|The Courier N° 127 May - June 1991- Dossier 'New' ACP Export Products - Country Reports Cape Verde - Namibia (EC Courier, 1991, 104 p.)|
by Christopher STEVENS
Since Lom was signed, the share of non-traditional commodities in Kenyas exports to the European Community has increased substantially. It should be noted that in the context of Kenya, the term nor-traditional refers to a broadly selected group of some 179 commodities (mainly at the Customs Code 6-digit level) which does not include any of the well-established, dominant commodities such as lightly-processed coffee, cocoa or minerals. As in any such selection for a whole group, there are certain anomalies at a country level. In the case of Kenya, for example, non-traditional exports include canned pineapple, which some might argue has been a feature of trade sufficiently long for it now to be regarded as a traditional export.
Bearing in mind these caveats, nontraditional Kenyan exports to the European Community grew three times as fast as total exports between 1976 and 1987. In consequence, their share (by value) of total exports rose from 10% in 1976 to 23% in 1987.
There was also a broadening of the range of non-traditional commodities. In 1976 the bulk of such exports were various kinds of processed fruit (mainly canned pineapple) and lightly-processed hides and skins. By 1987, by contrast, a range of horticultural products and a small amount of clothing had joined the list. As a result of this rapid growth, horticulture is now Kenyas fourth largest merchandise export, being exceeded only by coffee, tea, petroleum and, on the non-merchandise account, tourism.
Commodity diversification has proceeded further in Kenyas exports to the EC than to other destinations. Nontraditional exports to the USA in 1987, for example, were at a very low level (equivalent to only some 3% of the level of exports to the EC) and were concentrated on leather goods and woven clothing. The relatively low share of the USA in Kenyas non-traditional exports (which contrasts with the experience of other ACP states such as Mauritius and Jamaica) may be due to the very limited role of manufactures. Unlike many of the other ACP diversifiers, Kenyan nontraditional exports are heavily concentrated on agricultural rather than manufactured goods. Whereas the EC offers preferences under the Lomonvention for both agricultural and manufactured goods, this is less true of other industrialised countries.
This commodity diversification has been particularly helpful because Kenyas traditional exports are characterised both by considerable price instability and by declining prices relative to imports in recent years. The Kenyan economy is a very open one, with the combined value of imports and exports equivalent to 49% of GDP in 1988. World prices for coffee and tea have been very volatile with, for example, coffee experiencing a 39% rise in the realised price between 1985 and 1986 and a 37% fall in the following year. Over the period since the mid-1970s, however, the general trend of prices for traditional exports in relation to the prices of imports has been downward. The index of purchasing power of exports has declined from 114 in the period 1974-1978 to 86 by 1984-1988.
The Policy Environment
In practice, if not in precept, industrial policy has tended to put import substitution before export diversification. This applies particularly to manufacturing, which may explain why this sector has played only a minor role in the commodity diversification of exports to the EC. This absence is the more surprising since Kenya has a well-developed manufacturing sector and was a major regional exporter during the colonial and post-colonial periods. During the period of Lom (1975-80) real manufacturing GDP grew by an annual average of 7.2% (higher than the average for the total GDP, which was 5%), and in the period of LomI it increased by 4% (as against 3.2% for total GDP).
Government policy statements during the 1970s and early 1980s were couched in terms of the need to reduce protection to domestic sectors. An Export Compensation Scheme was introduced in 1974 to assist manufacturing exporters by means of cash subsidies intended to offset the protective effects of tariffs on inputs and the cascading effects of domestic excise and sales taxes. Practice, however, has tended not to conform with this precept. Since 1971 there has been a consistent rise in the average level of protection as import licensing has become an increasingly important element of both macroeconomic management and the system of protection for domestic manufacturing industries. This was particularly marked during the 1970s, when a range of quantitative import restrictions were introduced. During the 1980s the protective effect has been moderated somewhat with the replacement of quantitative controls by tariffs.
The most important source of manufacturing growth over the past two decades has been increased domestic demand. One analysis of the sector claims that two-thirds of output growth during the twenty years to 1984 was accounted for by domestic demand, and just over one-quarter from import substitution. Export growth contributed only 5% to the increase.
The one exception to the bias in recent years has been in relation to the exchange rate. Diversification has undoubtedly benefited from devaluation. The period of rapid growth in horticultural exports has coincided with a gradual, but substantial, devaluation of the Kenya Shilling, which has been subject to a real depreciation of the order of 28% between 1985 and 1988.
(b) Fiscal incentives to export
The fiscal regime tends to act as a disincentive rather than a stimulus to export diversification. Provision does exist for a 20% tax rebate for exports, but this applies only to manufactures which, as noted above, are notable mainly by their absence. The rebate is considered by the Ministry of Finance to be compensation for taxes paid on the imported capital goods required to produce the export rather than as a subsidy. It is for this reason that it has not so far been available for horticulture exports with few clearly identifiable imported inputs.
Two particular aspects of the fiscal regime appear to have caused problems. These concern taxes on aviation fuel and duties on imported packaging materials. The major constraint on further expansion of exports at the present time appears to be air freight capacity. Unlike Ethiopia, there is no shortage of southbound flights to bring freight costs down to an acceptable level. But there is not always sufficient space on scheduled airlines to absorb supply and there appear to be constraints in hiring charters. A widespread view, expressed by both private sector and Government sources during the fieldwork for this project is that aviation fuel prices in Kenya have been higher than in neighbouring countries as a result of Government tax policies. It is alleged that this has made it difficult to attract charter flights. The Government recently reduced the tax on aviation fuel considerably; it will be important to monitor the effect on air transport availability.
Another constraining factor, which appears likely to become increasingly important, is the absence of adequate packaging materials. In an effort to increase the unit value of exports, some exporters are attempting to move into the export of pre-packed vegetables which are suitable to be placed on supermarket shelves without further repackaging. These have two advantages: the level of value added in Kenya is increased, and the journey from farm to shop is reduced by one day - increasing the freshness of the product on the shelves and, hence, its price. Government policy is to provide trade protection for the domestic packaging industry. Packaging materials for bulk exports are supplied by a single company, which does not produce the type of material required for pre-packs. At present, therefore, the packs have to be imported, and face an import duty of 45% plus a sales tax of 17% (even though they are re-exported immediately). This reduces the financial competitiveness of the resulting export.
Such duties are not the only taxes applied to export production. The local authorities in the main horticultural growing areas (Machakos, Meru and Malindi) impose a production cess. Also a 15% cess is levied on imported hides and skins required for leather exports.
(c) Institutional support
The horticultural industry is supervised by the Horticultural Crops Development Authority (HCDA), set up in 1968. This registers all exporters and provides technical and marketing information to both exporters and producers, for which it levies a charge of 10 cents/kg. In conjunction with the Ministry of Agriculture and Livestock Development, the HCDAs technical services department provides production advice to farmers. It also has a marketing department which undertakes limited marketing for very small farmers and provides market intelligence to the industry as a whole. As part of this, it is a member of COLEACP, an organisation set up in 1973 under the aegis of the EC Commission, which offers a specialist professional framework for cooperation between ACP exporters and European importers of tropical fruits, vegetables, flowers and spices. HCDA is also responsible, in collaboration with the Central Bank of Kenya, for monitoring prices and foreign exchange remittances into Kenya.
However, the horticulture trade appears to be a highly individualistic affair, with exporters undertaking much of their own marketing. Partly because of this, a frequently voiced complaint concerns problems in ensuring payment by importers. At present there appears to be no system for obtaining references on potential importers or of checking the prices they actually receive on goods sent on commission (i.e. to be sold at the best price obtainable).
Pre-export inspection services are provided by the Ministry of Agriculture. This operates a unit at Nairobi Airport which provides phytosanitary certificates and other documentation required to gain entry to the EC.
There is a Kenya External Trade Organisation (KETO) within the Ministry of Commerce and Industry. This provides general government support for horticultural, as for other, exports. Toether with HCDA it participates in trade fairs, giving special emphasis to horticultural products, and it has conducted contact promotion programmes and sent trade missions abroad for horticultural marketing. Although most contacts are made by the exporters themselves, the KETO claims some credit for the development of markets for some horticultural products, such as mushrooms, and for the development of handicraft product markets.
The government is considering establishing an export processing zone, with the idea of developing clothing exports particularly in mind. However, studies are still being undertaken on the practical implementation of this. There already exists provision for manufacturing under bond within a factory, although this does not seem to have figured in exports to the EC.
There also exists a National Chamber of Commerce which has some interest in promoting non-traditional exports. It recently sponsored a mission of horticultural exporters to the main EC markets.
The European Community
The Lomonvention trade preferences of most relevance given Kenyas actual performance in diversification are the, often tightly delineated, concessions for products falling under the Common Agricultural Policy (CAP). The CAP regime for horticultural products is complex. The basic rule is that the system for supporting European farmers is relatively lightly structured, without the mandatory intervention buying and variable import levies characterising the cereals and meat regimes. For the fresh products of most interest to Kenya, the normal regime applying to imports is that the EC levies an ad valorem tariff and also establishes a reference price. Countries exporting to the EC are obliged to sell their goods at a minimum import price equal to the reference price plus the tariffs. Failure to comply results in a countervailing levy being imposed to bring the cost of imports up to the required level. Hence, it is possible to export fresh fruit and vegetables to the EC, but only if the landed price exceeds the level at which domestic produce is sold.
For the ACP, and some other third party suppliers, concessions are made on CAP products. The concessions take the form of full or partial rebates of the ad valorem tariff. But there are two provisos. The first is that ACP suppliers must still respect minimum import prices. In other words, they are unable to undercut domestic European produce but they retain a larger share of the proceeds from any exports they do make. This helps them, of course, to compete with other third party suppliers that have to pay the full tariff. The second proviso is that these concessions are limited to a fixed quota for some products. These quotas may be very small, e.g. the quota in LomV for small winter cucumber is 100 tonnes for the whole of the ACP group!
In addition, the Lomonvention provides for duty-free access to the EC market for manufactured goods that fulfil the rules of origin. Although Kenya has not taken great advantage of these concessions in the past, there is a possibility that it might do so in the future.
Kenyan exports have not been subject to any formal restrictions (other than those specified in Lom But surveillance and voluntary export restraints (VERB) on cut flowers have been proposed (although not implemented) at various times by the EC Commission, and by the Netherlands and German governments.
Kenya has exported horticultural goods to the EC since before the first Lomonvention. However, the trade was at a fairly modest level until the mid-1980s. The big jump in exports took place in 1984, when the volume increased more than threefold over the previous year; it was from 1984 that the government began to devalue the real effective exchange rate.
Since then there has been substantial growth in the volume, value and unit value of exports. There was an average annual growth of 10% in export volume over the five years to 1988. In value terms, exports grew in current prices from below K £10 million in 1979 to K £95 million by 1988. The unit value of Kenyas horticultural exports has grown more rapidly than the average for all exports. Between 1984 and 1988 it rose in current terms by an annual average of 4.6%; by contrast, the price index of all exports rose by an annual average of only 0.7%.
As a result of both the increase in volume and the faster-than-average growth of unit value, horticultures share of total merchandise exports has increased steadily. From only 3% in 1983, it had reached 10% of the total by 1987, a position which it maintained in 1988. Coffees share in 1988, by contrast, stood at 27%, with that of tea at 20%.
There are no detailed statistics on the horticulture sub-sector. For example, there are no official data on the number of people employed in horticulture production, but it has been variously estimated at tens of thousands. Flower cultivation alone is said to employ about 7000 people. One reason for the lack of data is that the growth of horticulture appears to have passed more or less unnoticed by the Government. The annual Statistical Abstract, for example, does not even identify horticulture as a separate agricultural sub-sector, let alone as a major export! This may account for the fact that the sector has benefited from no special Government support or subsidies.
Over one hundred exporters are registered with the HCDA, but only 40 to 50 currently are active. A typical exporter may deal with 50 to 60 farmers. The dividing line between farmers and exporters is somewhat blurred; the largest producers undertake their own exports, and many exporters also have some production capacity.
The farmers range from smallholders on half an acre to large farms with 400 or more acres devoted to horticulture. The relative shares of total production accruing to large farmers and smallholders is unknown. However, it is understood that large-scale farms in the area around Naivasha dominate the cut flowers market and that large farms (and the larger smallholders - with holdings of over five acres) are also particularly important for high value vegetables where quality control is especially stringent. As Kenya changes its product mix to increase the share of high value items, it will present a challenge to smallholders to maintain their share of the industry.
In addition to air space and packaging, noted above, another constraining factor is the absence of adequate common-user cold storage facilities at Nairobi airport. Some of the large producing and exporting companies have their own cold storage facilities, but the facilities available to small exporters are said to be inadequate. This has two adverse effects. First, it limits the possibility of precooling produce, a process that is favoured by importers in the EC.
Second, it makes the small exporters very vulnerable if cargo space is not available as planned. If, for any reason, cargo space fails to be made available after the produce has reached the airport, the exporter either faces the complete loss of his consignment or must sell at a knockdown price to an exporter with surplus space. Plans are afoot to construct additional storage, but they are still at a preliminary stage.
Another significant and relatively new export is canned pineapple. There is one firm in Kenya that is responsible for the bulk of canned pineapple exports. It is a subsidiary of Del Monte, the US-based multinational. Unfortunately, the firm declined to cooperate in any way with this study and so it has not been possible to analyse the sub-sector in detail. However, it is clear that canned pineapple exports increased steadily in volume terms during the 1970s, with a particularly large jump in 1975 when Lom came into effect, and have maintained that level during the 1980s.
In current value terms, canned pineapple exports by 1988 were about one-quarter of the level of fresh horticultural exports (i.e. around 2.5% of total Kenyan exports).
Other processed fruit and vegetable exports are notable mainly by their absence. This is largely because of shortage of raw materials (due partly to the higher prices received for fresh exports). The domestic market absorbs the whole output of the fruit and vegetable canning industry.
Clothing and Leather
Apart from horticulture, canned pineapple, and to a very small extent handicrafts, the only sub-sectors in which diversification has begun are clothing (2) and leather. This appears to be the result partly of the characteristics of these industries and partly of the recent performance of the domestic market. Clothing is well recognised as an early manufactured export from developing countries and figures prominently in the diversification of other ACP states. Leather is a domestically and regionally produced natural resource. The recent shift towards exports may be due to the fact that the clothing and leather industries suffered a sharp drop in growth during the 1980s.
Between 1975 and 1980 the annual average real growth of value added in the clothing, textiles and leather sectors was 9%; in 1980-84 this rate slumped to 2.75%. For manufacturing as a whole, by contrast, there was virtually no change in the rate of growth between the two time periods. Given the predominant role of domestic demand as a source of growth in manufacturing, this downturn in the clothing/leather sub-sectors may reflect a lack of buoyancy in the local market, and suggests that a search for exports could be a plausible response by producers seeking to revive their fortunes.
Until the mid- 1980s, Kenya might have been taken as an exemple by those critics of the Lomonvention and other trade preferences who argue that they fail to promote export diversification. As a country with a relatively well-developed production base, good manpower resources, favourable infrastructure and transport connections and a policy framework conducive to private sector growth, Kenya might have been expected at the time Lom was signed to be in the forefront of ACP diversifiers. Yet, for the first decade of the Lomonventions, this failed to happen.
During the second half of the 1980s, however, Kenya has begun to diversify, in a fairly dramatic fashion and in a not totally expected direction. It has been the agricultural sector, rather than manufacturing, that has taken the lead. Within the space of a few years Kenya has become one of the ECs principal foreign suppliers for some horticultural products. In 1987, for example, it supplied one-third of all EC summer carnation and winter green bean imports from developing countries, and three-quarters of EC summer green bean imports from all sources.
Although it is never possible to make a definite link between a set of policies and an export flow, there is some reason to suppose that both supply- and demand-side factors have had an effect. Government policies, particularly in respect of the exchange rate, have helped Kenya to sell into the fiercely competitive horticulture market. At the same time, the Lomoncessions have been instrumental in allowing Kenya to take advantage of this competitive position. The Common Agricultural Policy for fresh fruit and vegetables is a major barrier to imports into the EC. The combination of, on the one hand, a generally protective regime that limits supply to the European market and, on the other, specific preferences for the ACP is a very favourable one in the following sense. The preferences give Kenya a competitive edge over other third country suppliers to the European market while the general protectionism means that prices in Europe are higher than they would be under a more liberal regime. As a result, Kenya is able to garner some of the economic rent resulting from the restriction of supply. Of course, such positive features of the regime would be more than offset if the CAP protection was a major constraint on the volume of Kenyan exports. However, the protectionist policies of EC states have been a constraint only on Kenyan exports of green beans and, in the future, might become a constraint for strawberries. For other products the principal constraints on increasing the volume of exports relate to difficulties of supply (including transport) together with stiff competition from other sources.
The challenge for the future is for Kenya to maintain and build upon the position it has established in a highly competitive market. It is clear that competition for Kenyas existing range of products is intensifying. To maintain its position in the horticulture sector, the industry will need constantly to adapt its product range, production techniques and marketing systems. Not only will it have to move into new crops, but it will also have to come to terms with the increasing role of supermarkets in distributing fruit and vegetables. Otherwise, the export trade could collapse as fast as it has grown. At the same time, diversification needs to be extended into other sectors, notably clothing and leather.
A process of continuous adaptation to a remote market will present many practical difficulties for Kenyas, often small, export-oriented producers and traders. There is ample scope for a range of useful support measures to be financed through the aid provisions of the Lomonvention; the provision of supporting infrastructure within Kenya, the supply of technical assistance in product development, help in representing Kenyan export interests in the main markets, etc.