65758 POVERTY THE WORLD BANK REDUCTION AND ECONOMIC MANAGEMENT NETWORK (PREM) Economic Premise NOVEMBER 2011 • Number 71 JUN 010 • Numbe 18 The Drought and Food Crisis in the Horn of Africa: Impacts and Proposed Policy Responses for Kenya Gabriel Demombynes and Jane Kiringai As the world begins to feel the effects of climate change, the frequency of droughts is increasing in the Horn of Africa. In Kenya, the drought and food crisis affect welfare through two main channels. The first channel is the increased mortality of livestock in drought-affected areas, which are home to 10 percent of the country’s population. The second channel is by exacerbating increases in food prices, which are largely driven by worldwide price trends. Considering these two channels, this note identifies four broad policy changes that can reduce Kenya’s future vulnerability to such shocks: (i) investment in people in the arid and semiarid lands; (ii) reform of Kenya’s maize policy; (iii) review of the East African Community grain trade policy; and (iv) formulation of a unified social protection system. Impact of the Drought and the Rise in Food Beyond the direct impact in the drought-stricken areas, the Prices drought has contributed to food inflation across the country. Food inflation is driven by both a shortfall in production and The drought the increase in global prices. While prices have dropped from In Kenya, more than 3.7 million people have been affected by their July 2011 peak, as of October, the price for a 90 kilogram the drought. The counties bordering Somalia in the north and bag of maize stood at US$43, which is 55 percent above world east of the country have been the hardest hit. Drought-affected market prices and double the price of a year earlier. areas are also coping with the influx of refugees travelling from Agriculture policy and trade policy distortions are com- neighboring Somalia to the Dadaab refugee camp, creating an pounding the drought’s impacts. Kenya is a food deficit country additional burden in the region that is now home to the largest even in a bumper harvest year, yet the country levies import refugee camp in the world. duty on food grains that are only suspended on an ad hoc basis The drought-stricken region holds about 31 percent of Ke- in times of crisis. The East African Community customs union nya’s livestock, which is at risk from the debilitating effects of partners also impose export bans on cereals when Kenya experi- the drought. Livestock is the main source of livelihood in arid ences a food crisis, and the country pursues a high food pro- lands and accounts for about 5 percent of total GDP. Estimated ducer price policy. livestock mortality as a result of the current drought is about The combined economic impact of the drought and related 10–15 percent above normal in the affected areas, equivalent shocks is estimated to cost the economy approximately 0.7– to 5 percent of Kenya’s livestock population. 1.0 percent of GDP. However, the direct impact of the drought 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise on output is estimated to be mild—a decline of 0.2 percent— To estimate the overall effects of the rise in maize prices and due to the loss of livestock. The economy will slow down by an the decline in maize production, this analysis employed a simu- additional 0.5–0.8 percent as the result of lower than normal lation approach using the Kenya Integrated Household Budget rainfall in the first half of the year in Kenya’s agricultural heart- Survey and current data on price and production changes. land and a number of external shocks. Overall, areas most negatively affected by maize price shocks Food security is expected to improve to a crisis status (down are those where poverty rates were already high. Marginally, the from the humanitarian disaster phase) in pastoral areas of Ke- greatest increase in the poverty headcount is in the eastern nya by the end of 2011. This more favorable outlook is due province. Net producers of maize in the western Rift Valley to the forecast for near normal to above normal rains, ongo- have benefited from higher prices. ing relief interventions, and expected declines in staple food Proposed Policy Responses prices. Poverty impacts Given the two main effects of the drought—livestock mortality The seven counties most affected by the drought have an aver- in the arid and semiarid lands and rising maize prices national- age poverty rate of 73 percent, with Turkana registering a pov- ly—there are four broad policy changes that can reduce Kenya’s erty rate of 90 percent, the highest in Kenya. The main impacts vulnerability to drought: i) investment in people in the arid and of the drought come through two channels. First, there is a di- semiarid lands; ii) reform of Kenya’s maize policy; iii) review of rect effect on the lives of those living in drought-stricken areas, grain trade policy; and vi) strengthening of the social protection mainly through the increased mortality of livestock. The sec- system. ond channel is the rise in food prices, which is partially a conse- Investment in people in the arid and semiarid lands quence of the drought in Kenya’s arid areas and partially due to Over the last decade, Kenya as a whole has achieved strong below normal rainfalls in the crop-producing regions, which growth, driven by its diversified and urbanizing economy. The are elsewhere in the country. areas afflicted by the drought are Kenya’s arid lands, which have Livestock is the principle source of livelihood in the arid ar- the highest poverty rates and the lowest population density in eas. Fifty-eight percent of households in the seven drought-af- the country. The gap between the more prosperous parts of Ke- fected counties own livestock, with goats and sheep the most nya and the poorer arid lands presents a case of lagging and lead- common assets. Other livestock included in the statistics pre- ing regions similar to the situation faced in many countries sented here include cattle, camels, and donkeys. On average, across the globe. A crucial question facing policy makers is families own 42 animals. Even in nondrought years, house- what type of public investment should be made in the lagging holds in the arid lands are highly vulnerable to shocks, and live- areas. The World Bank’s 2009 World Development Report stock mortality is high. In a 2005–6 national survey, the aver- (WDR): Reshaping Economic Geography provides a framework age livestock-owning household in the region reported that to address this question. nearly half of their livestock died in the previous year, a mortal- Underlying the framework is the observation that across the ity rate twice the national average. world, the overwhelming historical pattern has been for devel- Droughts overwhelm traditional coping mechanisms em- ployed by pastoralists. Households with livestock manage mor- tality risk by moving their herds in response to rainfall varia- Table 1. Household Livestock Ownership in Drought-Affected Counties tion. They also have social insurance arrangements that provide % of households that own for the transfer of a breeding cow when they suffer severe losses. Sheep However, these schemes are in decline, do not cover everyone, County Livestock Cattle and goats Camels Donkeys and fail in the face of a drought that affects all households over Garissa 44 28 41 5 a wide area simultaneously. Isiolo 60 45 49 4 27 Impacts of changes in maize production and prices differ Mandera 49 27 40 11 15 across socioeconomic groups. The impact of increases in maize Marsabit 70 37 54 20 6 prices varies depending on whether a given household is a net buyer or seller of maize. The greatest effects of maize price Tana River 49 29 45 2 1 shocks are felt by Kenyans who are net buyers and make up the Turkana 51 2 50 2 7 majority of the Kenyan poor, including the urban poor, who are Wajir 87 51 77 27 3 entirely net buyers. Households that are net sellers of maize, a Drought-affected 58 28 52 10 6 small but politically influential group of less than 2 percent of counties Kenya’s farmers, are the major beneficiaries of Kenya’s high pro- All Kenya 50 38 32 1 3 ducer prices. Source: World Bank projections using Kenya Integrated Household Budget Survey 2005/6 data. 2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise opment to take place as people move from poor, sparsely popu- Given the low population density in the arid lands in the lated areas to leading areas. This is the pattern in rapidly devel- region, a focus on spatially connective infrastructure and tar- oping countries today, such as China, which has seen massive geted incentives is less advisable. Substantial development of migration from the poor, sparsely populated west to the coastal roads—the chief form of spatially connective infrastructure—is region. The same pattern is seen in Brazil, with migration from likely to be prohibitively expensive in the arid lands, and the the poor, less densely populated regions to the southeast. track record of incentive-type programs is generally weak. The forces pulling people away from areas such as arid lands Nonetheless, the mobile phone revolution and the rise of mo- are reinforced by climate change. The literature on climate bile money have introduced a new form of spatially connective change recognizes that migration is a principal tool people use infrastructure and have helped some cope with the drought by to adapt. As global temperatures rise and droughts become providing a lifeline through remittances. To the extent that in- more frequent, migration from arid areas will increasingly ap- centive-type programs can be successful, historical experience peal to communities. suggests they need to build upon policies that foster institu- In light of the insights from historical patterns and theory tions and ensure equality of opportunity. Without laying the on economic geography, the WDR framework recommends a foundations through a principal focus on institutions, targeted set of policy approaches addressing the “3 Is�— institutions, infra- incentives are unlikely to succeed. structure, and incentives: Overall, the WDR framework suggests recalibrating priori- • Institutions include both those that ensure equality of op- ties for the arid lands. The future welfare for people in these portunity in areas like education, health care, food security communities is likely to be driven largely by migration to areas and basic services, and those that provide a regulatory of economic concentration. The top priority for government framework such as property rights, land tenure regimes, investment and migrant remittances should be ensuring basic transport, and urban development regulations. Ensuring education and health care for children in arid areas. that institutions are spatially blind should be the primary Agriculture policy approach for most countries. Because maize is Kenya’s major food staple, efficient maize mar- • Infrastructure refers to spatially connective policies aimed at keting is critical to food security, poverty reduction, and pro- connecting places and markets. Prime examples are inter- ducer incentives. The operations of the National Cereals Pro- regional highways and railroads to promote trade and im- duction Board (NCPB) have raised the price of maize by fixing proving information and communication technologies to a price floor well above market levels, with the result that Ke- stimulate the flow of ideas. This approach should supple- nya’s maize prices are among the highest in Africa, yet without ment the focus on institutions in countries where lagging generating the expected supply response. It is important to un- areas have large numbers of poor people and impediments derstand why. to mobility. The government has intervened in maize markets in ways • Incentives refer to spatially focused policies to stimulate eco- that keep maize prices high and have little impact on price stabil- nomic growth in lagging areas, such as investment subsi- ity (figure 1). Liberalization opened maize markets to the private dies, tax rebates, location regulations, local infrastructure sector and reduced marketing margins and prices. However, the development and targeted investment climate reforms, NCPB remains a major player in the market among medium- such as special regulations for export processing zones. and large-scale farmers in the high potential maize zone of the This approach can complement the focus on institutions and infrastructure in areas fragmented by linguistic, po- litical, religious or ethnic divisions, which cause these ar- Figure 1. Kenya Maize Prices are Higher Than Global Prices eas to be particularly likely to suffer from coordination failures and poverty traps. 0.6 duty suspension duty suspension drought The fact that many now living in arid lands—particularly the political crisis 0.5 children—will migrate to other areas strongly recommends a primary focus on institutions, especially those that help people 0.4 drought US$/ kg migrate to places with economic opportunities. High priority 0.3 should be given to guaranteeing access to quality basic servic- 0.2 es—particularly education and health care—regardless of one’s location. Given the low population density in the arid lands 0.1 global Kenya and their remoteness, the cost of delivering these services will 0.0 Apr be high. This cost is justified for two reasons: to ensure equal Jan Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Jul Oct Apr opportunities for children from arid areas and to promote eco- 2007 2008 2009 2010 2011 nomic growth. Source: Kenya National Bureau of Statistics; World Bank estimates. 3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Rift Valley, where it sets prices and provides some degree of sta- shocks on households. Across Africa, countries with well-de- bilization. Smallholders have little interaction with NCPB. Pres- signed, operational safety nets have been able to respond more ently, only 2 percent of smallholders sell to the cereals board. effectively to crises, protecting human capital investments and NCPB’s maize market interventions are generally antipoor in the preventing people from falling into poverty, while jumpstart- sense that high prices paid to large-scale farmers negatively im- ing economic recovery. The response to the current drought in pact consumers—especially poor urban households and the ma- East Africa has again validated this approach. jority of poor rural households, which are net buyers of maize. The government of Kenya recognizes the potential of safety Despite the harmonization of formal maize import tariff nets to effectively mitigate the impacts of the drought. The gov- rates, both tariff and nontariff barriers to regional trade con- ernment has harnessed its existing safety nets to provide addi- tinue to cause domestic maize prices to rise. Given that Kenya tional support to people most affected by the drought and food is consistently a net importer of maize, a policy of restricting price inflation. However, these and the government’s other imports necessarily harms Kenyan consumers, who bear the ad- safety net programs are comparatively new and operate mostly ditional tax burden. as pilots. They are limited in coverage and their systems and Relatively high global maize prices due to structural change structures are not yet sufficiently robust to enable a rapid scale- in the energy markets provide an opportunity for NCPB to re- up to new beneficiaries. duce its role in the market and move to a more transparent, co- The government of Kenya’s draft social protection policy ad- ordinated system with minimal dislocation to surplus maize dresses these shortcomings and aims to strengthen the ability farmers in western Kenya. As a first step, NCPB could use trans- of safety net programs to respond to crises. Policy implementa- parent rules for setting buying and selling prices for maize. This tion will require increased financing for social protection. step would require NCPB to move away from pan-seasonal buy- There is potential to increase safety net coverage through effi- ing and selling prices (prices that are constant throughout the ciency gains within the current budget. Most notably, spending marketing year), which eliminate incentives for grain storage. on emergency food aid, which is relatively costly and not always Price stability could also be enhanced through the intraregional very effective, could be reallocated to longer-term and more ef- grain trade, which could be furthered by investing in market ficient programs. Currently, about 86 percent of safety net infrastructure; reducing trade restrictions and interventions; spending is allocated to emergency relief. At the same time, reducing nontariff barriers to trade; streamlining customs pro- overall spending for long-term safety nets is at relatively low lev- cedures; and harmonizing quality, safety, and phytosanitary els (around 0.25 percent of GDP); government will need to in- standards with neighboring countries. crease the financing for these programs over time. Private storage could be encouraged by turning some NCPB These investments will not only improve crisis response, grain silos and go-downs into storage-leasing operations. Addi- but will also build more resilient livelihoods. A growing body tional storage facilities, coupled with better financing arrange- of evidence shows that safety nets are an important comple- ments, could help the commercialized grain marketing system ment to efforts to improve the livelihoods of the poor, partic- to weather downside price risk. These efforts could be com- ularly in areas that remain vulnerable to shocks such as bined with a warehouse receipt system to help farmers and drought. Reliable access to safety net support allows house- traders get access to formal credit markets and would improve holds to take on more investment risk and thus produce high- the efficiency of the food marketing system in general. er returns. Implementing these reforms would open space for market- based risk management instruments through a commodity ex- About the Authors change with forward and futures markets. Most importantly, Gabriel Demombynes and Jane Kiringai are both Senior Econo- the government could provide a predictable policy environment mists in the Nairobi office of the World Bank, Africa Region. that does not destroy the incentives for private individuals and firms to trade market-based risk management instruments. References Scale-up and integrate social protection programs World Bank. 2009. World Development Report: Reshaping Economic The global food, fuel, and financial crises have demonstrated Geography. Washington, DC. the vital role that safety nets play in mitigating the impact of ———. Forthcoming. Kenya Economic Update. Nairobi, Kenya The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. They are produced by the Poverty Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect those of the World Bank. The notes are available at: www.worldbank.org/economicpremise. 4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise