Imperfections in Membership Based Imperfections in Membership Based Organizations for the PoorOrganizations for the Poor

An Explanation for the Dismal An Explanation for the Dismal Performance of Kenya’s Coffee Performance of Kenya’s Coffee

CooperativesCooperatives

ObjectiveObjective

To show that the success of membership To show that the success of membership based organizations of the poor is sensitive based organizations of the poor is sensitive to the underlying sociopolitical environment to the underlying sociopolitical environment and that in certain cases, releasing and that in certain cases, releasing ownership and management to groups of ownership and management to groups of individuals can unleash incentives that work individuals can unleash incentives that work against the benefits of collective against the benefits of collective coordination and result in the diminished coordination and result in the diminished welfare of its members.welfare of its members.

I highlight this issue from the prospective of I highlight this issue from the prospective of the smallholder coffee industry in Kenya.the smallholder coffee industry in Kenya.

Institutional Changes Impacting the Institutional Changes Impacting the Smallholder Coffee Sub-SectorSmallholder Coffee Sub-Sector

Why Cooperatives?Why Cooperatives? Fragmented nature of productionFragmented nature of production Large fixed costs Large fixed costs Inadequate infrastructure, missing marketsInadequate infrastructure, missing markets

LiberalizationLiberalization 1998: New Cooperative Act: Government relaxes control 1998: New Cooperative Act: Government relaxes control

on cooperatives. More decision making power given to on cooperatives. More decision making power given to themthem

Present situationPresent situation Bankrupt CooperativesBankrupt Cooperatives Deteriorating Factories and InfrastructureDeteriorating Factories and Infrastructure Generalized Corruption and Political ManipulationGeneralized Corruption and Political Manipulation Neglected coffee treesNeglected coffee trees

HypothesisHypothesis

The deterioration of coffee cooperatives can The deterioration of coffee cooperatives can be partly explained by the institutional be partly explained by the institutional changes in cooperative organization that changes in cooperative organization that gave full ownership and administrative gave full ownership and administrative control to its members.control to its members.

Vulnerabilities in Institutional Vulnerabilities in Institutional DesignDesign

Perfect Vote SignalingPerfect Vote Signaling Practice of Mlolongo facilitates vote-buying Practice of Mlolongo facilitates vote-buying

Local Monopsony PowerLocal Monopsony Power Protects cooperatives from competition Protects cooperatives from competition

thus dampening the incentives for thus dampening the incentives for efficiency and increasing the returns to efficiency and increasing the returns to rent-seekingrent-seeking

Analytical ModelAnalytical Model

Brief SummaryBrief Summary Large expected rents increase incentive Large expected rents increase incentive

for corrupt candidates to buy their way for corrupt candidates to buy their way into officeinto office

Voters accept any bribe at least equal to Voters accept any bribe at least equal to the expected loss of welfare should they the expected loss of welfare should they be pivotal voter.be pivotal voter.

Likelihood of being pivotal voter Likelihood of being pivotal voter decreases with increasing members.decreases with increasing members.

Data AnalysisData Analysis Nine of 19 Coffee Cooperatives in Murang’a District Nine of 19 Coffee Cooperatives in Murang’a District

purposively selected. purposively selected. Random selection of factories and coop members Random selection of factories and coop members

serving these factories for farm level surveys.serving these factories for farm level surveys.

Empirical StrategyEmpirical Strategy Goal: To test for the presence of rent-seeking behavior in Goal: To test for the presence of rent-seeking behavior in

cooperatives and show that it has a detrimental effect of the cooperatives and show that it has a detrimental effect of the technical efficiency of members.technical efficiency of members.

The separate but interrelated testsThe separate but interrelated tests Stochastic production frontier estimation to extract farm-specific Stochastic production frontier estimation to extract farm-specific

technical efficiencytechnical efficiency Determinants of Payments to FarmersDeterminants of Payments to Farmers Determinants of Farm-Specific Technical EfficiencyDeterminants of Farm-Specific Technical Efficiency

Stochastic Production Frontier Stochastic Production Frontier EstimatesEstimates

Parameter Coefficient Std. Err.

Parameter Coefficient Std. Err

Constant

-0.847 0.714 )ln( 2v *** -1.407 0.515

Plot Size * -0.258 -0.146 )ln( 2u

.5(Plot)2 *** -0.137 0.027 Kamacharia *** 2.957 1.102

Land Size * -0.174 0.099 Gaturi ** 2.088 1.066

.5(Land)2 -0.103 0.132 Weithaga 0.726 1.069

Household Labor *** -0.441 0.141 Kanyenyaini 0.024 1.073

.5(HHLabor)2 *** 0.160 0.057 Kahuhia * 2.032 1.098

Hired Labor ** -0.329 0.130 Iyego 1.004 0.918

.5(HDLabor)2 *** 0.193 0.052 Kiru ** 2.222 1.043

Tree Age *** 1.307 0.479 Kiriti ** 2.504 1.095

.5(TAge)2 ** -0.385 0.155 Constant -1.293 1.245

Harvest Loss ** 0.549 0.264

.5(HLoss)2 ** -0.259 0.130

Chemical Fertilizers *** 0.485 0.180

Natural Fertilizers 0.039 0.147

*** - Significant at the 99% level*** - Significant at the 99% level ** - Significant at the 95% level** - Significant at the 95% level * - Significant at the 90% level* - Significant at the 90% level

02

46

8kd

ensi

ty te

cofft

r

0 .2 .4 .6 .8x

kdensity tecofftr kdensity tecofftrkdensity tecofftr kdensity tecofftrkdensity tecofftr kdensity tecofftrkdensity tecofftr kdensity tecofftr

kdensity tecofftr

Kamacharia

Weithega Kanyenyaini

Kahuhia Iyego

Kiru

Gaturi

Kanguno

Kiriti

Technical Efficiency

Den

sit

y

Determinants of Payments to Determinants of Payments to FarmersFarmers

*** - Significant at the 99% level*** - Significant at the 99% level ** - Significant at the 95% level** - Significant at the 95% level * - Significant at the 90% level* - Significant at the 90% level

010

2030

coop

mea

n pa

ymen

t in

2002

/pre

dict

ed a

vcoo

ppay

0 2000 4000 6000 8000total # of coop members

coop mean payment in 2002 predicted avcooppay

Mean Cooperative Payments by Average Members per Factory Mean Cooperative Payments by Total Members per Cooperative

01

02

03

0co

op m

ea

n p

aym

en

t in

20

02/p

red

icte

d a

vco

op

pa

y

600 800 1000 1200 1400mean # of coop members per factory

coop mean payment in 2002 predicted avcooppay

Mean Cooperative Payments by Average Members per Factory Mean Cooperative Payments by Total Members per CooperativeMean Cooperative Payments by Average Members per Factory

Mean Cooperative Payments by Total Members per Cooperative

Sources of InefficiencySources of Inefficiency

*** - Significant at the 99% *** - Significant at the 99% levellevel ** - Significant at the 95% level** - Significant at the 95% level * - Significant at the 90% level* - Significant at the 90% level

SummarySummary A portion of the decline in cooperative A portion of the decline in cooperative

performance can be attributed to the gross level performance can be attributed to the gross level of corruption/management incompetency of corruption/management incompetency presentpresent

Certain features of institutional environment Certain features of institutional environment underlying coffee cooperatives undermine its underlying coffee cooperatives undermine its effectivenesseffectiveness

Collective organizations do not always lead to Collective organizations do not always lead to pareto-improvements for their members.pareto-improvements for their members.

Policy ImplicationsPolicy Implications Require that elections are carried out by secret-Require that elections are carried out by secret-

ballot in the presence of objective election ballot in the presence of objective election supervisorssupervisors

Remove legal monopsony protection and allow Remove legal monopsony protection and allow farmers to sell to highest bidderfarmers to sell to highest bidder

Creation of effective formal regulatory Creation of effective formal regulatory mechanisms with prosecuting powersmechanisms with prosecuting powers

Improved access to credit and extension adviceImproved access to credit and extension advice

Thank you for your Thank you for your attentionattention

Testing the HypothesisTesting the Hypothesis

Crisis of Kenya’s coffee sector cannot Crisis of Kenya’s coffee sector cannot be explained by poor world pricesbe explained by poor world prices

Highlighting vulnerabilities in Highlighting vulnerabilities in components of Institutional Designcomponents of Institutional Design Mlolongo Voting TraditionMlolongo Voting Tradition Local Monopsony PowerLocal Monopsony Power

Analytical ModelAnalytical Model Empirical EvidenceEmpirical Evidence

Role of Weak International MarketsRole of Weak International MarketsGreen Coffee Prices for Select Exporting Nations

0

20

40

60

80

100

120

140

160

180

1994 1995 1996 1997 1998 1999 2000 2001 2002

Years

Perc

en

t C

han

ge in

Pri

ce

(1994=

100)

Peru Brazil Ethiopia Colombia Kenya

Coffee Yield for Select Exporting Nations

0

50

100

150

200

Year

Per

cen

t C

han

ge

in

Ave

rag

e Y

ield

s (1

994=

100)

Peru Brazil Ethiopia Colombia Kenya

Coffee Production for Select Exporting Nations

0

50

100

150

200

250

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Perc

en

t C

han

ge i

n T

ota

l O

utp

ut

(1994=

100)

Peru Brazil Ethiopia Colombia Kenya

Descriptive Statistics for Frontier Descriptive Statistics for Frontier Estimation ModelEstimation Model

Descriptive Statistics for Payment Descriptive Statistics for Payment Determinants RegressionDeterminants Regression

Descriptive Statistics for Sources of Descriptive Statistics for Sources of Inefficiency RegressionInefficiency Regression

Plot Size Elasticity of Yield

-0.6

-0.4

-0.2

0

0.2

0.4

0.01

0.03

0.08

0.22

0.61

1.65

4.48

Acreage

Per

cen

t C

han

ge

Household Labor Elasticity of Yield

-0.80

-0.60

-0.40

-0.20

0.00

1.00

1.35

1.82

2.46

3.32

4.48

6.05

8.17

11.0

2

Total Household Labor Days

Per

cen

t C

han

ge

Hired Labor Elasticity of Yield

-0.30

-0.25

-0.20

-0.15

-0.10

-0.05

0.00

1.00

1.35

1.82

2.46

3.32

4.48

6.05

8.17

11.0

2

Total Hired Labor Days

Per

cen

t C

han

ge

Descriptive Statistics for Selected Descriptive Statistics for Selected CooperativesCooperatives