# **1. Introduction**

**This paper shows that through appropriate policy action to support well-functioning markets, Kenya can improve the welfare of consumers and reduce poverty.** Current wholesale sugar prices in Kenya are almost three times world prices.  We show in this paper that relaxing trade barriers to allow sugar prices to fall by even 20 percent could reduce poverty by 1.5 percent.  Similarly, adjusting government interventions in the maize market, that have been shown to inflate maize prices by around 20 percent on average, could reduce poverty by 1.8 percent. More competitive prices have a larger effect on the poorest households in both urban and rural areas.  While the estimated effects for maize are larger than those for sugar, there is much larger scope for reduction in sugar prices, and as such potential welfare effects relating to sugar reform are likely larger.

**This paper builds on a strand of literature that focuses on the welfare impacts on the poor associated with competition problems**<sup>1</sup> .  For example Urzua (2009) showed that the welfare cost from monopoly power in Mexico was borne disproportionately by the poor. Work by Creedy and Dixon (1998) analyzed 14 commodity groups using household survey data from Australia and concluded similarly that welfare losses from monopoly power were heavier among lower income than higher income groups.

**There is a considerable literature that examines the effects of food prices on welfare, and this has expanded rapidly since the global financial crisis.** Pioneering work by Deaton (1987, 1989) and Ravallion (1990), among others, developed the analytical and econometric tools for assessing the welfare impacts of changes food prices using survey data, at a time when these were already at the forefront of development debate.  Even at that time, Ravallion (1990) observed “The welfare effects in a food producing economy of changes in the price of food have been central issues in numerous debates on development policy”. While a substantial literature of welfare analysis of food prices already existed, recent global food crises have generated further expansion of this kind of work<sup>2</sup> , although the policy recommendations have not always been consistent<sup>3</sup> .

**This paper investigates the link between competitive, well-functioning food markets and consumer welfare.** The paper explores two key food markets in Kenya – sugar and maize – and argues that a variety of factors conspire to distort market prices upwards.  Distortionary factors include import tariff policy, non-tariff barriers, potential anticompetitive conduct by firms and direct state intervention.  We link the changes in prices to the associated welfare effects on consumers, using the most recent available representative household survey data - the Kenya Integrated Household Budget Survey (KIHBS) 2005/6<sup>4</sup> .  In the case of maize, where there is significant production by smallholders captured by KIHBS, we are able to integrate the effects of price change both on the value of household production and

> 1 See the OECD (2012) background note on competition and poverty from the Global Forum on Competition.

> 2 See for example Benson et al (2008), Ivanic and Martin (2008), Ivanic, Martin and Zaman (2012), Porto (2012)). 3 See Swinnen (2011) for a review of how policy recommendations have not always been consistent in their approach to high or low food prices.

> 4 While consumption patterns are doubtless changing in Kenya, annual data from FAOSTAT shows that _relative_ consumption of food is changing very slowly, supporting the validity of using the 2005/6 data to draw inferences on household behavior that are applicable to Kenya today.

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