consumption, to estimate net welfare effects. This builds on more general work by the World Bank, proposing broader level reforms for driving growth for shared prosperity in Kenya<sup>5</sup> .

# **2. The Sugar Sector**

**Sugar is one of the most widely consumed products in Kenya.** It is, surprisingly perhaps, more frequently purchased than any other good reported in the last household survey (KIHBS of 2004/5). At least 89 percent of households regularly consume sugar (80 percent of Kenyan households purchased sugar in the week prior to interview and a further 9 percent consumed sugar from their own stocks).  Average annual household consumption of sugar at the time of the survey is estimated 16.3kg per adult equivalent<sup>6</sup> .  This corresponds to a average annual household expenditure on sugar of KSH 1,084 (USD15) per adult equivalent from the same source<sup>7</sup> . To put this into context, the annual per adult equivalent poverty lines for rural and urban areas at the time were KSH 18,746 (USD256) and KSH 34,954 (USD477), respectively.  So the average household’s sugar expenditure is roughly 3 percent of the urban poverty line and 6 percent of the rural poverty line. The same level of consumption at _current_ retail prices would cost approximately KSH 2,147 (USD25)<sup>8</sup> .

**This paper is concerned only with white or brown sugar for human consumption – not**

**industrial sugar, or sugar that still requires further processing for consumption.** For clarity, our analysis covers all consumer sugar except for industrial refined sugar, as this is not a substitute for consumers – industrial sugar can only be imported for industrial purposes by firms listed in the East Africa Community (EAC) Gazette, with a remission of duty (to 10 percent).  When we refer to “raw” sugar we are following the EAC Common External Tariff (CET) definition<sup>9</sup> , which includes all refined or partially refined brown sugar. Raw imports into Kenya are brown sugar that is ready for human consumption, not “raw” sugar that must still be milled<sup>10</sup> .

## **Consumers do not typically adjust their consumption of sugar much in response to price changes – together with the high expenditure on sugar this implies significant welfare**

**costs from high prices.** In other words, the elasticity of demand for sugar is quite low – people are reluctant to adjust their consumption of sugar much in response to prices.  This means that sugar is sufficiently important to consumers that they are prepared to make sacrifices in the consumption of other goods to soften their reduction of sugar consumption in the face of high prices.  As a consequence, sugar prices are important for household welfare in Kenya (and particularly that of the poor, who spent a larger fraction of their income on sugar). High sugar prices result in lower consumption of other goods, rather than just sugar.

> 5 See Fengler et al (2013)

> 6 For all the estimations here we have trimmed outliers that are more than five standard deviations above the mean. This is the general rule followed for dealing with outliers in this paper.

> 7 The expenditure is that reported in the survey.  Converted to USD terms using the average exchange rate of 73.35KSH/USD from July 2005 – June 2006

> 8 Change in cost calculated by dividing by average prices between July 2005 and June 2006 and multiplying by prices as of January 2013.   Converted using the average exchange rate of 86.86KSH/USD as of January 2013.

> 9 Chapter 17 specifies that raw suguar includes all “...sugar whose content of sucrose by weight, in the dry state, corresponds to a polarimeter reading of less than 99.5°”.

> 10 See Monroy et al (2013)

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