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Production Response of Ugandas Key Agricultural Commodities to Trade Liberalization FINAL REPORT Prepared by: Premium Consulting Limited 4th Floor, Impala House 13/15 Kimathi Avenue P. O. Box 3068 Kampala, Uganda Tel: 256 (041) 253 783 Fax: 256 (041) 253 783 E-mail: premium@spacenet.co.ug Contract Number: SX93/06/04/TRF 2

August 2006 This study was commissioned by the Uganda Programme for Trade Opportunities & Policy (UPTOP) and funded by the European Union through the European Union Development Fund (STABEX 93). The views expressed in the report are those of the authors and do not necessarily reflect the position of the European Union or UPTOP

mailto:premium@spacenet.co.ug

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TABLE OF CONTENTS ____________________________________________________________________________ ABSTRACT ......................................................................................................................................................... v ACKNOWLEDGEMENTS .......................................................................................................................................vi LIST OF TABLES .......................................................................................................................................................vii LIST OF FIGURES ....................................................................................................................................................viii ACRONYMS AND ABBREVIATIONS ............................................................................................................... ix EXECUTIVE SUMMARY ....................................................................................................................................... xi I THE STUDY ASSIGNMENT ................................................................................................1

1.1 INTRODUCTION .........................................................................................................1 1.2 OBJECTIVES AND SIGNIFICANCE OF THE STUDY.............................................1 1.3 RESEARCH QUESTIONS ............................................................................................1 1.4 RESEARCH DESIGN AND METHODOLOGY..........................................................2 1.5 THE STRUCTURE OF THE REPORT .......................................................................3

II BACKGROUND TO TRADE LIBERALIZATION..............................................................4

2.1 THE CONCEPT OF ECONOMIC LIBERALIZATION ............................................4

2.1.1 Economic Liberalization Defined ......................................................................................... 4 2.2 TRADE LIBERALIZATION .........................................................................................5

2.2.1 The Content of Trade Liberalization .................................................................................... 5 2.2.2 The Benefits of Trade Liberalization .................................................................................... 6

2.3 CONCLUSIONS.............................................................................................................7 III AGRICULTURAL TRADE LIBERALIZATION IN UGANDA ..........................................8

3.1 AN OVERVIEW OF UGANDAS AGRICULTURE SECTOR.....................................8

3.1.1 The Structure of Ugandas Agriculture Sector..................................................................... 8 3.1.2 The Importance of Agriculture in Ugandas Economy ..................................................... 8

3.2 FACTORS INFLUENCING AGRICULTURAL SECTOR GROWTH .......................9 3.3 THE AGRICULTURAL TRADE LIBERALIZATION POLICY FRAMEWORK .... 10

3.3.1 Agricultural Policy Reforms under the Economic Recovery Programme .................... 10 3.3.2 Agricultural Policy Reforms under the Poverty Eradication Action Plan..................... 12

3.4 MAIN RESPONSES OF THE AGRICULTURE SECTOR TO THE REFORMS ... 14 3.4.1 Increased Output.................................................................................................................... 14 3.4.2 Growth of Agricultural Exports .......................................................................................... 14

3.5 CONCLUSIONS........................................................................................................... 15 IV COMMODITY ANALYSIS.................................................................................................. 17 SECTION I: THE TRADITIONAL COMMODITIES.......................................................... 17

4.1 THE COFFEE SUB-SECTOR..................................................................................... 17

4.1.1 The Significance of the Coffee Sub-sector......................................................................... 17 4.1.2 Liberalization of the Coffee Sub-sector.............................................................................. 17 4.1.3 The Observed Responses to the Reforms.......................................................................... 19 4.1.4 Conclusions ............................................................................................................................. 23

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4.2 THE COTTON SUB-SECTOR..........................................................................25 4.2.1 The Significance of the Cotton Sub-sector ........................................................................ 25 4.2.2 Liberalization of the Cotton Sub-sector ............................................................................. 25 4.2.3 The Observed Responses to the Reforms.......................................................................... 28 4.2.4 Conclusions ............................................................................................................................. 32

4.3 THE TOBBACO SUB-SECTOR..................................................................................33

4.3.1 The Significance of the Tobacco Sub-sector in Uganda.................................................. 33 4.3.2 The Performance of the Tobacco Sub-sector ................................................................... 33 4.3.3 Other Observed Responses to the Reforms...................................................................... 35 4.3.4 Conclusions ............................................................................................................................. 37

4.4 THE TEA SUB-SECTOR.............................................................................................38

4.4.1 The Significance of the Tea Sub-sector in Uganda........................................................... 39 4.4.2 Liberalization of the Tea Sector ........................................................................................... 39 4.4.3 The Observed Responses to the Reforms.......................................................................... 40 4.4.4 Conclusions ............................................................................................................................. 41

SECTION II: THE NON-TRADITIONAL COMMODITIES ...............................................43

4.5 UGANDAS EXPORT DIVERSIFICATION PROGRAMME....................................43 4.6 THE FISH SUB-SECTOR ...........................................................................................44

4.6.1 The Significance of the Fish Sub-sector ............................................................................. 44 4.6.2 Policy Framework for the Fish Sub-sector ........................................................................ 44 4.6.3 The Observed Responses to the Reforms.......................................................................... 45 4.6.4 Conclusions ............................................................................................................................. 48

4.7 THE FLOWERS SUB-SECTOR..................................................................................49

4.7.1 The Significance of the Flowers Sub-sector....................................................................... 49 4.7.2 The Policy Framework for the Flower Sub-sector ........................................................... 49 4.7.3 The Observed Responses...................................................................................................... 50 4.7.4 Conclusions ............................................................................................................................. 52

4.8 THE MAIZE SUB-SECTOR........................................................................................53

4.8.1 The Significance of the Maize Sub-sector .......................................................................... 53 4.8.2 The Liberalization of the Maize Sub-sector ....................................................................... 54 4.8.3 The Observed Responses...................................................................................................... 55 4.8.4 Conclusions ............................................................................................................................. 57

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4.9 THE HIDES AND SKINS SUB-SECTOR.........................................................58 4.9.1 The Significance of the Hides and Skins Sub-sector ........................................................ 58 4.9.2 Performance of the sub-sector............................................................................................. 58 4.9.3 Interventions in the Hides and Skins Sub-sector .............................................................. 62 4.9.4 The Observed Responses to the Reforms.......................................................................... 63 4.9.5 Conclusions ............................................................................................................................. 64

5.1 THE MAIN FINDINGS AND POLICY IMPLICATIONS........................................65

5.1.1 Lack of Production Response at the Secondary Level ..................................................... 65 5.1.2 Lack of Sub-sector Strategies ............................................................................................... 65 5.1.3 Deterioration of Quality........................................................................................................ 65 5.1.4 The Influence of External Factors ...................................................................................... 66 5.1.5 Price Instability of Commodities ......................................................................................... 66 5.1.6 Limitations of Ugandas Agricultural Exports................................................................... 66 5.1.7 Supply Constraints ................................................................................................................. 66 5.1.8 Limited Funding of the Agricultural Sector ....................................................................... 67 5.1.9 Lack of a National Agricultural Policy................................................................................ 68 5.1.10 Deficiencies in the Agricultural Statistical System ............................................................ 68 5.1.11 Underdevelopment of Commercial Agriculture................................................................ 69 5.1.12 Land Tenure System .............................................................................................................. 69 5.1.13 Lack of Effective Coordination Frameworks .................................................................... 70 5.1.14 Breakdown of the Marketing Infrastructure ...................................................................... 70

VI CONCLUSIONS AND RECOMMENDATIONS............................................................... 71

6.1 CONCLUSIONS........................................................................................................... 71 6.2 RECOMMENDATIONS..............................................................................................72

BIBLIOGRAPHY ...................................................................................................................................................... 75 APPENDICES ...................................................................................................................................................... 78

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ABSTRACT This study examines the response of agricultural products to trade liberalization. It focuses on Ugandas four traditional and four non-traditional commodities. The analysis is premised on the assumption that the introduction of trade liberalization was expected to trigger a positive response in the production of these commodities, because of the perceived benefits brought about by liberalization The study looks at the conceptual aspects of trade liberalization and how they relate to Ugandas agricultural sector in general. The analysis of the eight commodities examines their significance in the economy, their performance over a number of years, including production dynamics, constraints, government, policy reforms and their impact. The study also identifies findings of a general nature as well as those that are specific to the commodity sub-sectors.

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ACKNOWLEDGEMENTS A great many people contributed to the production of this study report. While it is not possible to list all of them, we are nonetheless greatly indebted to them. Some of them deserve special mention. They include the European Union through the UPTOP project, whose financial support made the project possible; officials from the MTTI and other Government ministries, members of Parliament, the donors, representatives of the private sector and civil society that provided invaluable information and answers to questions and queries in the process of consultations and others who provided feedback on the draft. This report was prepared by a team of consultants from Premium Consulting Limited led by Dr. Evarist Mugisa. Their effort is greatly appreciated.

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LIST OF TABLES Table 3.1: The Share of Agriculture in the Economy, 1988 2005

Table 3.2: Agricultural Exports by Value, 1998 2005 (in Millions of US Dollars)

Table 3.3: Agricultural and related Imports by value (US $ 000) by SITC grouping, 2000 - 2004

Table 3.4: Recurrent Expenditure of the MAAIF, 1999/00 1005/06 (in Shs 000)

Table 4.1: Investment in the Coffee Sub-sector, 2000 - 2006

Table 4.2: Incidence of Coffee Wilt in some districts of Uganda (%)

Table 4.3: Sales of Organic Coffee (in 60-kilo bags)

Table 4.4: Cotton Production and Earnings

Table 4.5: Organic Cotton Production in Uganda in 2000/01 2005/06

Table 4.6: Ugandas Fish Exports, 1992 2005

Table 4.7: Primary destinations of Ugandan formal exports of fishery products in 2004

Table 4.8: National Impact Targets of Ugandas Floricultural Strategy 2005 2010

Table 4.9: The Main Investors in the Flower Sub-sector

Table 4.10: Maize Exports by Market Segment, 1997 2002

Table 4.11: Exports of Hides & Skins by Commodity Category and Contribution to the Sectors

(1997-2000)

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LIST OF FIGURES

Figure 4.1: The Coffee Marketing Chain before Liberalization

Figure 4.2: The Coffee Marketing Chain after Liberalization

Figure 4.3: Exports of Coffee in 1965/66 2004/05

Figure 4.4: Cotton Marketing Chain before Liberalization

Figure 4.5: Tobacco Production Trends (in Metric Tonnes)

Figure 4.6: Tea Production and Area Planted (1970 2003)

Figure 4.7: Tea Exports in Values and Volumes (1970 2002)

Figure 4.8: Volume and Value of Flower Exports, 1994-2003

Figure 4.9: Maize Production (MT), Acreage (ha) and Yield (mt/ha), 1980 -2004

Figure 4.10: Hides and Skins Production Trends

Figure 4.11: Export Trends of Wet Salted Hides (MT)

Figure 4.12: Hides and Skins Export Trends

Figure 4.13: The Leather Supply Chain

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ACRONYMS AND ABBREVIATIONS AEP Agricultural Extension Project AOA Agreement on Agriculture ASAC Agriculture Sector Adjustment Credit BATU British American Tobacco Uganda Limited BPA Bukalasa Pedigree Albar CAP Common Agricultural Policy CDO Cotton Development Organization CET Common External Tariff CMB Coffee Marketing Board Limited COMESA Common Market for East and Southern Africa CSDP Cotton Sub-sector Development Project CWD Coffee Wilt Disease DFR Department of Fisheries Resources EBA Everything-But-Arms ECRP Emergency Cotton Rehabilitation Programme EPA Economic Partnership Agreements ERA Electricity Regulatory Authority EU European Union FCTC Framework Convention on Tobacco Control FHL Fresh Handling Limited FSSP Fisheries Sector Strategic Plan FTZ Free-trade Zones GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product HACCP Hazard Analysis Critical Control Point ICA International Coffee Agreement IDA International Development Association IFAD International Fund for Agriculture Development ILO International Labor Organization LDC Least Developed Countries LMB Lint Marketing Board MAAIF Ministry of Agriculture Animal Industry and Fisheries MFN Most Favored Nation MFPED Ministry of Finance, Planning and Economic Development MSY Maximum Sustainable Yield MTCS Medium Term Competitiveness Strategy NAADS National Agricultural Advisory Services NARO National Agricultural Research Organization NCC National Cotton Council NTAE Non Traditional Agricultural Exports NURP Northern Uganda Reconstruction Programme PEAP Poverty Eradication Action Plan PMA Plan for Modernization of Agriculture PTA Preferential Trade Area for Eastern and Southern Africa SEP Strategic Exports Programme TRIMS Trade-related Investment Measures TRIPS Trade-Related Intellectual Property Rights

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UBOS Uganda Bureau of Statistics UCDA Uganda Coffee Development Authority UDC Uganda Development Cooperation UIA Uganda Investment Authority ULAIA Uganda Leather and Allied Industries Association UNBS Uganda National Bureau of Standards UNCTAD United Nations Conference on Trade and Development UNIDO United Nations Industrial Development Organization UR Uruguay Round UTA Uganda Tea Authority UTGC Uganda Tea Growers Corporation WHO World Health Organization WRS Warehouse Receipt System WTO World Trade Organization

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EXECUTIVE SUMMARY 1. This report is a result of a call for research proposals made in October 2005 by the EU-funded

Uganda Program for Trade Opportunities & Policy (UPTOP) under the Ministry of Tourism, Trade

and Industry (MTTI). As the title of the study - Production Response of Key Agricultural

Commodities to Trade Liberalization suggests the study focuses on a number of agricultural

commodities. Four of these are Ugandas traditional export commodities (coffee, cotton, tea and

tobacco), and the other four (fish, flowers, maize and hides and skins) are non-traditional export

commodities.

2. The report analyses conceptual issues relating to liberalization in general and trade liberalization

in particular, as it relates to agriculture sector in Uganda. It analyses the conditions that existed

before liberalization in the eight commodities, the reform measures that were introduced and the

observed response to these reforms. It also discusses of the findings that are not necessarily

responses in themselves, but which have a direct bearing to production and draws some lessons

for consideration. The report makes conclusions and recommendations on the way forward.

3. The report is premised on the concept of economic liberalization which has been accepted and

implemented in many countries in the world. It examines its pitfalls and benefits and looks at its

application in Uganda and in the agricultural sector in particular. The study argues that the

process of liberalization has gained momentum and is irreversible and can only intensify and

accelerate. The process of growing openness of national economies will continue with or without

Ugandas involvement.

4. The main challenge for Uganda, which is a predominantly agricultural economy, is to ensure she

maximize the benefits of agricultural trade liberalization. These include attaining increased

market access opportunities for her agricultural products, increased competitiveness of her

products in global markets, access to low to low-cost and competitively priced inputs, etc.

5. The study notes that reforms introduced by the Government in the agricultural sector were

responsible for restoring it (agriculture) given the formidable challenges it was facing, not least

the drop in coffee earnings. Through macroeconomic and pricing policies Government was able to

prevent the collapse of the coffee and cotton sectors. The reforms in agriculture which began

with agricultural rehabilitation credit in 1983 were successful in rehabilitating the export crop

processing facilities (coffee, cotton, and tobacco).

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6. The introduction of liberalization as a policy in the coffee sub-sector coincided with the sharp

decline in the world coffee prices. Although introduced at a rather difficult time, nonetheless,

this policy has contributed greatly to the growth of the sub-sector, including exporting under

adverse conditions. At the same time, the liberalization of the sector seems to be geared towards

the external market with no focus on the domestic market. Currently domestic consumption

remains quite low with preference given to tea instead of coffee. Domestic coffee consumption

must be seen as a growth opportunity area for Ugandas coffee industry.

7. The liberalization of the marketing chain prompted a proliferation of players, especially

exporters, primary level buyers, hullers and processors. These were attracted mostly by the

favourable trade margins especially in the mid 1990s. The report notes that liberalization has

brought about important changes in most of the commodities analyzed including improvement in

the quality of the products, the increase in the farmers share of the international price,

introduction of more players in the sub sectors, increase in the area cultivated, etc.

8. In spite of the liberalization measures, cotton production remains generally low (at 254,000 bales

compared to Chinas 29 million bales). Thus, Uganda is and will be for a long time to come a

small producer. A number internal supply constraints as well as external factors (domestic

support in the major producing countries, competition from synthetic fibres, etc) are working

against increased production in Uganda. However, liberalization has helped to create an

environment conducive to the growth of the sub-sector and indeed has brought about some

changes in the system of purchase, ginning, marketing of cotton in Uganda.

9. The future prospects for fish exports looks good on account of the increasing demand for specific

fish products, as is the case for the white fish species, the Nile perch of which its demand has

increased following the decline in traditional white fish species in Ugandas main fish export

market due to over exploitation. In addition, to capture more fish markets Uganda has diversified

most of her fish exports; a case is point is the tilapia species which is now exported to the USA.

10. The main findings of the study include: lack of a comprehensive agricultural policy, poor state of

agricultural statistics, limited funding of the agricultural sector, under-development of

commercial agriculture, deficiencies in the land tenure system, serious supply constraints, lack of

production response at secondary level, influence of external factors, etc.

11. The main recommendation of the study include development of a comprehensive agricultural

policy, increase of the share of agricultural funding by the Government, improvement of the

agricultural statistical system, promotion of large scale agriculture, value addition, etc.

I THE STUDY ASSIGNMENT

1.1 INTRODUCTION This report is a result of a call for research proposals made in October 2005 by the EU-funded Uganda Program for Trade Opportunities & Policy (UPTOP) under the Ministry of Tourism, Trade and Industry (MTTI). Premium Consulting Limited (PCL), the author of the report, was among the successful respondents to that call and prepared a proposal which went through a rigorous and thorough vetting process. As the title of the study - Production Response of Key Agricultural Commodities to Trade Liberalization suggests the study focuses on a number of agricultural commodities. Four of these are Ugandas traditional export commodities (coffee, cotton, tea and tobacco), and the other four (fish, flowers, maize and hides and skins) are non-traditional export commodities. The essence behind the study is that policy reforms, especially agricultural trade liberalization, are supposed to induce some positive response in production or supply. Ideally, supply response for any operation should be measured by the growth of production before and after the reforms. Supply response is symmetrical. There has been a tendency to expect increased production as an inevitable consequence of agricultural policy reforms. But where there has been heavy agricultural reform, liberalization leads to contraction accelerated movement of resources out of agriculture and re-allocation within the sector to the more profitable crops. This report is a product of a two-and-a-half month intensive work on the assignment. It contains the consultants key findings, observations, and recommendations for future action by the concerned parties - government agencies, donor agencies, farmer associations, private sector operators, etc.

1.2 OBJECTIVES AND SIGNIFICANCE OF THE STUDY The main objective of the study is to analyze the production response of selected agricultural commodities to trade liberalization as a government policy. The specific objectives of the study are: To contribute to capacity building for policy makers, negotiators in multilateral trade negotiations

and practitioners in agricultural trade. To assess the extent to which different social groups are benefiting from agriculture due to trade

liberalization. To discover gaps in the area of trade liberalization and production response of key agricultural

commodities and propose policy measures to address them. To make recommendations for improving production response of key agricultural commodities to

trade liberalization.

1.3 RESEARCH QUESTIONS The research was guided by the following research questions: What was the performance of agricultural sector before the implementation of trade liberalization? What has been the production response of the key agricultural commodities to trade liberalization?

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What are the sub-sector constraints that have impeded the growth and responsiveness of key agricultural commodities in the face of trade liberalization?

What measures have been designed to overcome these constraints to boost the productivity of the agricultural sector?

What emerging challenges have been brought about by trade liberalization in the production and export of key agricultural commodities?

What recommendations can be made for enhancing the responsiveness of key agricultural commodities to trade liberalization?

1.4 RESEARCH DESIGN AND METHODOLOGY In carrying out this assignment, the Consultant adopted an approach, which was distinguished by three principles, namely: the strategy and solutions proposed would directly contribute to increased competitiveness of

Ugandas agricultural commodities in the current liberalized trade environment; any proposals for change or reform would build on the capacity already built; and all stakeholders would be consulted for their views and lessons learned from the experience to-

date.

1.4.1 Conceptual Framework and Roadmap The conceptual framework is presented in Figure 1.1 below. As can be seen from the Figure, there are independent variables on the left representing the causal factors trade liberalization measures (such as the exchange rate reforms, balance of payments reforms, removal of price controls, etc). On the other hand, we have the dependent variables such as the production of export commodities, income growth, the balance of payments position, the terms of trade, etc represented as outcomes. The intermediate effects such as prices, production volumes, the trade balance, etc, are the parameters which measure the impact of trade liberalization and other reforms on the outcomes. Figure 1.1: The Analytical Framework

INTERMEDIATE EFFECTS

Prices

Production Quantities

Export/Import Volumes

OUTCOMES Increased production of the

commodities

Increased investment

Improved value addition

New products and markets

CAUSAL FACTORS Trade Liberalization

Other Reforms

External Factors

Ideally, trade liberalization and other causal factors are supposed to lead to increased production of key agricultural commodities, export growth, rise in incomes of practitioners notably the farmers, agro processors and exporters. From economic theory, trade liberalization increases competition arising from the emergence of new market players. Competition in this case is based on price, production volume and the trade balance. Increases in competition forces farmers and firms to adopt leaner production techniques leading to improvements in quality and ultimately productivity. Assuming there are no production and supply bottlenecks and macroeconomic environment is stable such as inflation, exchange rate and no external barriers to trade. Assuming there are no production and supply bottlenecks, such as inflation, exchange rate appreciation, and external barriers to trade, etc, trade liberalization should translate into increased exports, growth in income for producers and exporters.

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Sustained growth over a period of time should lead to a fall in poverty levels. Furthermore, under a properly functioning trade regime, increases in a countrys exports should lead to an increase in export revenues, which can be channeled into capital investments, thus increasing the countrys capital account. This improves the BOP position over time. At the same time, when a countrys exports grow, this increases its leverage in international markets. On the basis of this conceptual framework, the research investigated the various sources of information primary and secondary using various techniques. The starting point in this research was thorough investigation of the relevant literature on the subject (reports, policy documents, journals etc), Internet search (of recognized bodies such as the WTO, World Bank, FAO, UNECA, EAC, COMESA, etc) which helped to conceptualize the problem. The study adopted a data collection approach that emphasized trend analysis and validation through interviews with key persons involved in the production of the commodities in question. The trend analysis using time series of secondary data highlights the dynamics of the output volumes, yields, export volumes and price changes across the pre and post liberalization period. The purpose of this approach was to highlight the implications of the changing policy environment on output, yields, exports and prices. The observed changes in the policy environment were then mapped on the trend of these quantitative dimensions. In order to validate the observed trend changes, stakeholders involved in the production of the commodities under investigation were then asked to describe the challenges, opportunities and threats experienced in the pre and post-liberalization era. Those interviewed included policy makers, farmer groups, agro-processing firms such as BATU and ULAIA, sub-sector organizations such CDO, UCDA, UFEA, UFPEA, UTA), relevant government ministries, donor agencies, etc. The views and information from the interviewees constituted the qualitative aspects of the report.

1.5 THE STRUCTURE OF THE REPORT This report is organized in six chapters. It starts with an abstract, acknowledgement and an Executive Summary. The first chapter gives the context of the assignment. The second chapter deals with background issues to liberalization. The third chapter discusses trade liberalization as it relates to agriculture sector in the broader context. The fourth chapter gives a commodity analysis, dividing them into sections on the traditional commodities and the non-traditional commodities. The fifth chapter is a discussion of the findings and the main lessons learned from the analysis. The sixth and last chapter gives the main conclusions and recommendations on the way forward.

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II BACKGROUND TO TRADE LIBERALIZATION

2.1 THE CONCEPT OF ECONOMIC LIBERALIZATION Over the last two decades, economic liberalization (also known as neo-liberalism) has been an influential model of development in many countries. The World Bank and International Monetary Fund (IMF) adopted the neo-liberal development philosophy by 1979 (Dawson, 2005). With this endorsement by the international financial institutions, economic liberalization has emerged as a central component in the development debate. The shift to economic liberalization followed the failure of state-centred development strategies of the post-war period. Other factors that in the international environment, most notably the second oil crisis, the declining terms of trade for developing countries, low export demand for primary products, high global interest rates and the debt crisis.

2.1.1 Economic Liberalization Defined But what is economic liberalization? There is no clearly accepted definition of the concept of economic liberalization. What is agreed on, however, is that it covers the questions of macro-economic stabilization, structural market liberalization, social policy reform and institutional building to lower transaction costs of market exchange. These questions, in turn, cover an undefined set of more specific operational policies. According to Dawson (2005), economic liberalization refers to government policies that involve promotion of free trade, deregulation, the downsizing or privatization of public services, and the reduction or elimination of subsidies, price controls and rationing systems. Put differently, these policies follow a non-interventionist (or laissez-faire) approach to economic activity that relies on market forces for the distribution of resources. Apart from discouraging intervention in the domestic economy, economic liberalization also encourages unrestricted international trade. Consistent with the law of comparative advantage, all countries mutually benefit from free trade. A country that is less productive than its counterparts stands to benefit from the removal of tariffs and other trade barriers, as market forces induce it to move resources (within the country) from industries with a comparative disadvantage to those with a comparative advantage. Neo-liberalism also proposes some advantages for social welfare. Regarding distributive issues and social justice, neo-liberalism claims that these matters are managed by a trickle-down effect. Originating in supply-side theory, the trickle-down effect maintains that economic growth will eventually benefit all members of a society. Even if wealth creation is not initially equally distributed, in a free market it will nonetheless bring about expansion through activities such as employment creation and increased demand for skilled labour, which will ultimately improve both the income and general well-being of the entire society. A. Economic Liberalization in Uganda Uganda adopted market-oriented economic policies in 1987. The adjustment process began with a stabilization programme to reduce the level of inflation and regain control over economic policy. This was followed by the liberalization of prices and markets (allowing free market prices and removing institutional constraints) and the corresponding rationalization of institutions (including the streamlining of the public sector and the financial sector). Only such a transformed economy was capable of sustaining economic development the engine of the private sector.

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The main objective of the reforms in Uganda was to weaken the effects of the factors that inhibit productive efficiency and export development. These had arisen earlier either through taxation, protectionism or the over-valuation of the currency exchange rate. In the area of tax policy, reforms were directed at licensing, rationalization of the tax structure, exemptions and other quantitative restrictions. At the level of industrial policy, the Government targeted the elimination of price controls, loss-making enterprises, the entry and exit restrictions on private enterprises, discretionary tax and subsidy policies as well as soft budget constraints on state-owned enterprises. Public enterprises were lined up for privatization in order to improve efficiency. Following the stabilization phase in which inflation was controlled, budgetary reforms implemented and government expenditure curtailed, Government set out to liberalize the markets. Consequently, Government embarked on removal of price controls and other artificial barriers to commerce and allowing investment to operate in a fairly free market environment. Maintaining such free markets meant that the Government would have to steer clear of commercial sector activities. Its main economic roles would be to enforce market roles, collect taxes, and only be involved in the provision of public goods. Consistent with this thinking, Government abolished the monopoly hitherto enjoyed by public enterprises and marketing boards. The coffee sector was liberalized, which not only saved the industry but was also the single greatest contribution to the reduction of rural poverty. Government started a programme of privatizing public enterprises. It returned dispossessed properties to their former Asian owners; in 1991 it created the UIA to encourage foreign investors. As the process of trade liberalization gained momentum, Government eliminated all restrictions to foreign trade, including all non-tariff barriers to importing and rationalized the structure of customs. On the export side, Government eliminated all export taxes, simplified the hitherto bureaucratic procedures for exporting and introduced a duty-drawback scheme for exporters. Along with the import and reforms, the Government introduced a more realistic exchange rate and a more transparent system of foreign exchange allocation, thus eliminating the black market on foreign exchange. In July 1990, a foreign exchange bureau system was established, and in 1993 an inter-bank system that unified the foreign exchange market was introduced.

2.2 TRADE LIBERALIZATION There is no single and universal definition of trade liberalization. The literature on trade policy (Kruegger (1986), Bhagwati (1998), Papageourgiou and Choski (1991), Thomas and Nash (1991), etc) includes various definitions and concepts on liberalization. In general, trade liberalization has been equated with becoming more outward-oriented. Countries are considered more outward-oriented if their trade reforms imply a move toward (a) neutrality, (b) liberality, and (c) openness. Neutrality is about equalizing incentives, on average, between the exporting countries and import-competing sectors. Liberality involves a more liberal regime where the level of intervention has been reduced. Finally, an increase in openness is equated with an increase in the importance of trade in the economy as a percentage of GDP.

2.2.1 The Content of Trade Liberalization Trade liberalization includes not only a reduction in the anti-export bias of the trade policy regime and an increase in the reliance on the price mechanism, but also a reduction in the level of intervention. The policy changes that come with trade liberalization include: the lowering of average nominal tariffs, narrowing the range of nominal and effective tariffs, a shift from quantitative restrictions to tariffs, a real devaluation of the currency, a unification of multiple exchange rates, removal of export taxes, introduction of export subsidies, rebates or compensation schemes, etc.

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Trade liberalization has two closely inter-related sides, namely import liberalization and export promotion (Oyejide, 2004). The former is associated with movement away from complete control over imports and foreign exchange towards a modes and mostly tariff-based protection. In SSA this movement has occurred in several stages, i.e. rationalization of the tariff structure, reduction of tariff dispersion, and finally reduction of tariffs. Through a combination of unilateral and regional modalities, import liberalization has progressed quite rapidly in many African countries, particularly in the 1990s. In Eastern and much of Southern Africa, for example, most countries are still in the process of implementing the CET of the EAC and the COMESA. A number of countries have achieved low simple average tariffs that are well within the COMESA CET. They include Madagascar (5.7%), Malawi (13.4%), Rwanda (9.9%), Uganda (9%), and Zambia (14%). The other side of trade liberalization involves promotion of export diversification and growth as part of an outward-oriented development strategy. Until the beginning of trade policy reforms in many African countries, exports suffered high duties (which amounted to indirect taxes on exports), export licensing, export taxes, below-market producer prices paid by monopoly marketing boards, and overvalued currencies. Policy reforms have eliminated most of these barriers in the majority of African countries. In addition, trade liberalization presupposes an appropriate outward-oriented development strategy to ensure that producers for external markets have access to imported inputs at world prices. For this reason, mechanisms such as duty drawbacks/rebates, bonded warehouses, free-trade zones (FTZ), etc, may be used as a means of granting free trade status to such exporters. Many African countries, including Uganda, Kenya, Madagascar, Mauritius, Senegal, Zimbabwe, etc have used duty exemptions/drawback schemes. However, these have not worked well in several countries due to poor management and poor funding in some cases. Similarly, FTZ and bonded warehouses have been tried in many African countries, but with limited success. The most successful African FTZ (such as in Mauritius) have been supported by adequate infrastructure and good quality labour force.

2.2.2 The Benefits of Trade Liberalization The economic benefits of trade and trade liberalization are widely recognized. By improving the allocation of factors of production, trade is an important contributor to economic welfare. Trade allows countries to move beyond domestic production possibilities and constraints and in so doing provide a higher standard of living than would otherwise be the case. The reduction or elimination of barriers among countries encourages firms to produce and trade goods and services in which they have a comparative advantage. Economies will concentrate on goods and services that they produce efficiently and trade these with what they produce less efficiently. Exploitation of economies of scale: Trade liberalization allows for the greater exploitation of

economies of scale. By providing domestic producers increased market access opportunities, the freer market conditions enable firms to undertake specialized production runs and reduce the unit costs of production. For countries with small domestic markets, like Uganda, economies of scale may be extremely important (Shranks, 1999).

Promotion of competition: Trade liberalization also increases competition in both the foreign and

domestic markets. This implies that firms will need to respond faster to changing market conditions. Greater competition is likely to provide an incentive to firms to improve their economic performance through cost-saving innovations and to enhance the quality of their products. More competition also leads to lower prices for consumers.

7

Access to imports: Trade liberalization influences trade by allowing access to low-cost imports, thus playing an important role in enhancing consumers well-being as well as allowing domestic firms to have access to competitively-priced domestic inputs.

Reduction of uncertainty: Finally, trade liberalization, undertaken in a bilateral or multilateral

context and which establishes clear trading rules, will reduce uncertainty. Without such rules, a country may face unilateral, often damaging, actions from its trade partners. The reduction of uncertainty, while providing more table access, also allows firms to make more informed business decisions.

2.3 CONCLUSION From the above analysis it can be argued that there are potential benefits arising from liberalization. Agricultural trade liberalization, as indicated above, is intended to induce positive response in production or supply. Ideally, supply response for any operation should be measured by the growth of production before and after the reforms. However, there are also other dimensions of production response other than increased output. A change in the organization of production, for example, in order to promote the competitiveness of the products or emergence of a new product in response to opportunities created by liberalization is a case in point. Against this background, in examining the production response of the selected products under review, it is important to take not of the other forms of response that emerge in relation to production.

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III AGRICULTURAL TRADE LIBERALIZATION IN UGANDA

3.1 AN OVERVIEW OF UGANDAS AGRICULTURE SECTOR

3.1.1 The Structure of Ugandas Agriculture Sector Ugandas economy is dominated by the agricultural sector. It is concentrated in the southern part of the country where weather patterns provide two growing seasons. Agricultural production comes almost exclusively from 2.2 million smallholders, mostly working 2 to 3 hectares of land, using traditional methods of cultivation and family labour. With a favorable climate year-round and some of the best agricultural land in Africa, Uganda produces a wide variety of tropical and sub-tropical agricultural products throughout the year. There are four major sub-sectors in Ugandas agricultural sector: crops, livestock, fisheries, and the forestry. Of the four, the crops sub-sector is by far the largest in terms of area and contribution to GDP. Much of this is food crops for subsistence by smallholder households, with only a third sold to domestic and export markets (World Bank, 2005). Less than 1% of the food crops produced is processed beyond farm gate. The main food crops are tubers and roots, (cassava, sweet potatoes, yams, etc) bananas, maize, millet, sorghum, beans, oil seeds, fruits (pineapples, papaya, bananas, avocadoes, mangoes, oranges, etc) vegetables, spices (vanilla, cardamom, pepper) and flowers. About 49% of the food crops are marketed or bartered for subsistence consumption outside the market system. The livestock sub-sector is also another important agricultural sub-sector, accounting for 17% of the agricultural GDP. Livestock includes dairy cattle1, goats, sheep, pigs, and poultry. Livestock products include meat, hides and skins, as well as dairy products. Livestock production potential is high year-round with good quality pastures and there is a growing feed industry. In recent years there has been growing production of apiculture products. With about 17% of the countrys surface area covered by water (lakes, rivers, and swamps), the fisheries sub-sector accounted for about 5% of agricultural GDP in 1996/97 and has been one of the leading earners of foreign exchange after coffee. Almost all produce is marketed. Fish farming is beginning to take root and expand. The forestry sub-sector accounts for about 4% of Ugandas agricultural GDP. Natural and plantation forests are widely distributed throughout the country. Many areas also feature agro-forestry activities and community forests are developing.

3.1.2 The Importance of Agriculture in Ugandas Economy Agriculture has an important role to play in Ugandas economic development. It is a source of food supply and raw materials, a supplier of foreign exchange, a supplier of labour for industrial employment, a market for non-agricultural output and a source of surplus for investment (Townsend, 1999). Agriculture is central to Ugandas economic growth and the reduction of poverty, accounting for large share of GDP, exports, and providing employment to a large section of the rural population. The agricultural sector is also a major source of foreign exchange earnings, accounting for 48% of total export revenues (MFPED, 2004) and was the main reason for successive current account

1 In 2000 Ugandas dairy herd stood at 285,000 animals (both exotic and crossbreeds) compared to 209,000 in

1994. By year 2002, the total cattle herd had reached 6.3 million, including 5.9 million indigenous and 0.3 million exotic crosses.

9

surpluses over the years. Table 3.2 shows the contribution of the agricultural sector to Ugandas exports. It is also a major source of a large proportion of raw materials for the countrys agro-processing industrial sector (coffee hulling, cotton-ginning, grain milling, dairy processing, etc). As source of income and employment, agriculture accounts for about 69% of total employment. Crop farming is the main source of household income contributing just over 30% of all household income in Uganda. Other incomes include farm enterprises such as animal husbandry, poultry and cottage industries such as brewing. According to the Poverty Status Report (MFPED, 1999), households engaged in the traditional cash crop sector are better off than those in the traditional food crop sector and to that extent, areas and farmers growing coffee have benefited more from price liberalization policies and increased access to markets than areas growing mainly food crops.

3.2 FACTORS INFLUENCING AGRICULTURAL SECTOR GROWTH With fertile soil and good climate (abundant rainfall and excellent temperatures), the country is endowed with the best agricultural potential within the Eastern and Central African region. Of the countrys total area of 241,039 km2 (24.1 million hectares), 18 million hectares are arable land, but only 5 m hectares (less than 28%) are under cultivation (UNIDO, 2000). During the 1970-1980s growth in the agricultural sector in Uganda was hampered by a series of policy and structural constraints which are well articulated in the PMA. The factors as articulated in the PMA can be summarized as follows: Poor infrastructure: Inadequacy of physical infrastructure such as feeder roads, communication

facilities, power supply, education and health facilities, water supply and market infrastructure continue to constrain marketing of agricultural produce and investments in rural areas and are responsible for the high market transaction costs.

Technology dissemination: Non-availability of efficient and cost-effective cultivation technology,

low adoption rates of appropriate technology due to weak research, extension and farmer linkages, absence of effective delivery of extension services to farmers.

Lack of finance: Availability of cheap investment finance and working capital are serious

bottlenecks for smallholder agricultural production. Farmers have almost no access to credit to improve their productivity or to begin micro-enterprises. Formal banks are reluctant to lend to small farmers because they view them as too risky and expensive.

Land tenure and policy: Although a fairly comprehensive Land Act was enacted in 1998, it still

remains to be implemented to bring about the desired changes in land tenure systems, land policy and land registration as well as land administration improvements. Thus, the constraints of the land tenure systems that are not conducive to the emergence of land markets persist. Also the issue of land ownership and inheritance by women who are key stakeholders in agricultural production has not yet been resolved.

Farmers organisations: There are no effective grassroots/village-based, commercially-oriented

institutions, capable of mobilising small producers for the production of income-generating commodities. The cooperative movement, which was effective in mobilising farmers in this fashion, has not been able to perform this function in the past decade.

Human resource constraints: The majority of Ugandan farmers is illiterate and cannot easily adopt

modern agricultural practices. They lack knowledge and skills related to modern production (harvesting, handling, storage, packaging, etc), negotiation and execution of export orders, marketing,

10

etc, to be able to meet the standards of the markets. Many of them have limited or no knowledge of the market requirements in terms of quality, the rules governing it, packaging, costing, timely delivery, etc.

Information constraints: There lack of accurate and reliable agricultural statistical data. Many

agencies involved in the collection and dissemination of agricultural data are not well coordinated. These agencies are bedevilled by organisational, financial and managerial deficiencies. At the same time, the potential users are not aware of the work of the various agencies.

On-farm and off-farm storage: Post-harvest losses, particularly for food crops, are very high,

aggravating the food insecurity problem. In addition to timely harvesting, proper drying, protection from infestation with diseases and pests and storage are critically important and should be introduced. Today, few farmers in rural areas have well-constructed storage facilities. Off-farm storage facilities owned by traders, millers, processors, and exporters are generally lacking and need to be addressed.

Environmental degradation: Increase in population pressure, intensive utilization of land

including restricted grazing, soil erosion, deforestation and the drainage of swamps have resulted in considerable environmental degradation and low productivity in many areas of the country.

Effects of HIV infection: The AIDS epidemic continues to impact negatively on agricultural

production. The loss of labour as a result of AIDS has reduced the amount of time, care and cash required to effectively carry out farming activities by small farmers, leading to declines in crop yields. The sickness and/or death of an adult as a result of HIV/AIDS can result in the inability of the household to cultivate the land at its disposal. In order to adapt to factors caused by AIDS, farmers have responded by changing their cropping patterns. In some farming systems this has resulted in a shift away from cultivation of cash crops such as coffee, in order to concentrate all available labour on the production of subsistence crops like sweet potatoes and cassava.

3.3 THE AGRICULTURAL TRADE LIBERALIZATION POLICY FRAMEWORK

3.3.1 Agricultural Policy Reforms under the Economic Recovery Programme A. Main Developments in the Agricultural Sector before the ERP Before the mid-1980s, the agricultural sector was dominated by central government structures, particularly in the following areas: Financing and delivery of research and extension services to farmers: In this respect, the bias was

towards supporting traditional export crops, while constraining the traditional food crop sector due to lack of technical attention and inputs. It also tended to neglect the poor the farmers making them even poorer. Research was scattered in the different ministries and departments. The main problem was the most of these departments had limited capacity to carry out research and farmer participation in research was marginalized.

Marketing and pricing of agricultural inputs and produce: As noted earlier, the marketing and

pricing of agricultural inputs and produce was mainly through the marketing boards and a limited number of licensed traders CMB for coffee, Lint Marketing Board (LMB) for Cotton and Uganda Tea Authority (UTA) for Tea. Producer prices for these traditional export commodities were determined by the Government and almost all exports were sold after minimal processing.

11

This situation created monopoly and related production and marketing problems. Agricultural export proceeds were controlled by the government and gains from agricultural marketing and trade were lost through government bureaucracies. Some goods became scarce leading to the emergence of parallel markets corruption.

Production and marketing finance/subsidies: While this was intended as an incentive to promote

increased agricultural production, it tended to benefit the so-called large-scale or commercial farmers as well as large-scale traders, hence widening the gap between the rich and the poor. In the long run, however, the subsidy programme was not sustainable because it increased the Government budget deficit.

Development of irrigation infrastructure: This programme did not receive high priority and the

infrastructure did not expand as desirable. In some areas, it broke down instead. A case in point is the irrigation scheme in Kasese. As a result, agricultural production was severely restrained by the erratic rainfall, even in areas with relatively sufficient water supply.

There were a number of structural constraints that hampered agriculture. They included low productivity, inadequate transport infrastructure, lack of agricultural research an inefficient extension services, lack of credit, non-incentive pricing policies, inefficient markets for capital and agricultural inputs; shortage of foreign exchange for the importation of agricultural inputs; government monopoly over food and export markets. Annual growth in the agricultural sector was about 1.2% between 1965 and 1980 and 2.3% between 1980 and 1985 (ILO, 2000). B. The Economic Recovery Programme In 1987 the Government introduced the Economic Recovery Programme (ERP). Government policy in the agricultural sector aimed at the following key areas: rehabilitation of traditional export commodities (coffee, cotton, tea and tobacco) in order to

increase export earnings and thereby improve the countrys balance of payments position; diversification of the export base through the development of non-traditional exports; and removal of constraints (physical, technical and institutional) to the development of sustainable

agriculture. In order to achieve these objectives, the Government designed and adopted the so-called agricultural Sector Policy Agenda which was implemented in 19912. The agenda had six major objectives for the agricultural sector: intensification of agricultural production and processing; increase of agricultural producer prices; restructuring the finance of production cooperatives; liberalization and promotion of agricultural trade; reorganizing agricultural marketing institutions; and improvement of agricultural research and advisory services. In the course of implementation of the Agenda, emphasis was put on prevention of the erosion of farmers price incentives, increased efficiencies in the processing of crops and livestock products,

2 The agenda was implemented with financial support from the International Development Agency (IDA) and

technical support from the Agricultural Secretariat, IDA missions, and Working Group Task Forces.

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improvements in the marketing arrangements for agricultural products, removal of the monopoly of marketing boards, and strengthening of agricultural services (including provision of agricultural inputs, research and extension services). Export promotion and diversification focused on the development of non-traditional export crops. Liberalization of agricultural markets included the removal of the monopoly of marketing boards and price controls. The main objective was to correct the market failures, leading to better farm-gate prices and an increase in the number of marketing outlets3. Regulatory and promotion agencies were set up for key export crops, for promotion, quality control and dissemination of market information. The National Agricultural Research Organization (NARO) was created in 1992 to strengthen research services in agriculture, among others. The impact of these measures was positive. In 1990-1993, for example, the real price of Robusta coffee rose from Ushs 90 per kilogram to Ushs 196; Arabica coffee from Ushs 263 to Ushs 504 and maize from Ushs 23 to Ushs 126. Specific sub-sector reforms were introduced for the coffee, cotton, tea, and non-traditional commodities. The removal of the monopoly of marketing boards and the freeing of producer prices from Government control liberalized the market for agricultural produce, including export crops. The removal of export taxes and other market distortions provided incentives for producers. On account of the various policy and institutional reforms under the Agenda, the agricultural sector recorded significant recovery achieving annual GDP growth rates of 4-10% in 1986-1999 (MAAIF/MFPED, 2000).

3.3.2 Agricultural Policy Reforms under the Poverty Eradication Action Plan The reforms under the ERP were subsequently revised and consolidated into an all-inclusive government development framework the Poverty Eradication Action Plan (PEAP). The main objective of the PEAP is to reduce the level of poverty in Uganda from about 35% in 2000 to less than 10% in year 2017. To this extent, the main PEAP recognizes three important conditions which are essential for broad-based economic growth. These are: modernization of the agricultural sector by taking into account its comparative advantage at home,

regionally and globally; maximization of economic growth and reduction of income inequality through active participation

of the poor in the economy; and promotion of sustainable economic growth by ensuring macroeconomic stability. The PEAP is implemented through the Plan for Modernization of Agriculture (PMA) and the Medium Term Competitiveness Strategy for private sector (MTCS). A. The Plan for Modernization of Agriculture The PMA is a strategic and operational framework for the transformation and structural change of agricultural sector. It seeks to re-orient the subsistence farmers from producing predominantly for consumption, to producing more for the market. The overall objective of the PMA is to increase the incomes and the quality of life of the poor subsistence farmers, improve household food security, improve the productivity of the subsistence farmers (who form the backbone of the economy), expand by 6% annually the area under crops, and adopt modern farming practices, with emphasis on specialization and production for targeted markets.

3 However, most farmers in areas with poor or no feeder roads were disadvantaged. They had limited access to

markets, had inadequate market information, received unattractive prices and experienced high post-harvest losses due to unsold stock.

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One of the priority areas of the PMA is agro-processing and marketing and improved market access (Box 3.1). The PMA recognises that market access is a function of both domestic and external factors. Domestically there is need to address constraints (infrastructure, information, etc) and ensure an environment which is conducive to trade. External issues include international trade rules and policies, comparative advantages and market opportunities. Government has committed itself to address the issue of international market access. To this end, efforts have been made to align the countrys trade policies to take full advantage international trade rules.

Box 3.1: PMA Priority Areas of Action Research and technology

development Agricultural advisory services Improved access to rural finance Better physical infrastructure Agricultural marketing and agro-

processing Sustainable natural resource

utilization and management

Measures have also been taken to ensure the country benefits from intentional markets. They include: Building capacity in terms of competent personnel for international trade negotiations (for policy

formulation, monitoring, and enforcement especially in the area of the WTO Agreement on Agriculture and trade related intellectual property rights (TRIPS);

Restructuring and strengthening of existing trade-related institutions so that they can effectively perform their functions;

Establishment of a warehouse receipt system (WRS) and an agricultural commodity exchange. These are now already in place and functioning; and

Promoting regional trade in order to exploit existing opportunities. To this end, emphasis is put on trade in local foodstuffs and newer high-value agricultural products.

B. The Strategic Exports Programme In September 2001, the Government introduced the Strategic Exports Programme (SEP), which was an initiative to promote exports. The SEP identified nine sectors and commodities which were perceived to be strategic exports. They included coffee, cotton, tea, livestock, fish, horticulture, Irish potatoes4. In order to ensure implementation of the SEP, Government provided a total of Shs. 52.5 billion to promote the production, processing and marketing of these strategic exports. A total 46 million coffee seedlings were distributed to 200,000 households, while 16 wet coffee-processing machines with the capacity to process 20,000 tonnes of coffee per annum were imported. In addition, Government initiated the organic coffee certification scheme for 16,000 farmers. In the tea sub-sector, 300,000 improved clones were imported for multiplication and five million seedlings distributed to 1,300 farmers. Furthermore, over 100 nursery operators were trained, 150 nurseries with capacity of 9 million seedlings were brought into operation, and 500 hectares of tea estates were rehabilitated. In the horticulture sub-sector, Government trained 315 farmers in nursery management, 35 farmers in export marketing, and 10 exporters on how to access the EU market. In the fisheries sector Government intensified lake surveillance, control, monitoring and enforcement of regulations to curb the use of illegal fishing gear and the catching of immature fish. Efforts were made to promote fish-farming and to this end 20 water sources were stocked with 3 million fish fry.

4 Other non-agricultural commodities included ICT and commodity trading and risk management.

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3.4 THE MAIN RESPONSES OF THE AGRICULTURE SECTOR TO THE REFORMS The above reforms triggered of positive responses in the agriculture sector in terms of increased output and export earnings.

3.4.1 Increased Output In response to the reforms, there was a marked increase in food production, although this was achieved through increased acreage in cultivated land rather than an improvement in yields overall. The most important cash crops for the economy are: coffee (accounting for 272,000 ha and generating about $300 million per annum), cotton (previously the main export crop, earning up to US$ 30 million a year), tea (grown on 20,570 ha, but mostly for export markets earning about $30 million a year), tobacco (grown on 11,590 ha and now earning over $10 million a year), sugar cane (grown almost exclusively for the local market) and cocoa (which is a relatively new crop). As recently as 1990, agriculture accounted for 53% of total real GDP. Since that time, however, the share has been declining reaching 34% in 2003. However, its actual share of GDP value (both monetary and non-monetary) has been growing as shown in Table 3.1. The agricultural sector has also become more diversified. Coffee has dropped from about 60% of total exports, but export revenues have fluctuated very widely since the collapse of the International Coffee Organization in 1989 (FAO, 1998). The traditional food crop sub-sector has the biggest influence on overall agricultural GDP accounting for well over 65% of overall agricultural production. In 1999, the sub-sector contributed 27.1% of total GDP, 50% of agricultural monetary GDP and 83% of the non-monetary GDP (MFPED, 2000). The livestock sub-sector also contributed 17% of agricultural GDP, while forestry and fishing accounted for 4.3% and 4.6%, respectively. The share of the traditional cash crops sub-sector in GDP was lower than that of traditional food crops (3.9% in total GDP and 17.2% in agricultural GDP in 1999).

Table 3.1: The Share of Agriculture in the Economy, 1988 - 2003

Source: MAAIF

Calendar Year

Total GDP

Agricultural GDP

Share in Economy (%)

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

1,769 1,881 1,985 2,088 2,182 2,320 2,555 2,768 2,906 6,470 7,114 7,998 8,643 9,313 9,892

11,597

964 1,019 1,061 1,086 1,116 1,170 1,246 1,291 1,299 2,671 2,835 3,065 3,186 3,134 3,076 3,901

54 54 53 52 51 50 49 47 45 41 40 38 37 34 31 34

3.4.2 Growth of Agricultural Exports There has also been a thriving trade in agricultural commodities internally as well. To that extent, the distinction between food crops and cash crops is misleading. The situation is complicated by the lack of an efficient system of records of all such transactions even within government agencies. Ugandas exports are predominantly agricultural commodities. Major export commodities are coffee, cotton, tea, and tobacco the traditional export commodities. They contribute over 50% of the countrys export revenues, with coffee alone accounting for the largest share of total export earnings. (Table 3.2) Their share has fallen in recent years due to the decline in world market prices and the growth of non-traditional exports (NTEs). Although coffee remained the main foreign exchange earner, its share in total export earnings fell from 31.2% in 2000 to 18.7% in 2004 (UBOS, 2005).

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Table 3.2: Agricultural Exports by Value, 1998 2005 (in Millions of US Dollars)

Commodity 1998 1999 2000 2001 2002 2003 2004 2005 Traditional Export Crops

Coffee Cotton Tea Tobacco

295,666 7,691

28,181 22,332

287,958 17,408 21,425 14,673

125,316 22,088 37,050 26,889

97,652 13,434 30,031 32,096

96,626 9,519

31,293 45,262

100,233 17,755 38,314 43,042

124,237 42,758 37,258 40,702

172,942 28,821 34,274 31,486

Sub total 353,870 341,464 211,343 173,213 182,700 199,344 244,955 267,523 As percentage of total 83 86 76 54 57 56 58 53 Non Traditional Exports

Maize Beans & other legumes Fish and fish products Cattle hides Sesame seeds Soya beans Cocoa beans Pepper Vanilla Live animals Fruits Groundnuts Bananas Roses and cut flowers Ginger

9,359 6,451

39,879 6,088

11 40

1,429 117

1,260 75

386 118 257

7,502 21

5,291 8,754

24,837 2,967 1420

- 1,474

692 -

58 111 228 473

7,328 -

2,437 4,454

30,818 12,893

747 12

1,191 354 781 21

733 14

983 9,912

77

18,339 2,354

78,150 25,532

796 91

1,921 397

2,417 199 68 26

672 14,750

26

10,609 3,284

87,945 9,810

510 74

2,023 111

6,898 80

670 75

225 17,828

462

13,724 5,235

88,113 4,925 2,183

87 7,001

176 13,546

61 436

7 110

22,080 15

17,896 8,968

103,309 5,409 2,788

118 6,801

368 6,120

130 917

1 850

26,424 -

21,261 8,693

142,691 7,064 4,779

126 9,638

594 6,135

29 1,158

23 806

24,128 78

Sub total 72,993 53,633 65,427 145,738 140,604 157,699 180,099 227,203 As percentage of total 17 14 24 46 43 44 42 47 Total Agricultural Exports

426,863

395,097

276,770

318,951

323,304

357,043

425,054

494,726

Source: UBOS Uganda has since the early 1990s been increasingly selling abroad commodities which have come to be known as non-traditional exports (NTEs). As Table 3.2 shows, the share of NTEs has been growing over the years, with the highest of 47% recorded in 2005. It is worth noting, however, that while non-traditional exports have grown faster than traditional exports, they have not replaced traditional exports as the main sources of export revenue. Coffee, for example, takes the lead in terms of earnings, followed by tobacco, and tea. Among the NTEs, fish is becoming Ugandas major export commodity, accounting for 18.5% of the countrys export revenue in 2003 before falling to 15.5% in 2004. Earnings from the export of fish rose from US$ 1 million in the early 1990s to about US$ 88 million in 2002, but declined slightly to US$ 87.5 million (MFPED, 2004).

3.5 CONCLUSIONS 1. The reforms introduced by the Government in the agricultural sector were responsible for its

recovery, given the formidable challenges it was facing, not least the drop in coffee earnings. Through macroeconomic and pricing policies Government was able to prevent the collapse of the coffee and cotton sectors. The reforms in agriculture which began with agricultural rehabilitation credit in 1983 were successful in rehabilitating the export crop processing facilities (coffee, cotton, and tobacco).

2. Although agricultural trade liberalization as a policy was introduced in the early 1990s, this has

not stemmed the progressive decline in overall export volumes. As can be seen from the figures in

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Table 3.2, from the mid-1990s to 2000 there was a general decline in total agricultural exports (from US$ 426.8 million in 1998 to US$ 277 million in 2000). This decline was due to a number of factors, including the El Nino effect, the EU ban on fish exports, the fluctuations of commodity prices on the international market (especially the sharp decline in coffee prices), etc. From 2000 to 2004, exports started recovering, albeit at a slow pace, rising from US$452 million in 2001 to US$ 665 million in 2004 (UBOS.

3. In spite of agricultural liberalization, there has been a significant shift in the volumes and values of

Ugandas traditional export commodities. Specifically, the volume of Ugandas major export coffee has remained relatively stable over the years, but the earnings from coffee have shown a progressive decline from US$ 343 million in 1994 to US$ 288 million in 1998, and a mere US$ 96 million in 2003. Cotton recorded a drastic fall in both volume and value and has recovered rather slowly, although it is attracting a new level of support from both government and donors. Tea has not fully recovered to its level of the 1970s, but it is improving faster than cotton.

4. Export earnings from NTEs have been growing from US$ 208.7 million in 1995 to a peak of

US$ 321 million in 2003. As Worth et al (2005) note, the share of NTEs over this period has recorded a growth of 6.8 percentage points, reflecting the impact of the Government policy of trade liberalization and diversification of the export base. Also, the NTEs have a higher value added, because most of the traditional export products are exported in raw form.

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IV COMMODITY ANALYSIS SECTION I: THE TRADITIONAL COMMODITIES Ugandas traditional commodities include coffee, cotton, tea, and tobacco. These commodities contribute significantly to the countrys export revenues, (50-60%) with coffee alone accounting for over 40% of total export earnings. The share of traditional commodities in total export revenues has been declining over the past years due to the fall in world market prices and the increase in the share of non-traditional exports. Although coffee maintained its position as the main foreign exchange earner, its share in total export earnings fell from 55% in 2001 to 20.7% in 2002 (UBOS, 2003).

4.1 THE COFFEE SUB-SECTOR

4.1.1 The Significance of the Coffee Sub-sector The coffee sub-sector is important for the economy of Uganda. It is a major source of employment and income for a large proportion of Ugandas population. It is estimated that over 3.5 million people especially in the rural areas are employed in the coffee sub-sector and related support activities. In addition, there are over 2 million people in off-farm employment related to the coffee industry. About 500,000 households, distributed over two-thirds of the country, depend on coffee for their livelihood. For many of these households, coffee is the only source of cash income. There is an estimated 500,000 - 600,000 small coffee farms in the country with an average size of less than one hectare. The coffee sub-sector contributes greatly to the countrys GDP. The share of the agricultural sector in total GDP stands at 38%, with coffee alone contributing about 80% of monetary agricultural GDP (UBOS, 2005). This is a substantial proportion of the countrys monetary sector and demonstrates the importance of the coffee sub-sector in the economy. But perhaps the coffee sub-sectors importance to Ugandas economy is its leading role as a source of export revenues. When the world coffee prices were high in 1994 1997, the sector earned over US$ 400 million annually. However, in subsequent years, following the decline in world coffee prices, export revenues tended to fall as well. Against this background, the liberalization of the coffee sub-sector is expected, through increased production response, to have a significant impact on employment and incomes, poverty levels, foreign exchange earnings (balance of payments position), and GDP growth in general.

4.1.2 Liberalization of the Coffee Sub-sector For a long time, the marketing of coffee was not conducive to increased production. Figure 4.1 shows the coffee marketing chain before liberalization. As can be seen, the coffee farmers sold their produce to primary cooperative societies and private hullers. The cooperative societies and unions competed with the private buyers/hullers for the procurement of the dry cherry from the farmers. The hullers and buyers were often local companies of small size. There was no formal involvement of foreign companies, even at the export level, since the CMB was the sole exporter. Both the cooperatives and private operators operated under fixed producer prices and fixed margins. All the hulled coffee was sold to the CMB, which enjoyed the monopoly of exporting.

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Figure 4.1: The Coffee Marketing Chain before Liberalization

SMALLHOLDER COFFEE

FARMERS

PRIMARY COOPERATIVE

SOCIETIES

PRIVATE TRADERS

COOPERATIVE UNIONS

COOPERATIVE/ GOVT CURING

PLANTS

COFFEE MARKETING BOARD

(CMB)

PRIVATE HULLERS

Direct exports by the CMB

COOPERATIVE UNIONS

COOPERATIVE/ GOVT CURING

PLANTS

COFFEE MARKETING BOARD

(CMB)

Direct exports by the CMB

The farmers received payment for their coffee according to the quality of the coffee delivered and often with considerable delays. As Ponte (2001) points out, the handling and payment systems were fairly laborious and often slowed down the flow of coffee to the importer. The overhead costs associated with these transactions were high, which meant the farmers received a lower proportion of the export price than they would have in a more efficient system (quality considerations being equal). The inefficiencies and inequities of the above monopolistic system were compounded by the abolition of the quota system under the International Coffee Agreement (ICA) in 1969, leading to the collapse of coffee prices. The steady slide of the international prices had a negative impact on producer prices, rendering the marketing system in Uganda unsustainable. In 1990, the Government made a thorough review of the coffee sub-sector following, which it approved the liberalization of both internal and external marketing of coffee (GOU, 2003). In liberalizing the coffee sub-sector, Government sought (i) to expand Ugandas share of the international market by increasing the volume of export to both traditional and non-traditional markets; (ii) to minimize the unit cost of export by improving the efficiency at every stage of the marketing chain, through the introduction of competition; (iii) to increase the unit value of export by making the pricing system transparent, improving quality and initiating an aggressive market strategy; and (iv) To create an independent body the Uganda Coffee Development Authority (UCDA) - to coordinate, regulate and monitor the performance of the countrys coffee industry. In order to achieve these objectives, Government introduced the following policy measures: (a) Separation of the regulatory and marketing/trading functions of the defunct Coffee Marketing

Board: The Coffee Marketing Board (CMB) was split into two new institutions, namely the Uganda Coffee Development Authority and Coffee Marketing Board Limited (CMBL). Government injected additional equity capital of Shs 9 billion into CMBL.

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(b) Removal of CMB monopoly in export: Hitherto, the CMB enjoyed the sole monopoly in the export of coffee. Under the new arrangement, this monopoly was removed and a new marketing structure, made up of 1 parastatal, 6 cooperative unions, and 14 private companies, was created. All these were licensed to export coffee. At the same time, joint ventures with foreign companies were allowed.

(c) Transfer of crop finance from Bank of Uganda: Effective November 1991, all crop financing

functions for the coffee sub-sector were transferred from the Bank of Uganda to commercial banks.

(d) Lifting of price controls: Effective November 1991, all control of producer prices, processors

and export margins was lifted. All prices and margins were left to be determined by market forces. Government, however, continued to announce indicative producer prices in order to improve farmers bargaining positions.

(e) Removal of the coffee export tax: In July 1992, the export tax on coffee proceeds was removed.

However, a withholding tax of 2% was introduced at producer level.

4.1.3 The Observed Responses to the Reforms The process of liberalization of the coffee sub-sector in Uganda is well in advanced stages. Observers have, however, noted that it is still more regulated than in other coffee producing countries, where there are no formal export certification requirements (Ponte, 2001). Nonetheless, as a result of the above measures, there have been important supply responses as both production and profits of the farmers have increased, although there were setbacks in recent years. A. Increase in Production Coffee has increasingly become Ugandas core business. Uganda is now second among Africas top producers of coffee and ranks ninth globally, producing about 3.5 million bags per annum. Although Robusta coffee dominates production (85%), a sizeable amount of fine Arabica (15%) is also produced. Ugandas Robusta coffee is concentrated in a broad belt around the shores of Lake Victoria. Districts with the highest output are Masaka, Mpigi and Mukono, followed by Luwero, Rakai, Jinja, and Iganga also produce large quantities. Production spreads as far as Masindi in the West and Rukungiri in the South West. Arabica coffee is concentrated in highland areas of the East (Mbale and Kapchorwa), to the North-West, (Nebbi) and the South-West (Bundibugyo, Kasese and Kabale). Uganda started production of organic coffee on a small-scale in the late 1990s. Some insight on coffee production can be got from the export data (Table 4.1). As can be seen from the figures, before the liberalization of the sub-sector, production stood at over 2 million bags between 1965/66 and 1990/91. After liberalization, it rose from 2.03 million bags in 1991/92 to 4.2 million bags in 1995/1996 but it then fell to about 2.5 million bags in 2003/2004. This fluctuation has been attributed to instabilities in overall supply and prices on the world market. Internationally, Uganda surpassed Cote dIvoire as the leading coffee producer in Africa with 4.2 million 60-kg bags exported in 1996/97. Uganda ranked 5th overall in Robusta output after Indonesia, Brazil, Vietnam, and Cote dIvoire. Unfortunately, the CWD has reversed these positive trends with potentially dangerous consequences for the economy.

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Table 4.1: Coffee Exports in 1965/66 2004/05

Coffee Season

Quantity (60 Kg Bags)

Value US $

Unit Value US $/Kg

1965/66 2,855,621 106,126,982 0.62 1970/71 3,032,609 130,818,018 0.72 1975/76 2,431,524 245,222,753 1.68 1980/81 1,973,458 230,463,637 1.95 1985/86 2,392,198 390,362,568 2.72 1990/91 2,085,004 121,343,113 0.97 1991/92 2,030,829 101,442,768 0.83 1992/93 2,088,642 108,873,991 0.87 1993/94 3,005,205 273,658,850 1.52 1994/95 2,792,753 432,651,034 2.58 1995/96 4,148,803 388,916,157 1.56 1996/97 4,237,114 355,126,641 1.4 1997/98 3,032,338 276,476,134 1.52 1998/99 3,647,989 282,995,511 1.29 1999/00 2,917,257 164,763,789 0.94 2000/01 3,074,773 104,776,424 0.57 2001/02 3,146,381 83,936,951 0.44 2002/03 2,663,888 104,787,094 0.66 2003/04 2,523,042 115,705,844 0.76 2004/05 2,495,094 162,146,235 1.08

Note: Quantity is in 60 kg bags Source: Uganda Coffee Development Authority

B. Proliferation of Players The liberalization of the marketing chain prompted a proliferation of players, especially exporters, primary level buyers, hullers and processors (Figure 4.3). These were attracted mostly by the favourable trade margins especially in the mid 1990s. Specifically, the number of active exporters increased dramatically from 12 to 117 between 1991 and 1995 (Ssemogerere, 2004). Many of these were joint ventures with foreign companies. At the same time, a number of international companies (e.g. Kaweeri Coffee) attempted to enter production by setting up large plantations in order to gain market share and internalize the profits. However, the upsurge in the number of players was short-lived (Akiyama et al (2003), Ponte (2001), NRI/IITA (2002), Sayer (2002)). As soon as the international prices began to fall in the late 1990s, the number of exporters decreased substantially. Only a small number of exporters with foreign connections which enabled them to borrow crop-finance off-shore at lower interest rates (4-7%) were left. By 2000/01 only 26 exporters remained with 10 of these controlling 87% of the export business (Semogerere, 2004). Since that time, the procurement, processing and marketing of coffee have become concentrated into the hands of firms with foreign connections. By and large, however, increase in players in the market led to a substantial increase in the real producer price and increased the farmers share of the FOB price.

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Figure 4.2: The Coffee Marketing Chain after Liberalization

Source: Adopted from Ponte (2001) C. Increase in Export Volumes and Values Figure 4.3 below shows U