MILK, SUGAR AND THE CHANGING EAST AFRICA ECONOMY

It was an interesting coincidence that 10 years since the East Africa Customs Union came into force, a Kenyan delegation was in Uganda a few weeks ago, to help resolve a trade spurt between our two countries.

At issue was the surge in milk exports to Kenya from Uganda, which had halved farmgate prices in our eastern neighbor and made some powerful constituencies very jittery.

The price collapse in the Kenyan dairy market was prompted by a near sevenfold jump in milk exports from Uganda. Last year according to official figures Uganda exported 110 million liters of milk to Kenya from 16 million liters the previous year.

It is safe to say our neighbours have seen nothing yet.

The Dairy Development Authority reported in June last year that in 2017/18, milk production stood at 2.5 billion liters. Of this only a third of the milk or about 800 million liters is processed.

So if Kenyans have got their undies in a twist about 110 million liters, what would happen if we processed 50% of our production and exported the extra 400 million liters their way?

This was one of the best business stories of last year. The surge in exports overturned our trade balance in Kenya for the first time ever, with us exporting more to them than we import from them. It vindicates the champions of regional free trade...

The Kenyans are pondering slapping 16% VAT on our milk to give their embattled dairy farmers a chance. Which is good politics, but bad economics.

One of the main benefits of free trade is that it sharpens competitive advantages, the ability to produce something better than your competitors, which is a good thing.

The most efficient producers of a good or service end up thriving and the less competitive ones go off to look for their niche, what they can produce better than everybody else in the market.

There will be casualties of course, especially of those refusing to adapt to the changing times.

The anti-market lobby like to say that this is a bad trend and government should step in to subvert the market every so often. Often times the ones fronting this argument are those caught on the wrong side of the competition who want a government bailout.

The best way to look at it is to think of Uganda and its 100-plus districts. Imagine if we had, hard district borders, with customs posts at every district boundary.

To get matooke from Isingiro to Kampala currently, your main impediment is the state of the lorry carrying the matooke. There are no real tariff barriers between Isingiro and Kampala.

But if they were hard borders the inconvenience in crossing the nine district borders to get to Kampala, the time spent – a trip that probably took 10 hours would now be drawn out over a week, and the costs in import levies, overnight travel, would make a bunch of matooke so expensive that Kampala would start growing its own matooke.

The Kampala soils are nowhere near the quality of those in Isingiro, so the people of the capital city would settle for lesser quality food because of these barriers to trade. Kampala will be forced to indulge in an activity it’s white and blue collar workers have no competitive advantage in.

"The net effect of this would be a lower standard of living for city dwellers, than if the district boundaries were brought down....

The East African Community is bringing this reality to the fore.

In 2019 Kenyan farmers have complained not only about Ugandan milk but Ugandan sugar, grain and even poultry. The hard border and Uganda’s years of instability in the 1970s and 1980s allowed less efficient Kenyan producers operate. With stability and the Uganda economy back on a growth path, the Kenyan farmer is being reminded that there are more efficient producers on the other side of the border.

But you can expect that the interest groups who have invested their lives in this inefficient arrangement will not roll over and die. They will fight long and hard to maintain the status quo. But as they say, there is nothing more powerful than an idea whose time has come.

In Uganda too, some of our producers will have to face up to this new reality. Those who were sucked into the whole import substitution drive will be the hardest hit. There are somethings we have no business trying to produce, because the Kenyans produce it cheaper or even further afield, the Chinese, with their massive economies of scale can produce and land it on our shores, for a fraction of the price that either of us can produce it at.

"Some cynics would argue that agriculture is not the way to develop modern societies, but that would be to ignore the experience of Denmark or New Zealand. This is also to not appreciate the scope of agro-industries that can be built around research, processing, logistics, marketing, retail, hospitality and, that we haven’t even begun to scratch the surface of our true potential....

The government rather than side with entrenched interest groups or crony capitalists needs to direct our economy towards the production of that, that we have a competitive advantage in. When we have mustered enough capacity and surpluses, we can tinker around in areas where we can develop some competence, eventually.

And by the way more than two decades ago the United Nations Development Program (UNDP) mapped out a strategy based on the industries that we have or can develop a real competitive advantage in, at least in the region.

These were agriculture, tourism, services – education, health, financial and ICT and mining. Twenty years later and we are just waking up to our agricultural potential.