Imperfections in Membership Imperfections in Membership Based Organizations for the Based Organizations for the Poor Poor An Explanation for the Dismal An Explanation for the Dismal Performance of Kenya’s Coffee Performance of Kenya’s Coffee Cooperatives Cooperatives
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Imperfections in Membership Based Organizations for the Poor An Explanation for the Dismal Performance of Kenya’s Coffee Cooperatives.
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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
*** - 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
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
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2002
/pre
dict
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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
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op m
ea
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20
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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