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THE ROLE OF LIVESTOCK IN THE KENYAN ECONOMY: Policy

Analysis Using a Dynamic Computable General Equilibrium

Model for Kenya

Ermias Engida

CONFERENCE ON MAINSTREAMING LIVESTOCK VALUE CHAINSACCRA, GHANA

NOVEMBER 05-06, 2013

IMPORTANCE OF LIVESTOCK IN A DEVELOPING ECONOMY

Livestock’s macro roles are not often recognized• “Livestock revolution” - Growing demand for meat and dairy

products• Crop-livestock interactions (e.g., draft power, manure, crop

residue feed, etc)• Livestock products and agro-processing (e.g., dairy, leather, etc)

How high are macro multipliers from livestock sector growth?• How much income growth can we generate with livestock

sector growth?• General equilibrium analysis needed to capture these

POLICY AND RESEARCH PRIORITIES NEPAD (2006) recognized the importance of integrating the livestock sector into the CAADP framework

Diao and Pratt (2008) conclude that “growth in staples is the priority for poverty reduction”• Combining growth in staples and livestock has high economic multipliers

& strong poverty reduction gains in food deficit areas

Dorosh and Thurlow (2009) - poverty-growth elasticities• Cereals have highest rural poverty reduction potential

The existing Model

DYNAMIC CGE MODEL FOR KENYA »We use Thurlow and Benin’s (2008) model

(“Agricultural Growth and Investment Options for Poverty Reduction in Kenya”)

• General equilibrium: the model represents different markets, all reaching equilibrium

• Dynamic: the model is solved recursively

The model is calibrated on a SAM for 2007 Kenyan economy (Mabiso et al., 2012).

53 activities; 24 AEZ specific agri. activities, and 29 non-agri., 53commodities, 19 factors, and 45 households (disaggregated by location and income level)

Young female

Sale of live animals

costs of keeping young animals

+ +

SCHEMATIC PRESENTATION OF HERD DYNAMICS AND PRODUCTIVITY

Production and economic flows (off-take, in-takes and others) Reproduction and growth (growth, births, deaths)

Immature female

Mature female

Births

Young male

Immature male

Off-takes

Sales of products

=

=

Yields/animal

+

TR

Other economic

uses

+

Mature male

costs of keeping immature animals

costs of keeping mature animals

Female deaths

Male Deaths

TC

-

=

Gross margin

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...Modifications Developing a separate herd dynamic module Coupling the herd dynamics with the economy-

wide model Nesting the biological and the economic

processes Establishing stock-flow relationships in existing

economy-wide models (e.g. livestock as capital and livestock products)

Revising and improving the system of economic accounts in the existing models (e.g. breeding stocks as capital in livestock)

Simulation and ResultsSimulation specification Four sim. scenarios; BASE, CEREAL, LIVESTOCK and AGRIC Total Factor Productivity (TFP) shocks are applied on three

agricultural subsectors: cereals, livestock and other-agrilture

Initial shares in total agricultural GDP: cereals (27%), livestock (21%), and other-agriculture (52%)

The TFP growth rates are adopted from Mabiso et al. (2012)

111.5

86.5

214.4

Cereal Livestock Other-agri

...Simulation specificationSimulation Shocks

BASE All Ag activities grow at the previous trend

CEREAL Maize, Wheat, Rice, Sorghum, Millet including root crops grow faster

LIVESTOCK Beef, Dairy, Poultry, Shoats and Other livestock activities grow faster

Agric CEREAL + LIVESTOCK activities grow faster

1.68

4.48

1.68

4.48

0

0

3.67

3.67

0.90

0.90

0.90

0.90

3.04

3.04

3.04

3.04

2.87

2.87

2.87

2.87

SIM_BASE

SIM_CEREAL

SIM_LIVESTOCK

SIM_AGRIC

Services

manufacturing

Other-AGRI

Livestock

cereal

The weighted average annual TFP growth across all agricultural activities in; CEREAL is 1.68 percent, LIVESTOCK is 1.70 percent, andAGRIC is 2.45 percent

Results09

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» The results reveal the importance of the livestock sector in increasing various macro measures (GDP, export earnings, factor returns) and combating food insecurity

» Livestock TFP growth spurs overall economic growth by both promoting livestock GDP and by supporting the cereal sector.

» significantly strong growth potential in contrast to previous thoughts

Sub-sector Agricultural sector GDPBASE 3.82% 5.09%CEREAL 4.71% 4.73% 5.37%LIVESTOCK 4.68% 4.88% 5.53%AGRIC 5.14% 5.65%

…Results» A 1% point of CEREAL sector growth impacts Ag and overall

GDP less than similar growth rates in LIVESTOCK» Accelerated agricultural TFP expansion thus results in

significant export growth.» In LIVESTOCK demand for imports is the largest, thus lower

real exchange rate appreciation is needed. As a result, total export growth is the largest.

6.1 6.266.57 6.59

-0.37 -0.43 -0.24 -0.2

-1

0

1

2

3

4

5

6

7BASE CEREAL LIVESTOCK AGRIC

Export pct change

Real exchange pct change

…Results» In LIVESTOCK, demand for existing livestock factor

increases the least and so does its price and returns. However, demand for land is instead quite strong.

» Returns to land held by poor households rises the most in the LIVESTOCK simulation.

» Cereal activities are intensive in the use of land and labor

0.0% 2.0% 4.0% 6.0% 8.0%

flab

flnd

fliv

LIVESTOCK

CEREAL

BASE

…Results» factor returns increased for all factors in all the

simulations» significant positive growth in households’ income» Rural households gain the faster growing income as

compared to their urban counter parts.» Semi arid areas are getting better as compared to

the others. » Livestock simulations are still exhibiting strong

effects on households’ income too. It is stronger in Arid and Semi-arid areas as households in these areas got 95% of their income from livestock activities.

Policy recommendations» Importantly, as factors are dynamically re-allocated

between agricultural activities, the inefficiency of strategies focusing on cereal sector development alone was highlighted.

» Investing more in enhancing livestock activities’ growth has huge implication in poverty reduction and narrowing the income gap.

» Thus it is better to give equal policy priority emphasis to the livestock sector and plan livestock – cereal sub-sectors joint growth instead of cereal sub-sector growth alone.

» Thus, balanced agricultural growth, in which productivity gains are more evenly distributed across sub-sectors, is preferable.

THANK YOU!

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