivian administrative structure of provinces and departments
but all belonging to the Andean Region. From 1999 on, the OECAs (economic peasant
organizations) entered national politics as a third force through CIOEC-Bolivia. CIOEC is a
national organisation and in the process of developing a departmental structure. The national
unit comprises the whole country, with major emphasis on the smallholders in the Andean
Region and the colonisation schemes in the Lowlands of small holders formerly part of the
Andean Region (colla’s).
These different interest representation groups are from time to time involved in
disputes for political leadership, often motivated by party political opportunism, but do not
have important contradicting economic interests nor cultural differences. The political
landscape in the Andean Region is therefore far less complex than in the Lowlands. The main
issues that dominate the agricultural policy agenda in the Andean Area are the rights of
villages to benefit from subsoil natural resource exploitation, the need for supportive market
regulations and an improved access to investment funds for agricultural productive
infrastructure. The institutional organisation of Andean small holder agriculture explains
these issues: pluri-activity of livelihoods, economic articulation with the local food markets
and dependence on external (donor) finance for agricultural investments. Land property rights
are an important issue too, though regulation of titling administration is more important than
conflict resolution.
AGRICULTRAL
POLICY
ISSUES
Credit
Land property
Agricultural R&D
Natural resource exploitation
Market regulation
Infrastructural investment funds
LOWLANDS
ANDEAN REGION
++
++
+
-+
+
-++
+
++
Agricultural policy making and legislation in Bolivia has traditionally been very responsive to
mobilizations of different interest groups. Road blockades on interdepartmental roads or in
the city centre (‘civic strikes’) are accepted ways to negotiate specific policy points. Villages
31
use it to demand government support to infrastructural investment. The supra-local use of
these pressure instruments in the Lowlands geared mostly around economic policies and
credit restructuring, while in the Andean Region these were especially related with issues
around property of natural resources. Though each coalition government invested in the
elaboration of agricultural policies (PNDAR 1999, PRSP 2001, ENDAR 2003) most
programmes and projects described in them did not mature or remained without funding,
while the measures with real impact respond to improvised replies to interest group demands.
This dichotomy of political interest representation and ad-hoc policy improvisation
explains partly the apparent ‘chaotic’ political turmoil in Bolivia. Popular mobilisations are
recurrent and oscillate in time. However, the political ‘tune’ is composed of two separate
‘radio frequencies’ derived from the Andean Region at the one hand and the Lowlands on the
other, that sometimes may outweigh each other (creating stability) and sometimes reinforce
each other (creating instability). This oscillation and instrumental tuning of these ‘radio
frequencies’ by varying government coalitions, has long explained the continuation of
paradox that characterize Bolivia: its relative political stability amidst a ‘Harmony of
Inequalities’ (Molina 2005).1
4.4 Key dynamics
In the foregoing paragraphs we made a description of Bolivia’s bi-polar agrarian structure as a
result of a historic pattern of unbalanced growth and highlighted the major poverty and
ecology impacts of the agricultural specialisation process. Using our institutional economic
analysis we will try to go beyond the mere description of the problematic duality in Bolivia’s
agrarian structure, and identify some general institutional dynamics and mechanisms that still
sustain reinforce this bi-polarity, related with the policy environment. Insight in these
dynamics might give clues for policy initiatives to influence these mechanisms for attaining a
more balanced and sustainable agricultural growth.
These key mechanisms are not mere abstraction from economic reality, but intimately
related to the dynamics of real markets. They are experienced by economic agents in their
transactions in the market and shape the institutional environment and regulatory framework
(Cullinan 1999), in a political process where interest representation, and power struggles are
an inherent feature.
Globalisation of agricultural markets
Consumption of imported agricultural products in relation to consumption of domestic
produce is relatively low in Bolivia. However, a small percentage of imports can be decisive
for price formation in domestic agricultural commodity chains, especially in urban markets
(Prudencio and Ton, 2004). Traded agricultural output is increasingly negotiated at world
market price and competition for local production on local markets comes from a widening
geographical area. Transactions of agricultural produce are not governed by prices alone, but
by other elements too, especially ‘frequency’ and ‘uncertainty’ (Williamson 2002). Price
fluctuations are an important source of uncertainty in agricultural production in developing
countries, and influence decision making by farmers on their farming system. Developing
countries, in contrast to developed countries do not have the means to provide public
institutions that cushion local supply chains from world price instability. Private institutions
and private actor strategies have emerged in response to this.
In the Andean Region, small holders typically use diversification of crops as one of
their main risk coping strategies. Transactions are usually made in spot markets with price
1
The emergence of the MAS as dominant nationalist political project for small holders and city
dwellers in the Andean Region from 2003 onwards, and its subsequent acceptance in the Lowlands, can
possibly change this phenomena of oscillation of political mobilizations and may create a platform for
a more stable and straightforward agricultural policy.
32
negotiations largely influenced by ‘reference prices’ in urban markets. Sometimes advance
payments are made by buying agents, but generally without fixing the final price. Thus, price
and climate risks come down to the producer only.
The Lowlands have an enabling environment for several risk sharing mechanisms
between chain partners. Soy and wheat production in Santa Cruz is delivered to agroindustries. These companies use pre-financing of agricultural inputs as their prime mechanism
to secure provisioning of their processing plant. The contract specifies the price to be paid for
the product, the inputs to be used and the mechanism (drawing rights) for obtaining input
credit. In compensations it demands exclusive delivery of the produce to the processing plant,
sometimes accompanied with quakity requirements. These contracts reduce the risk for price
fluctuations for producers and, important, does this before sowing time. This makes that
producers can responde to the (world market) price signals directly with changes in individual
cropping acreage.
The most direct risk reduction mechanism in this chain partnership was the
government interference in the credit system. Low soy prices and a stagnant domestic
economy in 1999-2002 created credit problems for the producers and companies in the
Lowlands that have been assisted by different debt rescheduling mechanism. These efforts
were functional in overcoming the period of low world market prices. Most problems of
indebtedness of commercial farmers in the Lowlands have been resolved by the price boom in
2003-2004.
During the period of low soy prices, the Bolivian soy producers also benefited from
price stabilization through the Andean price band system (SAFP). Bolivian governments have
curiously enough declined to use the system for cushioning their internal agricultural sectors
from periodic international price falls. However, in the case of soy the SAFP resulted in
relative favourable prices for exported Bolivian soy compared with US soy in their final
markets: especially Colombia and Venezuela. In the low price period (1999-2003) the SAFP
resulted in significant higher soy prices in these markets.
Concentration of foreign investment in material resource extraction
Foreign direct investment in Bolivia has been concentrated in extractive industries principally.
Petrol and gas mining has replaced the dominance of mineral mining. Commodity prices for
minerals and petrol based products rose sharply from 2004 onwards. This is largely attributed
to the high growth rates of the Chinese, Indian and US economy and their need for raw
material for domestic consumption and investment. The ‘grasp’ for resources is evident in
both the Andean Region and the Lowlands, especially in mining. The Andean Region and the
Lowlands will benefit from increasing foreign investments in mining. Contract conditions
related with taxes (regalías) and concession rights are focussing on gas and petrol mining, but
will be translated to metal mining too when the price level for metals on the world market will
continue to rise. However, technological advances limit needs for massive employment, and
the related impacts on the local food economy. Urban markets in mining centres like Potosí
and Oruro are increasingly provisioned by outside production, e.g. agricultural commodity
inputs for beer breweries and flour mills in the Andean Region, derive partly from the
Lowlands, but mainly from Argentina (Prudencio and Ton, 2004). Economic gains of
increased mining will depend on the use of the profits and regalias and less through the
linkages with other economic activities and the articulation with increased domestic consumer
demands.
China’s growth also explains the rise of soy prices and the growth of soy production
for the world market. China might be the fourth largest soy exporter, but is a large netimporter. To meet its rising vegetable oil and animal feed demand, China now must import
55-60 percent of its total consumption of soybeans. More than 40 percent of current world
trade in soybeans goes to China (Ash et al 2006). In 2006/07, China alone could dominate as
much as 83 percent of the growth in world soybean imports and 45 percent of the entire
volume of international trade (Ash and Dohlman, 2006). In respect of their agricultural
development policies, China is expected to specialize on labour intensive products for exports
and increasingly import labour extensive bulk, like soy from MERCOSUR. This ‘race’ for
33
future access to the resources necessary for growth and economic ascent (Bunker 2003) is
already reflected in the political dynamics of trade policy negotiation and regional investment
projects in Latin America. The tendency to create regional free trade blocks (CAN,
MERCOSUR) or even a continental free trade zone covering North and South America
(FTAA) has gradually been replaced by a complex set of intertwining bilateral free trade
zones negotiated by individual Latin-American countries with countries that are or will be
their most important export market, notably in Asia.
Increasing importance of domestic taxes for financing the state
The domestic food economy is still a form of economy that is characterized by informal
institutional arrangements to limit tax paying. Taxes are charged on imports (GA),
transactions (IVA-IT) and profits (IUE). However most of Bolivia’s economy is realized with
regulations that limit the tax paying base. The general tax regime (Regimen General) is the
‘rule’ but nevertheless not the dominant practice in many sectors. Next to this general tax
regime there exists a simplified tax regime (Regimen Simplificado).. To be part of the
simplified system an economic agent has to act as a natural person (no legal persons are
admitted), testify a maximum sales volume and a maximum capital base. Much of the
informal economy takes place in transactions between agents inscribed in one of both tax
regimes, but 1) not sticking to the maxima that apply for the simplified regime, or 2) nonregistering transactions that officially have to be registered in the general regime. The
existence of the two regimes side by side and deeply intertwined is a structural feature of the
economic institutional environment.
Crossing the divide of the formal-informal dichotomy is costly. Economic agents
subject to the informal economy legal framework that have to compete market shares with
other agents in the informal economy that change their tax regime (inscribing themselves in
the General Tax Regime) loose a significant percentage of their margins. A study of lettuce
producers in the Viacha municipality, near the city of La Paz, tshows a decrease in the gross
margin for marketing services with an astonishing 64% when all taxes on transactions would
be fully paid by their economic organisation. (Mendoza and Ton 2003).
The impossibility to get VAT deductible transaction notes from smallholders places a
serious financial burden on agribusiness serving the internal market. Competition in some
sectors, like dairy and horticulture, is to a large extent made up of non-VAT paying
intermediary agents that buy there goods directly from domestic producers. Other tax paying
economic agents, working in sectors like flour and sugar, suffer competition from irregular
imports (‘smuggling’) from Chile and Argentina for which VAT and GA are only paid for
only a part of the imports, as control on imported quantities by border personnel fall short
(human resources, corruption).
The tax system, combined with the lack of control on irregular imports, function as
severe restrictions for domestic market oriented agricultural chain development, and do
reinforce the tendency to specialisation on exports.
The tax system increases the
tendency of favouring export over production for domestic markets. Agribusiness companies
serving external markets remain largely untouched as VAT deductions are compensated when
the final product is exported, through the tax refgund “CEDEIM” system.
Cultural modernisation: growing individual entrepreneurship
Another institutional arrangement in the Andean Region that tends to reinforce economic
stagnation in Andean rural areas relative to the Lowlands is the relevance of cultural and
political mechanism to redistribute individual accumulation among fellow villagers. Rising
private income is distributed through assigning them responsibilities in village life that
compromise private monetary and non-monetary resources for collective social activities, like
compadrazgo and being the host of social and religious events. These wealth redistribution
mechanisms, proven to be effective in reproducing village life in adverse natural conditions
for centuries, compromises the right to individual accumulation in the wider economy, and
limits the use of capital for investment opportunities in rural areas. It has to be considered part
of the colla cultural identity associated with rural life in the Andean Region.
34
The Lowlands, instead, nurtures a cultural ‘Camba-mentality’ where rent seeking,
private investment and entrepreneurship are highly respected strategies for creating individual
accumulation. The possibilities to get private revenue of economic endeavours stimulates
entrepreneurial risk taking and stimulates the investments with private and banking capital to
set up commercial activities. The more individualistic culture fits better with the demands of
the modern market economy, and facilitates the successful use of possibilities of market
oriented enabling policies emanating from the Washington Consensus.
4.5 Agricultural trade policy and negotiation alliances
Institutional context
Agricultural policy making is characterized by a extreme institutional instability. The internal
organization and place of the Ministry of Agriculture has changed several times in the last
decade. In 1993, in the government of Sánchez de Losada, the Ministry of Peasant and
Agricultural Affairs (MACA) was divided in two secretaries that reflected the dichotomy in
the Bolivan agricultural sector: the National Secretary for Agriculture and Cattle keeping, part
of the Ministry of Finance and Economic Development, and the National Secretary of Rural
Development, part of the Ministry of Human Development. Issues related with Land Reform
(INRA) were placed in the Ministry of Sustainable Development.
The Banzer government restored the Ministry of Agriculture in 1997, Cattle Keeping
and Rural Development (MAGDR). In 2001, in a response to the peasant mobilizations, an
additional Ministry for Peasant Affairs was creates. In 2002 both ministries merged again in
the Ministry of Peasant, Indigenous and Agricultural Affairs (MACIA) part of the second
Sánchez de Losada government. In 2003 the Mesa government split the ministry in Ministry
of Peasant and Agricultural Affairs (MACA) and the Ministry of Indigenous People Affairs
(MAIPO). The present Morales government (2006) created the specialized Ministry of Water
and restored the Ministry of Rural Development, Agriculture and Environmental Affairs
(MIDRAM). Institutional stability is further aggravated by the shuffle of Ministers that head
these ministries. Most governments had two or more reshuffles in their (sometimes quite
short) period.
The agricultural trade policies are responsibility of the Ministry of Foreign Relation
(Cancillería). Agricultural trade policies are only consulted with the Ministry of Agriculture
but decision making is located in the Cancillería. Several intents are made to establish a
specialized unit in the Ministry of Agriculture (Loza 2002), but budget and human resource
constraints are a major obstacle for institutionalizing agricultural policy analysis into the
government. The reduced number of staff for the follow-up of the multiple meetings about
international trade are partially compensated by a modest private support through the Bolivian
Institute for Foreign Trade (IBCE) located in Santa Cruz. IBCE is a private institute with a
Board of Directors from the Chambers representing sector interests: Chamber of Agriculture
in the East (CAO), Chamber of Industry, Commerce, Services and Tourism (CAINCO),
Chamber of Exporters of Santa Cruz (CADEX), Bolivian Forestry Chamber (CFB) and the
Regional Chamber of Border Clearance Services (CRDA)
Interests involved in trade negotiations
One of the major problems of policy making in developing countries is the unbalanced power
structure, where poor sectors have far less political importance than richer sectors of the
population. On the issue of trade policy this bias is even worse. The economic interests for
improved trade relations are based in importers and exporters primarily, in which agricultural
producers are eventually dominant in the latter, but never in the former. Importers are
generally agro-industries and traders, but not producers, and generally interested in lowering
prices and transaction costs for raw material inputs. Instead, producers of export products
have a direct interest in improved market access to other countries and align in position with
the agro-industries or traders they deliver their produce. In OECD countries this situation is
35
countervailed by good organized and political influential producer organizations with
production systems (at least historically) geared to domestic consumption, while in
developing countries the good organized producer organizations tend to be export oriented.
Although there is a large debate by smallholder farmers on globalization and international
trade in developing countries (like the Via Campesina alliance, or the IFAP network), these
smallholder organizations have had only marginal influence on the technical outcome of trade
negotiations. The distance between analysts in UDAPE and the negotiators in the Cancillería
without detail knowledge on agriculture1 and the organizations and institutes that articulate
farmers opinions on trade issues without detail knowledge on trade issues impedes a smooth
negotiation of interests between export/import agro sectors and agro sectors geared to the
domestic market (Prudencio and Ton 2004).
Coalitions in the WTO Doha Round
Bolivia moved from a protectionist import substitution economy to extreme openness
between 1985 when a shock therapy for fiscal stabilization started (DS21060). Tariff on
agricultural products went down from an average 100% to 20% in 1985 decreasing to 10% in
1990. Under the Uruguay Round in 1994, Bolivia notified a bound rate of 40%, and an
applied rate of 10% on all products with the exception of some capital imports. However this
flat rate is far form generally applied, as a range of trade agreements give its major
commercial partners significant tariff preferences. The most important are the trade
agreements with the CAN and with MERCOSUR.
Bolivia is founder of the free trade zone CAN in 1990, with Peru, Ecuador, Colombia
and Venezuela. The CAN agreed a base tariff of 20% for agricultural products but Bolivia
used the argument of ‘being land locked’ to get a special position in the CAN and maintain
the 10% and not adopt the price band system (SAFP) described in preceding paragraphs.
In 1996 Bolivia became associated member of the MERCOSUR. Bolivia adopted the
economic free trade principles, but did not take part in the broader policy intentions
(harmonisations of policy areas, infrastructure cooperation, etc.) as full member. The free
trade agreement implied free entrance for most tariff lines from 2007, except most agri-food
products that will be tariff free in 2012 or 2017 (soy). This explicit policy of open borders has
been maintained till now, though some mechanisms for differential tariffs are to be expected
from the Morales government.
The prominence of international soy companies, like ADM and Cargill, in Bolivia has
a big influence in coalition forming and policy. In 2002-2003 Bolivia supported the effort of
MERCOSUR to create a free trade zone with CAN, while their objective interests where
clearly associated with the maintenance of a privileged and protected market in the CAN for
soy products. However, the Bolivian companies are only subsidiaries of the multi-national
firms mentioned above, and these have far more investments in soy processing in Brazil and
Argentina for which CAN market access would be highly beneficial. These broader corporate
interests induced them to lobby for this contradictory political role of Bolivia ‘against’ its
national economic interests.
In 1999 Bolivia joined the Cairns Group on the eve of the WTO Ministerial Meeting.
Driving force was the frustration of being without voice and without adequate policy support.
The Cairns Group was eager to provide this support and enlarge it legitimacy claims. The
Cairns Group was created in 1986 by the major agro-export countries to lobby for market
access, especially to the European market. Australia is the country where the Cairns Group
was born and functions as its secretary and coordination. The inclusion of developing
countries was crucial for the Cairns Groups as the importance of the developing countries for
brokering a result in the negotiations became manifest in the 1999 Seattle Ministerial
Meeting. The costs of the governmental delegation to Seattle are said to be paid by the
1
This might have changed with the appointment by the Morales government of Gabriel Loza, as head
of the UDAPE - Unit for the Analysis of Social and Economic Policies- . He wrote a policy paper on
Policies and Strategies for International Agricultural Trade for the Ministry of Agriculture in 2002
Loza, G. (2002). Políticas y Estratégias de Comercio Exterior. La Paz, MAGDR.).
36
Bolivian soy industry, and the CAO. From 1998 the Cairns Group organized a special
advocacy group of national farmer organisations named Cairn Group Farm Leaders.
Membership overlaps with IFAP, but is restricted to Cairns Group countries. It is overtly
instrumental for advocacy on the main points on the Cairns Group agenda of pressing for
market liberalization. The Cairns Group articulates as their main argument the benefits of
trade liberalisation for developing countries1, though it is quite obvious that the OECD
countries in this group have important economic self-interests.. The Cairns Group - which
accounts for more than a quarter of the world's agricultural exports - comprises Argentina,
Australia, Bolivia, Brazil, Canada, Chile, Colombia, Costa Rica, Guatemala, Indonesia,
Malaysia, New Zealand, Pakistan, Paraguay, the Philippines, South Africa, Thailand and
Uruguay. The prevailing paradigm behind this view is based on perfect market equilibrium
modelling. They have a strong normative value on efficiency gains by specialisation on
comparative advantages, even considering the WTO clauses on special treatment for
developing countries as harming welfare and efficiency (ABARE 2002). It will be clear that
the general Bolivian interests in trade negotiations are less uniform and polarized than they
appear in the Cairns Group policy proposals. Even the interests of Lowland farming are not
accurately reflected in this policy stance, as it is biased to exporter interests only.
The Cairns Group lost predominance in the last WTO negotiations to the G-20 group,
with a largely overlapping but slightly broader constituency, and to the G-33 group of
developing countries. The G-20 was formed in 2003 with Brazil as one of its leading member
nations. The other members are Argentina, Bolivia, Chile, China, Cuba, Egypt, the
Philippines, Guatemala, India, Indonesia, Mexico, Nigeria, Pakistan, Paraguay, South Africa,
Thailand, Tanzania, Uruguay, Venezuela and Zimbabwe. The G-20, formed on the eve of the
WTO ministerial meeting in Cancun in 2003, is united primarily around the offensive
agricultural interests of developing countries against agricultural dumping of subsidized farm
products (Polaski, 2006). Their political stance on market liberalizations is far less dogmatic
than the Cairns Group and is less exclusively focussed on agriculture. Central in their
negotiations is the protection for domestic Non Agricultural Manufacture (NAMA) from
cheap imports, and to restrict direct foreign investment in services. In the negotiation
strategies to cushion the domestic economy from NAMA liberalisation pressures the
agricultural negotiations are used as a ‘leverage’, and the radical Cairns Group stances are
instrumental for the G-20, resulting in various pragmatic alliances between the groups Their
combined political pressure in WTO to demand US and EU agriculture reform is instrumental
for limiting scope and size of NAMA reform by the G-20 countries themselves.
The G-33, was formed at the 2003 WTO ministerial meeting in Cancun to address the
defensive agricultural interests of developing countries and stresses the importance of special
treatment instruments like safeguards and the designation of “special products” shielding
them from market liberalization and subsidy cuts. The G-33 has advocated a broad-based
right for developing countries to be able to designate special products based on food security,
livelihood security, and rural development needs. The G-33 emphasizes the defensive
interests of developing countries.
Following the Bolivian political earthquake after the 2005 elections and the coming in
office of the Morales government, mid 2006 Bolivia entered also as a member of the G-33. It
is not clear whether this move will be followed by the withdrawal from G-20 and the Cairns
Group. Mid September 2006 the Morales government published thir first public statement on
trade negotiations, conditioning ongoing and new trade negotiations (BOLIVIA 2006),
especially targeting the ongoing US-Bolivia FTA negotiations in the context of APTDEA
The Cairns Group fact sheets echo this strategic argumentation - “Domestic support: limiting
opportunities for developing country farmers” ; “Agriculture reform: critical for developing countries'
economic growth”; “Market access: the key to expanding developing country trade”; “Export subsidies:
detrimental to developing country exports” (http://www.cairnsgroup.org/factsheets/index.html).
1
37
preference extensions1. The document give a sketch of Bolivia’s history and stipulates some
conditions to any trade agreement:
“5. In the same manner that the United States insists that there are matters that are
not subject to negotiation in a bilateral agreement, or that require special treatment,
such as agriculture subsidies, national security, and others, Bolivia will assert in its
trade negotiations its sovereign rights to:
a. Guarantee access to affordable generic medicines and access to medical
treatments, entailing exclusion from agreements patent-related rights that
undermine Bolivia’s ability to implement fully the 2001 Doha agreements, and
preserving at a minimum the flexibilities contained in the Trade Related
Aspects of Intellectual Property Rights (TRIPS) and implementing the Doha
Declaration on Public Health and TRIPS.
b. Protect from theft, expropriation or monopolization Bolivia's wealth of
traditional knowledge and rich biodiversity, through measures such as the
exclusion from patentability plants, animals and living materials;
c. Maintain and broaden mechanisms for building domestic markets and national
production capacity, such as the Compro Boliviano;
d. Promote foreign investment that guarantees transparency and appropriate
technology transfer; utilization of local raw materials and inputs; hiring of
national labor and respect for domestic environmental and labor policy;
e. Guarantee transparent, accessible, efficient and effective mechanisms for
resolving investment disputes in the framework of the jurisdictions established
by the Bolivian Constitution and national laws and, as was agreed in the U.S.Australia FTA, restrict application of the investor-state mechanisms;
f. Ensure universal access by Bolivian’s to essential services, including
strengthening the regulatory capacity and provision of essential services by the
public sector.
g.
Protect cultural goods and services in the framework of the UNESCO
“Convention on the Protection and Promotion of the Diversity of Cultural
Expressions” of October 2005.”(BOLIVIA 2006)
The document also anticipates the possible impact of the Constitutional Assembly that started
in August 2006 to draw up a new constitution text. Deliberations in this assembly reflect
divergent views on the mechanisms to build domestic markets and national production
capacity, and the role of state enterprises in the economy. At least discursively the political
will to significantly reshuffle the trade policy is big and discussions will be prominent in the
coming years.
4.6 Conclusion
In this case study we sketched the emergence of a remarkable bi-polar agrarian structure,
typical for the model of ‘unbalanced growth’. Agricultural specialization has reinforced a
process of social disarticulation of Andean smallholders from agricultural growth. The
shrinking proportion of income from agriculture as a result of declining price levels have
reinforced the drive to find pluri-activity livelihood strategies. At the same time the booming
mechanized soy production increased deforestation and soil compactation and did not create
significant rural employment. This bi-polarity is reinforced by several mechanisms derived
from the institutional environment that can be studied and analysed using a political and
institutional economic analysis. These key mechanisms are experienced by the stakeholders
1
Access to the APTDEA special treatment for drug-producing countries is conditioned by several
prerequisites. One of them is the condition to continue in the negotiations for a free trade agreements
with the US (FTAA).
38
and interest groups working in the agricultural sector and articulated by interest representation
groups in policy statements and policy proposals. This interest articultation maybe located
within the government or political system, but also from the (relative) outside by farmer
organisations or groups related with the agri-business.
Regional integration processes are dynamic and increasingly complex and intertwined.
Bolivia is pivotal in intents to create a regional free trade zone, be it South American
(preference of Brazil), Bolivarian (preference of Venezuela) or American (preference of the
United States). Bolivia’s specific spatial and geographic situation and the large proportion of
poor smallholder farmers, makes them key stakeholders in discussion on special and
differential treatment and compensation policies. It is to be expected that the Morales
government will continue to take initiatives to develop concrete guidelines and proposals for
such S&D provisions and that Bolivia a country-case will be more prominent in international
discussion on this topic in the years to come. The Bolivian search for mechanism to broaden
the domestic market and national productive capacity, if seriously, will also have to translate
in policy stances to CAN and MERCOSUR partners.
Bolivia’s trade policy has been translated in its participation in different coalition
groups during the WTO negotiations. Till 2006 the policy stance was supportive to increaseD
market liberalisation, coinciding with the interest of exporters and international agri-food
companies articulated in the Cairns Group. From 2006 a shift is visible towards more
defensive policies, articulating Bolivia’s position with the G-33. The internal power relations
between the different interest groups and farmer organisations within Bolivia have not settled
yet, neither the process of interest negotiation and policy definition on agricultural trade
policies by the Morales Government. Bolivia is thus an excellent country for studying the
institutional dynamics related with agricultural trade policy making.
The trade relations of Bolivia with neighbouring countries and its position in the
CAN and the MERCOSUR would provide a good vantage point for a Bolivia case study.
Considering the ongoing negotiations between the EU and the MERCOSUR and between EU
and CAN, this would add insights with concrete relevance for Dutch policy makers.
Especially the interaction with Brazil could be highlighted. Bolivia has a special relation with
this country when it comes to agricultural trade policies and negotiations. Bolivia’s joining of
the Cairns Group and the G-20 echoed policy articulation with Brazil and Argentina.
Economic interests of the Bolivian soy processing industries are influenced by the interests of
trans-national agroindustries, which are deeply related with their economic investments in
Brazil. The increasing influx of Brazilian producers is a direct illustration of the increasingly
transborder character of agricultural specialization and development in Latin America. The
position of the Morales government towards Brazil is complex, partly due to the 2006
disputes about gas exploitation by PETROBRAS. It is to be seen if Brazil’s direct and indirect
influence in Bolivian agricultural policy making will change significantly. Most probably the
dynamics in the Brazilian soy economy will continue to be of significant influence.
39
5. Case proposal 2: Kenya
5.1 Introduction
We choose Kenya as our example of the regional regime that we have called ‘involution’ (see
Section 3). Our main reason for this is the role of this country in the debate on the causes of
stagnation in Sub-Saharan Africa. For Robert Bates, spiritual father of the idea that this
stagnation was rooted in bad governance in the region itself (Bates 1981), Kenya was the
exception that confirmed the rule. In his book Beyond the miracle of the market (Bates 1989),
he highlighted the political influence of petty capitalist farmers as the basis of policies that
allowed growth to be much higher than in other African countries (Bates 1989). However, the
situation in Kenya has strongly deteriorated since. The question arises what light this sheds on
the real causes of involution in the region, and what this means for agricultural trade policies.
Kenya has a population of 34 million people, of which some 80 percent lives in rural
areas. Most of the land is dry and only suitable for extensive grazing. Only one-fifth has
medium to high potential for farming. Here four-fifths of the population and all big cities are
found. Some of these lands lie at the south-east coast, but most in the south-west of the
country – the highlands and the middle part of the Rift Valley. As a consequence, most
Kenyans live far from the sea and transport costs give some protection to producers of food
for domestic consumption.
5.2 Colonial evolution
In the mid-19th century, Kenya was a complex of heterogeneous areas and state structures.
The south-east coast was integrated in an international market exchange controlled by
Zanzibar and its European partners. High world market prices and the new Suez Canal
encouraged export production of grains and oil crops in slave plantations around the ports of
Mombasa and Malindi and in smallholdings in their immediate hinterland (Cooper 1977;
Munro 1976; Waaijenberg 1994).1 Around Lake Victoria in the west, population growth and
state formation stimulated semi-intensive bush-fallow systems and medium-distance trade in
farm products (Mosley 1983: 76). Between these two areas, the mixed farmers of the
highlands east of the Rift Valley and the pastoralists of the arid lowlands engaged in more
extensive farming systems and localised market exchanges within less centralised political
structures.
The settler economy
The fall of international agricultural prices after 1875 caused the export farming in the coastal
strip to stagnate and gave the incoming British few incentives to venture in agricultural
development. However, the British took control of Uganda for geopolitical reasons, and built
a railway from Mombasa to this protectorate. Making the Uganda railway profitable became
the historical argument for attracting European settlers (Cone & Lipscomb 1972; Mosley
1974). A series of colonial land ordinances reserved 12,200 square miles in the highlands and
the middle part of the Rift Valley for white farmers. This was eased because famine, disease
and war had reduced the African population. The inflow of settlers was correlated to the
international price evolution: swelling with the price improvement around WWI, halting
during the price falls in 1920-21 and 1928-33, and swelling again in the years of good prices
after WWII. By 1960, there were some 4000 European farmers (Kenyanchui 1992).
1
The rise of plantations was also stimulated by the reservoir of slave labour formed by the British ban
on slave exports.
40
Their strategic role in the world wars helped the settlers to increase their say in the
colonial state. Public investment in roads, railway branch lines, veterinary measures, the
Kenya Land Bank (1931) and, after WWII, agricultural research, all primarily benefited white
farmers. Government welcomed the formation of marketing co-operatives (amalgamated in
the Kenya Farmers Association in 1923) that imported inputs and gave settlers control over
maize exports by a system of grading (Mosley 1983; Zwanenberg & King 1975).
Mosley (1983) has disproved the idea that the settlers were inefficient producers.
Their yields were hardly lower than those in the US, Australia or Argentina (for maize) or
Brazil (for coffee). Their lower capital intensity reflected a rational response to cheaper labour
rather than financial weakness. On average, European farmers were certainly more productive
than African smallholders. However, their reliance on hired labour and purchased inputs made
them more vulnerable to declines in output prices. The brief interludes of improving prices in
which the settlers arrived were soon followed by new price falls. The settlers responded by
various coping strategies. One was to downsize investment: even very efficient bonanza
farmers reverted from tractor to ox-ploughing in the 1930s, compromising productivity to cut
down expenses. Another was the ‘squatter system’: European farmers allowed black
smallholder tenants on their lands to benefit from selling their products and to use them as
flexible workers (Mosley 1983: 189; Wambaa & King 1976). A third strategy was monopoly.
Phytosanitary and quality arguments were used to keep African smallholders from the
production of more remunerative export crops. Last but not least, the settlers asked for
protection. The international slump in 1920-21 was followed by import tariffs for crops that
were produced by settlers. The new crisis after 1928 was answered by maize subsidies and
centralised processing and marketing of export crops. However, this was not enough to
prevent one-fifth of the settlers from losing their farms. The area cultivated by settlers shrank
from 650,000 to 500,000 acres (Kitching 1980: 58; Zwanenberg & King 1975: 39).
The global shortages during WWII and its aftermath helped the settlers to get what
they wanted. Marketing boards and price supports were established and institutionalized by
the Price Control Ordinance of 1956. From 1942, guaranteed minimum returns safeguarded
cereal farmers against price falls and crop failures. These supports fitted in a more general
movement toward planning and regulation (Cone & Lipscomb 1972). They made settler
agriculture a productive sector, which became the base of growing import substitution
industries and flourishing market towns like Nakuru (Mosley 1983).
African agriculture
Meanwhile, African smallholders had fared less favourably. After WWI, population growth
had begun causing pressures in areas of African farming, which were reinforced because land
confiscation blocked an escape by horizontal expansion. African farmers adapted by shifting
to more intensive systems of land management. Commercial production of maize, vegetables
and small livestock spread from the periphery of Nairobi to adjacent areas (Kitching 1980).
Besides, Kikuyu farmers started to grow wattle for tannin extraction (Cowen 1978). African
farmers benefited from improved hand implements, and in several places, they began to invest
in ox-drawn ploughs and water mills for grinding maize. Wage earnings of public servants
played an important role in it. Traditionally, the acquisition of local political positions was
central to the accumulation strategies of individuals and their families, and access to mission
schools and jobs in the colonial state apparatus now came to play a similar role (Bates 1989).
In places (e.g., near Nairobi) and times (e.g., the mid-1920s) where agricultural prices were
favourable, African public servants invested their earnings in agricultural holdings. As a
consequence, innovation in African agriculture was led by individuals who – going by their
mentality, farm sizes and employment of labour – were petty-capitalist rather than poor
farmers (Cowen 1978; Iliffe 1983; Kitching 1980).
The price fall after 1928 did not reverse the growth in African farming as it did in
settler agriculture, but it altered its social base. Petty-capitalist farmers still played a role, but
the share of small farmers (including many females) in the increase in marketed output
41
became larger.1 The settlers’ reliance on black squatters also attested to the higher resistance
of small farmers to falling prices. The reaction of the colonial government was to embrace a
‘dual policy’ that added the aim of developing African farming to that of mobilizing African
labour for the settler farms (Cone & Lipscomb 1972).2 Nevertheless, Africans were not
allowed to grow coffee or tea nor provided with credit facilities; government interference
reduced rather than supported their prices;3 and any talk of redistributive land reform to
release the population pressure in the African areas was taboo. Inflexible taxes and reduced
employment forced black households to increase their marketed output but left them with few
margins for investment in fertility and conservation measures. The effect was not long in
coming. From the late 1920s, official alarms about erosion strongly increased (Anderson
1984; Mackenzie 1998; Munro 1975; Rocheleau et al. 1995; Tiffen et al. 1994), indicating
that increases in output had become coupled to generalized impoverishment and soil
degradation. Intense litigation before the 1934 Land Commission (Berry 1993) suggested a
concomitant rise in internal tensions in areas of African farming. The official response took
the form of ‘betterment policies’ consisting of compulsory destocking, terracing, and other
coercive measures. These policies exacerbated the plight of the farmers, were strongly
resisted, and fuelled the growth of movements for national independence (Mackenzie 1998;
Munro 1975).
The improvement of markets in the 1940s and the early 1950s gave African farmers
more margins for investment and led to a revival of the pattern of petty-capitalist growth
aided by off-farm (especially public sector) incomes. ‘(L)ittle pockets of better farmers, using
modern techniques, sprang up everywhere’, wrote the then Minister of Agriculture looking
back at this period (Blundell 1964: ?).4 Recent analysis of annual bands of coral colonies near
the mouth of Sabaki River that indicates a reduction in soil erosion in the 1950s-60s supports
his impression (Fleitmann et al. forthcoming). The colonial government gave some support to
this resurgence of petty-capitalist development (Cone & Lipscomb 1972), but the existing
restrictions were maintained in most places and the new price supports discriminated against
African farmers.5 In these conditions, the intensification of African farming failed to
accommodate the population growth which accelerated to 3 percent annually. As a
consequence, social differentiation and the adoption of ploughs by petty-capitalist farmers
involved an impoverishment of the poorest sections of the population. In the Kikuyu areas,
this was added to by the return of large numbers of squatters who the settlers evicted now that
improved prices induced them to modernize their farms.6
The effects varied. Around urban centres, the fragmentation of small holdings went
with a further shift to market gardening, while in more remote areas farming became a
subsistence activity of households that depended on migrant labour (Kitching 1980). In both
cases, poor farmers became dependent on purchased food but lacked cash for buying enough
of it. The growth of the settler economy, successful though it seems in its own terms, did not
1
See e.g. Cowen 1978 and Mackenzie 1998 for the Kikuyu areas.
In 1933, the Kenya Farmers Association even asked a reversal in the development model. African
farmers, who apparently were more resistant to low world market prices, should grow export crops,
while the domestic market should be reserved for white farmers (Zwanenberg & King 1975).
3
See e.g. Munro (1975) on the policy to force Kamba farmers to sell their livestock for cheap prices to
Liebig’s meat factory.
4
The well-described environmental regeneration in Machakos District (Tiffen et al. 1994), where
farmer resistance to ‘betterment’ gave way to spontaneous terracing, exemplifies the turn in tide.
5
During WWII, the price fixed for African-grown maize was little more than half that of Europeangrown maize (Zwanenberg & King 1975).
6
The eviction of squatters has been interpreted as an effect of European farmers increasing their
number of dairy cows, which were vulnerable to the ticks carried by Kikuyu cattle (Bates 1989). This
may have been an important factor, but more general mechanisms may also have been at work, for the
eviction of dependent tenants by large farmers in times of improving price ratios is a rather widespread
phenomenon that is also seen in other times and places (see, e.g., Koning 1994 and literature there
mentioned). See also Mosley (1983) on the correlation between the squatter system and the prosperity
of European agriculture in the White Highlands.
2
42
help them out. The settlers’ demand for farm labour and the 5 percent industrial growth rate
generated by their demand for manufactures (Pearson 1969) was not enough to absorb the
growing surplus population.1 In 1952, the Mau-Mau rebellion brought home to colonial
policy-makers that the tensions in the African area could no longer be controlled. They
responded with the Swynnerton plan (1954). Large-scale enclosures and land registration
were carried through in the reserves; restrictions on cash crop production were lifted; and
government agents supported petty-capitalist black farmers through credit and the
establishment of supply and marketing co-operatives. These policies benefited petty-capitalist
farmers among whom many Kikuyus who had remained loyal to the British (Bates 1989).
However, it was too late to stem the tide. The announcement by London in 1960 that Kenya
would become independent prompted an exodus of European farmers while wetting the
appetite of land hungry poor Africans. Between 1962 and 1976, almost 2 million hectares of
land were purchased from former white owners, with financial aid of the British government
(O’Brien & Ryan 2001). They were distributed in small tracts for poor farmers, mostly ex
Mau-Mau fighters, and larger tracts for petty capitalist farmers (Bates 1989; Kitching 1980:
316). Part of the European farms was taken over without subdivision, especially by high
officials in the new government (Bates 1989). Colonial officials considered the small tracts
unsound, but they were deemed necessary to defuse the political tensions (Bates 1989; Cone
& Lipscomb 1972).
5.3 Post-colonial evolution
Robert Bates (1981; 1989) has highlighted the difference between post-Independence Kenya
and other countries in Sub-Sahara Africa. He thinks that while the latter were ruled by urban
elites that enlisted the support of less-favoured rural areas with redistributive programmes, in
Kenya the dominance of a petty-capitalist rural elite created more room for private initiative
and an absence of ‘urban bias’ that elsewhere entailed agricultural over-taxation. This view
should be amended. Bates is right that the 1964 defection of the KADU leadership to KANU
clinched a bargain between Kikuyu and Kalenjin rural elites over the division of the White
Highlands while curtailing the influence of KANU’s left wing that pushed for more social
justice. But it didn’t make the urban-based public sector elite less influential. Their leading
representative Tom Mboya played orchestrated the politics of the period,2 and a small circle
of economic technocrats in the central bank and the finance and planning ministries defined
the economic policy (O’Brien & Ryan 2001). Actually, Independence transferred political
rule to a coalition dominated by public sector bureaucrats with petty-capitalist rural classes as
a junior partner.
This coalition pursued a planned development based on free enterprise and farm
progress that concurred with the vision of colonial technocrats.3 The policy of African-grown
cash crops, supply and marketing co-operatives, and land reform, registration and
1
Mosley (1983) thinks that a redistribution of income from whites to blacks would not have changed
the industrial growth rate significantly, because the propensity of Europeans to consume was not lower
than that of Africans. However, he ignores the effect that more support of African farming would have
had on agricultural growth and the sectoral linkage effects this would have entailed.
2
Mboya was secretary-general of KANU in 1960-67, minister of labour in 1962, minister of justice and
constitutional affairs in 1963, and minister of economic development and planning in 1964. He was the
most influential Kenyan politician in western political circles, where he was seen as the leading
spokesman for ‘responsible’ Kenyan interests. In 1963, as parliamentary secretary for local government
and regional affairs, he orchestrated the division of the White Highlands so that it entailed the
dissolution of KADU and the side-tracking of KANU’s left wing that was led by his rival Odinga
(Bates 1989).
3
In the wording of the last chairman of the colonial Kenya Board of Agriculture, ‘(t)he choice that
Kenya has made implies the acceptance of the free enterprise system, under strict conditions of control,
that was the basis of our thinking in the plans we made after the Second World War’ (Cone &
Lipscomb 1972: 135).
43
consolidation that the latter had started was continued. Additional products were brought
under marketing boards, and the price control policy was extended. Agricultural exports were
less heavily taxed than in other African countries (Bates 1989; Tiffen et al. 1994), but
agriculture was not strongly protected. Maize and wheat imports were restricted,1 but
inefficiency and lack of budget and storage capacity pushed the official buying prices of the
National Cereals and Produce Board (NCPB) below world market levels (Nyangito & Okello
1998: 9-10). Maize buying prices were raised several times, but lowered again because the
NCPB proved unable to handle the resulting increases in supply (Bates 1989; Karanja 2002:
50; Nyangito 1997). Meanwhile, price discrimination continued to hurt small farmers. The
Board gave priority to payments to large farmers, coping with chronic budget deficits by
delaying payments to small farmers (O’Brien & Ryan 2001; Van Wijk 2001). Given high
informal interest rates this meant that the real prices received by the latter were eroded.2
Although international agricultural prices had once more dropped to a lower level,
agricultural development received a new impetus. The new policies removed the shackles on
African entrepreneurship, while the institutional infrastructure that had served the settlers
continued to exist and through co-operatives also served small and petty-capitalist farmers.
Colonial investment in agricultural research also began to pay off. The first Kenyan hybrid
maize that was released by the public research station in Kitale in 1964 entailed a rapid
growth in yields (Karanja 1996). In 1965-73, annual agricultural growth was 6.2 percent,
versus 2.6 percent in Sub-Saharan Africa at large (Bates 1989). An important part was
realised in small and medium-sized farms. By 1968 these were producing well over half of all
Kenyan coffee, ninety percent of the pyrethrum crop, and seventeen percent of the tea crop,
and thirty percent of all milk sales. Their production of horticultural products also increased,
as did the production of maize, the basic food staple (Kitching 1980). Agricultural growth was
the engine of industrial growth, which was also stimulated by public investment, exports to
Tanzania and Uganda and tariff protection. The annual growth rate of manufacturing doubled
to 10 percent in 1964-80 (O’Brien & Ryan 2001). Aggregate GDP growth in 1965-73 was 7.9
percent, against 3.7 percent in Sub-Saharan Africa at large (Bates 1989).
This apparent success, however, coincided with a rapid expansion of the public
sector. Rural families stinted themselves to invest in the education of their children, and there
were rising pressures for creating public sector jobs for school-leavers. Especially in areas
where the government found its main support, this could not be ignored without creating
serious political problems (Bates 1989; Kitching 1980). From 8 percent in 1959-63, the
annual growth in the public sector wage bill jumped to 14 percent in 1964-70, and 20 percent
in 1971-75 (Kitching 1980: 421). This reflected an expansion of public tasks, but the political
necessity to provide jobs for political supporters as well. The expansion of the public sector
caused the growth of public expenditures to outpace the fiscal base. From 12 percent in the
mid-1960s, the ratio taxes to GDP mounted to 20 percent in 1979-80 (O’Brien & Ryan 2001),
but even this could not prevent fiscal deficits.
From the 1970s, economic development began to lose speed. The five-fold increase in
oil prices in 1973 was a serious blow to the Kenyan economy. Its effect on the agricultural
sector was only partly cushioned by a temporary recovery in international agricultural prices
and the enlargement of Kenya’s quota under the International Coffee Agreement.3 Nutrient
depletion and soil degradation increased again. Analysis of coral colonies near the mound of
Sabaki River indicates a new rise in erosion starting around 1975 (Fleitmann et al.
forthcoming). Agricultural growth rates subsided to .. percent in 1973-80. Government
attempts to maintain economic growth by encouraging import substitution industries (Van
1
Sugar was also protected, but this benefited refineries rather than farmers.
This was added to by discrimination at the input side. Inputs that were important for small farmers
were often subjected to higher import duties than inputs that primary served large farmer (Nyangito
1998b; Nyangito & Okello 1998: 23). Also, the subsidised credit provided through the Agricultural
Finance Corporation benefited larger farmers much more than small farmers (Argwings-Kodhek 1998;
Nyangito 1998a).
3
A new push in terracing in the Machakos story of Tiffen et al. (1994) illustrates the room that farmers
still had for investment.
2
44
Wijk et al. 2001) could not turn the tide, also because the breakdown of the East African
Community with Tanzania and Uganda in 1977 reduced the outlets for manufacturing. GDP
growth fell to .. percent. Fiscal deficits rose to 3-6 percent and were financed by international
borrowing (O’Brien & Ryan 2001). The dollar was cheap and loans easy to get, but the
burden of debt servicing exacerbated the unbalance between public expenditure and the fiscal
base.
A second oil shock in 1979 coincided with a bust in coffee and tea prices. It was
followed by a general and protracted decline in international agricultural prices. In the early
1980s, the current account deficit rose to 11-12 percent of GDP, the fiscal deficit to 9 percent
of GDP, the debt service ratio to 14 percent of export revenues, and the inflation rate to 18
percent (O’Brien & Ryan 2001). Private lenders became hesitant to finance the fiscal deficit,
and the attitudes of foreign donors changed. Until then they had largely endorsed Kenya’s
government-led development strategy, but now they began to propagate liberalization and
fiscal discipline to redress deficits and stimulate agricultural exports. In 1982, the IMF forced
an austerity programme on the government that reduced the fiscal deficit to 3 percent but
squeezed investment and growth. Together with a drought in 1984, it caused a decline in per
capita GDP in 1982-84 (O’Brien & Ryan 2001). Only after donors allowed some relaxation of
the fiscal discipline, per capita GDP growth recovered to slightly positive levels.
In spite of all this, the growth in the bureaucracy continued to exceed that of the
economy or the government budget. Civil service employment increased at over 7 percent per
year, reaching 50 percent of formal wage employment in 1991 (O’Brien & Ryan 2001).
Government recurrent expenditures started to displace development expenditures. For
example, the NCPB embarked on a costly and inefficient programme of local grain buying
centres that was evidently influenced by demands for public jobs in the government’s
constituency (Bates 1989). Meanwhile, real yearly expenditure for maize research was
reduced by one half, which probably contributed to a significant decline in the yieldadvantage of newly released varieties (Karanja 1996).
Meanwhile, the political situation began to change. In 1978 president Kenyatta had
died. He was succeeded by vice-president Moi who appointed more Kalenjin in high posts.
This affected the dominance of Kikuyus in the KANU and the government apparatus, and
stimulated the rise of Kikuyu-based opposition groups. Reacting to this, in 1982 Moi
formalized the one-party system that had de facto already existed since the suppression of
Odinga’s left-wing Kenyan People’s Union in 1969.
In the late 1980s, donor impatience with Kenya’s economic policies rekindled. While
they had long been unwilling to criticize the one-party system, donors now began to support
the internal demands for a return to multi-party democracy. When president Moi refused to
submit, they acted together to suspend all balance of payments support in 1991. In 1992, Moi
allowed a multi-party election. However, his confederates used the tensions in the countryside
to set Kalenjin and Masai in the Rift Valley Province against Kikuyu immigrants who had
gained land titles through the land reforms. Thus they chased 300,000 people, mostly
Kikuyus, out of this province that had a significant number of seats in the parliament (Kahl
2006). This and a new spending spree allowed president Moi to remain in power. However,
the price was a galloping inflation and a strong increase in the government’s domestic debt,
which forced the government to strike a deal with the donors. From 1993, the price control
system was dismantled, protective tariffs reduced, the exchange rate brought in line with its
free market value, the monopoly of agricultural marketing boards suspended, and the role of
the state in the supply of agricultural inputs and services strongly decreased. Variable tariffs
on a number of food crops were maintained, but they were evaded by corrupt practices,
suspended when prices rose, or protected inefficient processing plants rather than farmers
(Nyangito 1998; Nyangito & Okello 1998; Van Wijk et al. 2001).1
The effects on agriculture varied. Exchange rate liberalization boosted the exports of
tea and horticultural crops (Van Wijk 2001), but confronted farmers with price rises in inputs
and consumer goods. The ending of public monopolies improved the prices for domestic food
1
This latter was especially true for sugar.
45
producers close to big cities, but reduced those for producers in more remote areas.
Discontinued public services were not always taken over by the private sector. Farmers were
cut off from reliable inputs, while roads, extension, health care and water supply deteriorated
in many cases (Argwings-Kodhek 1998; Karanja 2002; Van Wijk 2001).
The marketed output of agriculture stagnated. Maize yields declined as seed quality
deteriorated and farmers lacked machines for land preparation and means to buy fertiliser
(Karanja et al. 1998; Mose et al. 1997; Nyoro 2002). Larger farms that had been leading in
maize production increased fallow or fell back on low intensity dairy production (ArgwingsKodhek 1998). Coffee yields strongly decreased after the collapse of the International Coffee
Agreement collapsed in 1989 entailed a severe price decline (Argwings-Kodhek 1998;
Karanja 2002; Nyangito & Okello 1998). Many smallholders reduced the use of fertiliser and
fell back on subsistence production (Karanja 2002; Van Wijk et al. 2001). Farmers who
lacked off-farm incomes resorted to low external input techniques as a labour-intensive
coping strategy, but their nutrient balances were no better than their neighbours’ (Jager et al.
2001). Analysis of coral colonies indicates some moderation of erosion in the course of the
1980s, but the level of sedimentation remained significantly above that in the 1950s-60s.
In this situation, the government hesitated to enforce the drastic retrenchment of
government staff and divestiture of state-owned enterprises that was agreed with the donors.
Between 1991 and 1996, the share of the public sector in formal wage employment only
decreased from 51 to 46 percent (Van Wijk 2001). Given the low state of the economy, it did
not bring a reduction in the fiscal burden. Government expenditures remained at around 30
percent of GDP (Van Wijk et al. 2001). Although the share of government revenue slightly
increased, the government could pay little more than the eroded salaries of the officials. Any
further activities depended on donor support (Argwings-Kodhek 1998; Nyangito & Okello
1998; Van Wijk et al. 2001). At the peak in 1990-91, net inflows of official development aid
amounted to 45 percent of the government budget or 14 percent of the GDP. After this year,
the volume of aid subsided. Donor dissatisfaction about the slowness of public sector reform
once more combined with dissatisfaction about the lack of democratic reform and led to a
new aid freeze in the late 1990s (O’Brien & Ryan 2001). The pressure of donors and
opposition groups provoked new attempts of the regime to exploit rural tensions for
influencing elections, this time by setting Mijikenda farmers against Kikuyu and Luo
immigrants in Coast Province (Kahl 2006).
Rural stagnation continued to push many people to the cities, but lack of other jobs
made that urban immigrants were increasingly locked into petty trade (Lyons & Snoxell
2005). Eroding wages and urban unemployment altered the flow of private savings between
the countryside and the cities. While off-farm earnings had always supported rural
livelihoods, now the opposite occurred. Absentee landownership became more important in
risk-reducing strategies of urban dwellers, with negative effects on agricultural productivity
(Foeken & Owuor 2001; Van Wijk et al. 2001). Social networks in the countryside were
increasingly overburdened and – in contrast to the poverty-sharing aspect of involution
stressed by Geertz (1963) – started started to exclude the poor (Nayaran & Nyamwara 1996).
5.4 Situation in some important subsectors
Maize
Maize is the most important food crop in Kenya. Until the mid-1980s, maize production
expanded, not least by new hybrid varieties and increases in fertiliser use that raised the
yields. Since then, the area cultivated with maize has increased but average yields have
declined from 2,0 to 1,5 tons per hectare. Until the early 1990s, the market for maize was
rigorously organised by National Cereals and Produce Board (NCPB). This controlled farmgate prices and the movement of maize from one place to another, and subsidized large
millers that offered refined maize meal to urban consumers. Deficits of the NCPB were a
large and uncontrollable burden on the budget of the Kenyan government. Although the
46
NCPB strained itself to pay large maize producers in time, retardation in government
financing of its deficits were accommodated by long delays in paying smallholder products.
In practice this meant a considerable discount on the prices that small farmers received, also
because of the high informal interest rates. In the early 1990s, price controls were abolished,
subsidies on refined maize meal for consumption in urban areas ended, the internal grain trade
liberalized, and the role of the NCPB was strongly reduced. The trade in fertilizer was also
liberalized, and the effect was a decline in the ratio between maize prices and fertilizer prices.
The effect was reinforced because the NCPB stopped providing crop-secured loans to
farmers. The use of fertilizer stagnated, and plowing and harrowing was neglected so that the
quality of seedbed preparation declined (Karanja et al. 1998; Nyoro 2002).1 Meanwhile,
breeding programs of the Kenya Agricultural Research Institute (KARI) became less
effective. The germination power of certified hybrid maize seeds decreased, causing farmers
to fall back on older varieties or on retaining seed from crops (Karanja 1996). The price
evolution accelerated the shift to products like tea, dairy and horticultural crops. An
increasing number of farm households became themselves dependent on buying maize on the
market. A household survey in 18 districts shows 52 percent of rural smallholder households
to be net-buyers while only 32 percent were net-sellers (Jayne et al. 2001). The stagnation of
maize production has made Kenya more dependent on maize imports. In the 1970s-80s,
Kenya imported maize only in years with bad harvests, while it exported maize in good years.
More recently, exports have declined while maize is also imported in normal years. Producers
and local politicians have complained that maize production is threatened by cheap imports.
The basic import duty on maize is 25 percent. In addition, the government can impose a
‘suspended duty’ up to 70 percent (WTO 2000). Most imports come from South Africa and
the United States, but the formation of COMESA has also led to some limited imports from
Uganda.
Coffee
Between 1968 and 1988, international coffee prices developed favourably. The production of
coffee in Kenya almost quadrupled and was the number one foreign exchange earner. The
strongest increase occurred on smallholdings, stimulated by co-operatives that supplied inputs
on credit and took care of pulping and marketing. In 1989, the collapse of the International
Coffee Agreement entailed a fall in the world market prices, and coffee production declined
from 127,000 tonnes in 1987/88 to 80,000 tonnes in 1993/94. Uprooting coffee trees was
prohibited, but farmers neglected their trees, interplanted them with food crops, and
sometimes killed them with salt (Dijkstra 1997). The domestic reforms from 1992 had mixed
effects on the price ratios for coffee farmers.2 However, the overall influence seems to have
been moderate compared to the recovery of international coffee markets in the mid-1990s.3
Between 1994 and 1997, international coffee prices were back on the pre-1989 level. Yet this
induced no more than a partial recovery of Kenya coffee production, to 100,000 tonnes in
1995/96. On smallholdings, a new decline already started in that year in spite of the improved
prices. This was partly caused by small producers increasing their food self-sufficiency to
hedge against increased price volatility, but the major cause seems to have been the
1
In 1999, the NCPB started again to buy maize from farmers for prices considerably above the
prevailing market prices, but the amounts were too small to have a significant influence on market
prices, and the program one-sidedly benefited large farmers (Nyoro 2002).
2
Exchange rate deregulation and tax reform raised producer prices for coffee. (Karanja 2002 estimates
that the share of producer prices in the export prices increased from 52 percent to 63 percent, mainly
due to the replacement of the export duty by a lower presumptive income tax.) Exchange rate
deregulation and abolition of fertiliser subsidies raised the prices of inputs and consumer goods. The
liberalisation of secondary processing (milling) had little effect, because because over-capacity kept
milling margins at the old level in spite of increased competition (ibid.).
3
Karanja (2002: 73) gives estimates of the ratios between coffee prices on the one hand, and maize
prices, fertiliser prices and wages on the other hand, between 1985 and 1998. Dividing these estimates
by indicator prices of the International Coffee Organization does not exhibit any clear change between
the years before and after domestic liberalisation.
47
breakdown of social capital in the coffee chain (Karanja 2002). In the 1970s, small producers
trusted the coffee co-operatives enough to readily deposit their savings in them (Von Pischke
1983). Since then, however, mismanagement and corruption increased and aroused distrust
among smallholder members (see also Argwings-Kodhek 1998). The reforms failed to redress
this situation; the excessive margins that co-operatives deduced from the export price (around
a quarter on average) were not reduced (Karanja 2002). Therefore, small producers used the
weakening of central control to non-reimburse loans, sell part of their coffee to private
traders, and enforce the splitting of co-operatives. This went against the exigencies of
economic efficiency. Whereas the asset specificity (coffee trees), product differentiation
(grading) and economies of size in coffee marketing made a certain extent of concentration
and vertical integration desirable, the distrust among coffee farmers led to de-concentration
and a return to spot market transactions. This also undermined the possibilities for cropsecured loans, so that many smallholders lacked enough inputs to sustain the yields of their
coffee trees.
After 1997, a recovery of production finally set in, but it proved short-lived. A rapid
expansion of coffee production in Vietnam and new plantings in Brazil prompted a new
coffee crisis that drove prices down to levels even below those in the early 1990s. New
acrimonious confrontations between smallholder producers and coffee co-operatives
followed, including occupations of pulping factories and fights with the police (Karanja
2002). Production declined to a mere 52,000 tonnes in between 2001 and 2004, and a new
increase in international prices failed to achieve a recovery. From the first place, coffee has
fallen back to the fourth place of Kenya’s foreign exchange earners, coming only after
tourism, tea and horticulture.
Tea
While the production of coffee declined, that of tea expanded. From 197,000 tonnes in 1990,
the total output of tea increased to 295,000 tonnes in 2004, due to increases in both acreage
and yields. An obvious factor in this success was that international tea prices remained much
steadier than coffee prices was. The Kenya Tea Development Authority (KTDA) played an
important role in the expansion of production. It provided planting materials, fertilizers and
extension, and took care of green leaf collection, quality control, processing and marketing of
smallholder tea. It used its exclusive control over these activities to postpone part of the
payment for up to 18 months and to use the ensuing funds for cross-subsidizing green leaf
transport and building new tea factories (Argwings-Kodhek 1998). Around 2000, farmers
became dissatisfied over mismanagement, corruption and political appointments in the KTDA
(ibid.; Karanja 2002).1 They formed organizations like the Kenya Union of Small Scale Tea
Owners, which demanded prompter payment and more farmer control. However, little has
changed up to now other than that ‘authority’ (the last character in the acronym) was renamed
‘agency’ and that farmers can sell green leaf to private traders who pay considerably lower
prices, but pay them immediately. Nevertheless, the conflicts between smallholder producers
and the agro-industrial management seem to have gone less far than in the coffee sector, and
no occupations of factories and battles with the police have occurred.
Horticultural products
Horticulture has also strongly expanded. Exports of products like french beans and flowers
experienced spectacular growth rates from the 1980s, and benefited strongly from the
liberalisation of the exchange rate policy in the 1990s (Karanja 2002; Van Wijk et al. 2001).
Nevertheless, only some one-tenth of the marketed volume of horticultural production is
exported. Further expansion is complicated by fierce international competition, increasing
standards in importing countries, and the lack of a home market for the products involved
(Dijkstra 1997). The export sector is a separate sub-sector, with much more risks, capital
intensity, large-scale production, vertical integration and contract production than the other
1
Farmers were particularly angry because they saw no improvement of the roads that were vital for
transporting their green leaf, in spite of the cess money they had to pay to the KTDA for this purpose.
48
nine-tenths of Kenyan horticulture. This latter produces vegetables and fruits for domestic
consumption and is an activity of smallholders. Under the influence of population growth and
urbanisation, this part of the sector is also rapidly growing, but its structural development
goes in a different direction than that of export horticulture. Rather than vertical integration,
one sees an increasing vertical differentiation between primary producers, assembling traders,
wholesalers and retailers (ibid.).
Because of the variety and perishable nature of the crops involved, the domestic trade
in horticultural products is difficult to organize by (para)statal institutions and has been left to
individual farmers and private traders. The resulting market is quite competitive, but traders
have to cope with moral hazard. While they may leave the negotiations with farmers to agents
or employees, they have to finalize the transactions themselves to avoid being cheated. This
imposes limits on the span of activities that traders can undertake. Nevertheless, the
development of trade itself involves mechanisms that discourage opportunistic behaviour. For
instance, farmers who accept an advance from one agent but sell their products to another
trader can no longer reckon on the agent if they need him in future. Similarly, agents who
cheat a wholesaler lose their reputation among wholesalers and their standing in the local
community.1 In this way, the development of a privately organized sector can induce social
capital formation (Dijkstra 1997). In the current situation, however, the development of the
horticultural sector is complicated by the lack of roads and market infrastructure and by
stagnating consumer incomes that restrict the markets for higher quality products. High costs,
low prices and lack of credit reduce the room that farmers and traders have for buying
fertilizer, pesticides or better packaging material, or for diversification and assortment
building. Also, small market gardeners did not benefit from structural adjustment like the
growers of horticultural products for export did. The depreciation of the Kenya shilling raised
the prices of their inputs rather than their output prices, and this was reinforced by the cuts on
input subsidies.2 Many traders remain dependent on little remunerating assembly or retailing
activities, and many smallholders on products like cabbages or potatoes that bring no higher
profits per acre than maize. Wholesale activities or crops like tomatoes give considerably
higher returns, but involve much higher investment (Dijkstra 1997; Nyoro 2002). Until higher
consumer incomes and better roads will induce better prices, many small traders and farmers
cannot afford this.
Dairy
Kenya has a unique dairy sector for an African country. Since 1963, the dairy herd has
expended from about 400 thousand to 3,000 thousand cattle. Dairy is the second largest
contributor to the agricultural GDP (beef being the first). Almost all dairy production is
consumed domestically, and in normal years, little is imported although per capita
consumption of milk is high for African standards. Until 1963, commercial dairying was
almost exclusively found on settler farms. Since then, smallholder dairying has strongly
expanded, and smallholders now produce around four-fifths of all marketed milk (Bebe 2003;
Muriuki 2001). This is predominantly done on mixed crop-dairy farms. A typical smallholder
dairy farm has 1 to 3 cows, fed with napier grass and maize residues, sometimes
supplemented with purchased fodder or concentrates, while the manure is used to fertilize the
crops. Some 60 percent of all smallholders have one or more cows. Some 25 percent are
selling milk, which gives steady stream cash income, whereas coffee or tea brings only an
income in certain times of the year (Bebe 2003). The profitability of dairy production on
smallholder farms is comparable with that of more remunerative horticultural products like
tomatoes (Nyoro 2002). For the smallest farmers, though, a cow is too high an investment.
The development of smallholder dairying benefited from favourable biophysical conditions in
de highlands and central Rift Valley, indigenous traditions of livestock keeping and milk
1
Also, many traders depend on informal savings and credit groups for their capital, which are based on
trust and sanctions against defaulters (Dijkstra 1997).
2
Besides, the privatisation of inputs supply sometimes led to fake pesticides being sold to farmers
(Dijkstra 1997).
49
consumption, and the livestock and dairy institutions that had been inherited from colonial
settler agriculture. The Veterinary Research Laboratories, the Animal Husbandry Station, the
Central Artificial Insemination Station, the Kenya Co-operative Creameries (KCC) and the
Kenya Dairy Board formed a solid supportive infrastructure. To allow smallholders to engage
in dairy production, they were supplemented by a national artificial insemination service,
multiplication farms that provided heifers for subsidized prices, and local dairy co-operatives
that were the interface between smallholder dairy producers and the KCC (Bebe 2003).
Together, these institutions played a vital role in the development of smallholder dairy
production.
Like public institutions in other sectors, these institutions became a focus of
clientelist job provision and rent-seeking behaviour. By the late 1980s, and in spite of
considerable donor support, their efficiency and quality had seriously declined (Karanja 2002;
Muriuki 2001). When droughts caused declines in milk production, this entailed long delays
in payments to dairy producers rather than increases in milk prices as one would normally
expect (Karanja 2002). A vital difference with products as coffee, however, was that potential
alternative market channels were much closer at hand, at least in the neighbourhood of the
bigger consumption centres. Farmers could easily sell their milk to urban consumers directly
or through small dealers. This was forbidden by law, but it was difficult to keep dairy farmers
under control when the KCC and its local co-operatives failed to provide fair and regular
payment. In 1992, the monopoly of KCC on processing milk and selling milk in urban
markets was ended, and the market shares of the KCC and the dairy co-operatives sharply
declined. In Central Province, co-operatives sold less than 4 percent of the marketed milk in
1999-2000 (Karanja 2002). Much more milk was sold locally or to private dealers who
transported the milk to the cities, often by bicycle. KCC officials grumbled about the dangers
of ‘hawked’ milk, but this could not stem the tide. In 2000, the KCC was closed down.
The increased competition raised farm-gate prices with up to 50 percent (Owango et
al. 1998). Unlike the co-operatives, private dealers paid promptly. They also organised the
collection of evening milk that was necessary to avoid wasting but had been neglected by the
co-operatives (Karanja 2002). So like in horticulture, private small-scale trade in milk was
quite efficient, while its employment creating effect was larger than that of the formal sector
(Muriuki 2001). The downside of the decline of the formal dairy sector, however, was that
dairy farmers at some distance from the towns saw their outlets and prices reduced. Especially
in more remote areas, like the North Rift region, dairy farmers were dependent on the
marketing and processing function of the KCC and the co-operatives, and the decline of these
institutions strongly affected them.
More generally, the development of smallholder dairying is hampered by serious
handicaps. Due to the rising population pressure on the land, smallholder dairying has
increasingly assumed the form of zero grazing. However, unfavourable price ratios hamper
the use of purchased fertilizer and fodder, so that too little nutrients are imported to maintain
soil fertility in zero grazing systems. Besides, farmers minimize their dependence on
purchased feed by reducing their numbers of heifers. This makes them dependent on open
range farms for replacement cows, whose number is dwindling by the continuing
intensification. Furthermore, dairy farms are dependent on well functioning veterinary and
artificial insemination services. Reduced government support has led to a decrease in artificial
insemination and dippings for tick control. Co-operatives have filled part of the void, but
could not turn the tide. As a consequence, herds are becoming more sensitive to disease or
genetic deterioration by the use of uncertified local bulls (Bebe 2003).
5.5 Key mechanisms
Summarizing a century of Kenyan history with the concepts we introduced in Section 3, one
can say that a pattern of unbalanced growth (the settler economy) was overwhelmed by
involutionary tendencies in the smallholder sector. The unravelling of this pattern allowed a
50
moment of seemingly balanced growth, but this was short-lived and soon gave way to a
pattern of generalized involution.
Remarkably, the turn from apparently successful growth to generalized involution
was coupled to continuity in Kenya’s political regime and to continuity between the policies it
pursued and those of the colonial government it succeeded. President Moi and his KANU
party presided both over Kenya’s miracle and over its demise, and their economic policy
continued the line that was initiated by the Swynnerton plan in the 1950s. It is true that Moi’s
one-party rule became more repressive as the years passed, but this was a gradual
development. In fact, the turnaround in donor attitudes around 1990 was more drastic.
This political continuity makes the Bates’ (1981) thesis that the internal political
configuration was the primary cause of involution in Sub-Saharan Africa an implausible one.
If anything, the degeneration of Moi’s regime seems an effect of the rising economic
problems rather than the other way around. It suggests that some other force or complex of
forces must have pushed Kenya into a multifaceted poverty trap – one with political as well as
economic aspects.
A conspicuous feature of the story that has been told above was the relation between
the evolution of agriculture and that of the public sector. Public sector salaries were a major
source of savings that financed private investment in farming. On the other hand, the
disproportion between the growth of the public sector and that of the private sector was the
root cause of many problems.
Our interpretation of these realities starts in the realm of material flows and economic
ascent (see Section 2). The co-evolution of Kenya’s societies and the global economy had
resulted in a combination of semi-intensive farming systems and of socio-political networks
where access to public positions was vital for individual fortunes. This combination formed a
system with two attractors, one leading to endogenous growth, the other to a complex poverty
trap.
- Endogenous growth would occur if the flow of young into the public sector would remain
moderate, and sufficient private savings of civil servants would be ploughed back into
agriculture (cf. Kitching 1980). This would allow sustainable agricultural intensification.
The linkage effects of this would stimulate industrial and service activities, which would
allow part of the population to leave agriculture, creating room for innovations such as
ploughs that would raise the productivity of farm labour. The whole development would
increase the fiscal base allowing a gradual expansion of the public sector.
- A poverty trap would appear if too many people were to enter the public sector and too
small a share of civil service salaries would be ploughed back into agriculture. Increase in
government expenditures would then outpace the fiscal base. This would build up the
fiscal pressure on agriculture, so that farm profits would be squeezed and private
investment in farming would be further reduced. It would start a spiral of soil degradation
and poverty which would suppress any positive linkage effects, so that the crowding in
agriculture would be aggravated by non-farm stagnation. Generalized poverty would set
off a low social capital trap, because poverty-induced high discount rates would induce
individuals to select non-cooperative strategies that give a higher pay-off in the short
term. All this would cause an increased flight into the public sector. It would create a
political market based on the doling out of public sector jobs and erode the political
weight of the entrepreneurial classes in the private economy, so that the fiscal exploitation
of the latter would further increase.
To which side the balance would tip depended on the returns to private investment in
farming. If such investment was profitable, the demand for public sector jobs was moderated
and more civil servant earnings were ploughed back into agriculture, setting society onto a
pathway of endogenous growth. If farm profits dropped below a critical threshold, however,
society was pushed into the poverty trap. Bates’ internalist explanation of involution in Africa
is right insofar that social and cultural characteristics influenced the height of the threshold.
Compared to Asian societies where work ethic and private entrepreneurship were more
developed, this was higher because people disliked to slave and saw public positions as a
springboard for social improvement.
51
Bates (1989) is right that the fiscal pressure on agriculture was lower in Kenya than in
other African countries. Also, the infrastructure inherited from the settler economy averted a
low chain investment trap (cf. Kydd et al., forthcoming). Nevertheless, the critical threshold
for initiating self-sustaining growth was not achieved because Kenyan farmers were exposed
to low and unstable world market prices. Endogenous price fluctuations, dynamic
disequilibrium, and OECD farm policies, limited the profitability of investment by pettycapitalist smallholders. The post-colonial policies left smallholders unshielded against these
influences, and the demise of the coffee agreement had a similar effect. In this respect, postcolonial policies continued the line that colonial policies had followed towards black
smallholder farmers. This was the basic condition that pushed Kenya into the poverty trap; the
oil crises and the loan push in the 1970s were secondary, precipitating factors.
The poverty trap had a double influence on politics. On the one hand, it enhanced the
dominance of the public sector bureaucracy, stimulated nepotism and corruption, and
increased the resistance against public sector retrenchment, engendering ‘urban bias’ and bad
governance as endogenous results. On the other hand, it made the state ever more dependent
on official development aid. The coordination between donors, their relations with high
technocrats in the central bank and Finance and Planning, and the aid freezes by which they
forced their reform plans on the political top, amounted to the emergence of a new kind of
state structure. The power of the president and his political top was balanced by that of an
increasingly coordinated network of donors and economic technocrats in the state apparatus
(cf. O’Brien & Ryan 2003).
Until now, this dual power structure has tightened rather than loosened the poverty
trap. The national power centre around the president has blocked any significant reform of the
bureaucracy that hangs like a millstone around the neck of the national economy. The
political change in 2002, when Moi’s candidate Uhuru Kenyatta was beaten by the current
president Kibaki, has not really altered this situation. Meanwhile, the donors-cum-technocrats
power centre keeps enforcing liberal reforms that weaken the infrastructure for agricultural
growth while leaving farmers unshielded against unstable and low world market prices.
5.6 Trade policy
The general evolution in Kenya also influenced its trade policies. As part of the reforms in the
early 1990s, the exchange rate policy was liberalized, non-tariff barriers and export taxes
were abandoned, and import tariffs streamlined and reduced. The new maximum tariff of 25
percent was considerably below the bound ceiling of 100 percent to which Kenya has
committed itself in the WTO. However, the government has retained the right to impose
additional ad hoc tariffs (‘suspended duties’) or apply export licences if circumstances would
require so. The ad hoc tariffs make it possible to increase the tariff for important farm
products up to 95 percent (WTO 2000). Besides, marketing boards subsist for many products,
even if their powers have been restricted.
Regional cooperation
Kenya participates in two regional trade blocks. In 1993, it established the Common Market
for Eastern and Southern Africa (COMESA) together with twenty other countries. With eight
of these, it formed a free trade area in 2000, while it maintains preferential relations with the
other COMESA members. COMESA wants to become a customs union, but the level of the
common external tariff still has to be negotiated (Oyuke 2006). In the longer term, COMESA
aspires to become a monetary union.
Kenya’s neighbour Tanzania left COMESA in 2000, while its neighbour Uganda
remained outside the COMESA Free Trade Area. These countries were an important
destination for Kenyan exports. In 2001, Kenya, Uganda and Tanzania revived the East
African Community (EAC) that had been discontinued in 1977. The EAC members give
preferential access to each others products and want to become to a customs union. A
52
common external tariff ranging from 25 percent for many agricultural products up to 90
percent for maize flour (EAC 2005) may be introduced at the end of this year.
Doha Round
In the Doha Round, Kenya could manoeuvre more free from donor pressure than in
negotiations about domestic reform and official development aid. As a consequence, its
position was less stamped by the tussle between the political top and the donor community
and its national allies, and more an independent expression of the national interest as seen by
its representatives in the negotiations.
Kenya played an active role in the Doha Round. It submitted various papers, hosted
preparatory meetings of African representatives, participated in various coalitions, and was
involved in several green room meetings. Its contribution to the negotiation process was
acknowledged in 2005 by the election of its Geneva ambassador Mrs. Amina Mohamed as
chair of the WTO General Council. Kenya aligned with the African Group, the G33, the G90,
and a group of 11 countries asking for a ‘development box. These coalitions articulated the
concerns of poorer developing countries that wanted more access to western markets but
feared the consequences of far-fetched trade liberalization. Kenya was also a key player in the
events that led to the failure of the Ministerial Conference in Cancun in September 2003.
The general position of Kenya was worded in a paper submitted in the first phase of
the negotiations (WTO 2001). This argued that the implementation of Uruguay Round reform
had neither helped agricultural development nor improved food security in Kenya. It
complained that “substantial liberalization only takes place in countries which have no
financial means to support their farmers and exporters” and contented that this “one-sided
liberalization led to marginalization of millions”. It pleaded for a more positive kind of
special and differential treatment of developing countries. This should not just allow lower
reductions in support and a longer timeframe for implementing them, but “target at filling the
gaps between developed countries and developing countries in terms of supply capacity,
economic development, and financial resources”. In connection with this, it referred to the
‘development box’ that Kenya had proposed together with other countries, and that implied
that developing countries should also be allowed to raise certain tariffs if needed (WTO
2000b).
Kenya denounced new import barriers in developed countries, especially the
“arbitrary imposition of SPS measures”. However, it was also concerned about the erosion of
trade preferences by the reduction in MFN tariffs in developed countries, and asked for a
strengthening of trade preferences to compensate for this effect. It also asked for measures to
shield net food importing developing countries against sudden rises in international food
prices. Kenya strongly condemned the dumping of agricultural products by developed
countries, using a broad interpretation of dumping that also encompassed “massive cash
injections” to farmers and food exports that did not comply with SPS regulations of the
exporting country. It warned that developing countries should not be expected to undertake
further liberalization commitments until the distortions ensuing from such practices would
have been eliminated.
Kenya also led the African initiative regarding the problem of low and instable
international prices of agricultural commodities. From 2003, it submitted papers together with
Uganda and Tanzania on this issue to WTO Committees on Trade and Development and on
Agriculture. In 2005, a commodity proposal was submitted by these countries together with
Ivory Coast, Rwanda and Zimbabwe, and in 2006, by the African Group as a whole (African
Group 2006). A conspicuous element in the proposal is the wish to maintain room for
unilateral arrangements for supply management by producing countries, which be explained
by the vicissitudes of international commodity agreements and UNCTAD’s Integrated
Programme for Commodities in the 1970s-80s (Maizels 1992).
Negotiations with the EU
While in the WTO negotiations, Kenya was relatively free from external pressure, this was
less true for the negotiations on an Economic Partnership Agreement (EPA) between the EU
53
and 16 Eastern and Southern African countries (ESA) in which Kenya is also involved.
Unlike the trade preferences of the Cotounou Agreement which are on a non-reciprocal basis,
the ESA-EPA should establish a regional trade area based on mutual liberalization. The
official argument of the EU for this is the unwillingness of other WTO-members (including
some important middle income countries) to permit a new extension of the Cotonou
Agreement preferences after 2007. However, it may be assumed that own export interests of
the EU and the belief of many EU officials that it would be good for developing countries to
liberalize their own trade policies also play a role.
A free trade agreement between the EU and the ESA countries would expose Kenyan
farmers to strong import competition from European producers who are much more
productive and heavily subsidized – also by green box subsidies that the EU has no intention
to eliminate. Besides, a free trade agreement would strongly reduce the tariff revenue received
by the government and affect Kenya’s industrial exports to COMESA and EAC countries
(KIPPRA 2005; Milner et al. 2005). Admittedly, the first round effect of reduced prices for
consumers would be positive, and in a static analysis, the trade creation effect may seem to
exceed the trade diversion effect creating a positive welfare effect (Karingi et al. 2005). In the
light of what has been said in Subsection 5.4 above, however, the validity of such analysis
may be doubted. Increased import competition may lower farmer earnings and the
displacement of Kenya’s industrial exports to neighbouring countries may restrict
employment alternatives for farm workers. Both effects may reinforce the poverty trap in
which agriculture and the wider society are caught. Whether this can be countered by positive
effects of freer trade on technology import, learning and incentives for raising productivity, as
many economists think (e.g. Calì & te Velde 2006) is not at all sure. EU officials claim that
an EPA will facilitate regional integration. The opposite is more likely, however, because the
ESA group does not concur with regional trade blocks (COMESA, EAC and/or SADC) while
it includes less developed countries (like Kenya) as well as least developed countries. The
latter (including Tanzania and Uganda) have different interests, because they are already
assured of continued preferential access to EU markets under the Everything-but-Arms
arrangement (Stevens 2006).
In spite of these drawbacks, which have been highlighted by civil society groups and
African politicians (e.g. ACORD et al. 2006; African Union 2006), Kenyan representatives
are obliged to go along with the negotiations. Without an EPA, Kenya has to fall back on the
EU’s General System of Preferences for developing countries, which is much less favourable
than the current Cotonou agreement. The EU absorbs more than one quarter of Kenya’s total
exports, and not concluding an EPA may have serious consequences for Kenya’s horticultural
exports to the EU (Nalo 2006a). Moreover, Kenya would not benefit from the development
funds of the EPA, which are important for their intrinsic purposes as well as for securing the
employment of many public sector workers. As a consequence, Kenya has few alternatives
but to negotiate a long transition period, a less than full reduction of tariffs and a list of
sensitive products that will be exempted from such reduction (Nalo 2006b). At this moment,
the outcome of the negotiations is still unknown. In comparison to the WTO negotiations,
however, the EPA negotiations have certainly increased the leverage of the donor camp and
their allies, for whom the EPA is a possibility for ‘locking in’ liberal trade policy reform (e.g.
Collier & Gunning 1995; also cf. Panagariya 1999).
5.7 Conclusion
The above desk study suggests that Kenya can be seen as a dual equilibrium system, which
has been trapped in an unsustainability spiral in which the interaction between population
growth, natural resource degradation, and political markets leads to a low level equilibrium.
This makes Kenya a suitable case for studying the institutional and dynamic pattern of
‘involution’. An important element in such a study should be the search for quantifiable
longitudinal data on (on investment, soil degradation, social capital and political markets) to
54
corroborate the partly anecdotic information in that has been presented above. Besides, the
issue of an ESA-EPA could provide a topical vantage point for a Kenya case study, and one
that is clearly relevant for Dutch policy makers. What the EU is demanding from Kenya and
its neighbours is diametrically opposed to Kenya’s standpoints in the WTO negotiations. A
Kenya case study would provide an opportunity to inspect the assumptions of experts and
officials who believe that poor countries would benefit from reducing their barriers to imports
from developed countries. In addition to direct effects in Kenya itself, such a study should
also consider the effects of an EPA on emerging regional trade blocks of which Kenya is a
member.
55
6. Outline for further research
This report lays the foundation of case studies to explore the dynamic regimes that were
posited in Section 3. Bolivia (possibly added to by Brazil) is a suitable case for studying the
regime of ‘unbalanced growth’, and Kenya for studying the regime of ‘involution’. A first
step would be to validate and supplement the desk studies that underlie Sections 4 and 5 with
expert interviews and data gathered in the countries themselves. The next step would be to
identify key aspects for more in-depth study. In Sections 4 and 5 we have indicated the
perspectives from which this could start:
 The vantage point in a Bolivia case study could be the trade relations with neighbouring
countries, especially Brazil, and on the position of Bolivia in the Andean Customs Union
and the MERCOSUR. Central in this study would be the pattern of ongoing specialization
of agricultural production that creates stagnation in smallholder sector oriented towards
food production for the domestic market, and a booming latifundista export-oriented
frontier sector in which deforestation, poverty and an increasing global orientation by
transnational corporations go hand in hand. The general research question for this case
would be: how do national and regional agricultural trade policies evolve in response to
interest articulation of different farm sectors affected by the process of agricultural
specialization and social (dis)articulation? This question will be answered especially by
investigating in more detail the historical process of agricultural specialization in Bolivia
and Brazil and the structure and dynamics of interest articulation and policy consultation
in trade negotiations.
 Central in the Kenya case study would be the interaction between population growth, soil
degradation, and political markets, that leads to a low-level equilibrium in which trade
reforms have other outcomes than in standard models. A relevant vantage point could be
the European Partnership Agreement with a group of Eastern and Southern African
countries. The general research question could be: how would the interaction of the
above-mentioned forces affect the outcomes of an EPA in a country like Kenya? One
requirement for answering this question is quantifiable longitudinal data on investment,
soil degradation, social capital and political markets to corroborate the partly anecdotal
information in Section 5.
Parallel to these case studies themselves, the information ensuing from them will be used to
address the problem that trade model projections may deviate from local realities. Partly this
will be done by suggesting improved ways for handling issues like price transmission (see
Hertel & Winters, 2006; and OECD, 2003 for some perspectives on this). This will require a
refined analysis that focuses on a selected number of important products rather than using
countries as units of analysis. Additionally, a survey will be made of key issues that do not
lend themselves for integration into trade models (like socio-political interactions with
changing international market conditions). Efforts will be made to develop a simple heuristic
or checklist that can be used for an adequate assessment of predicted trade policy impacts on
developing economies
Supplementing the two desk studies with locally collected information will take a few
weeks during the first half year of 2007. If the Bolivia study would be extended to Brazil, an
additional desk study on this country should be added. The subsequent in-depth study of
selected aspects requires an additional mission to the countries concerned. Local consultants
may be hired to supplement field work by the researchers of Wageningen UR in this phase.
The research on consequences that the identified key mechanisms have for (the use of trade
models) will take another few weeks.
The third and final step, to be taken in 2008, would be to synthesize the insights
gained by the case studies and the study on consequences for trade models. This will lead to:
 A better explanation of the position that various kinds of developing countries take in
56


trade negotiations, including insights in the dynamics of regional trade blocks and their
relation with the EU.
An improved description of institutional-dynamic patterns presented in Section 3, as well
as insights on effects that EU policies may have on countries that exhibit these patterns.
Conclusions on whether and how important mechanisms of these patterns could be
incorporated in such models. This could be coupled to formal modeling to prepare such
incorporation. If observed key factors cannot be integrated in these models, the case study
information could be helpful to detect a code or heuristic that allows an adequate
assessment of predicted model impacts on local economies.
57
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