Imperfections in Membership Based Organizations for the Poor

1
Imperfections in Membership Based Organizations
for the Poor

• An Explanation for the Dismal Performance of
  Kenyas Coffee Cooperatives

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Objective

• To show that the success of membership based
  organizations of the poor is sensitive to the
  underlying sociopolitical environment and that in
  certain cases, releasing ownership and management
  to groups of individuals can unleash incentives
  that work against the benefits of collective
  coordination and result in the diminished welfare
  of its members.
• I highlight this issue from the prospective of
  the smallholder coffee industry in Kenya.

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Institutional Changes Impacting the Smallholder
Coffee Sub-Sector

• Why Cooperatives?
• Fragmented nature of production
• Large fixed costs
• Inadequate infrastructure, missing markets
• Liberalization
• 1998 New Cooperative Act Government relaxes
  control on cooperatives. More decision making
  power given to them
• Present situation
• Bankrupt Cooperatives
• Deteriorating Factories and Infrastructure
• Generalized Corruption and Political Manipulation
• Neglected coffee trees

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Hypothesis

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

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Vulnerabilities in Institutional Design

• Perfect Vote Signaling
• Practice of Mlolongo facilitates vote-buying
• Local Monopsony Power
• Protects cooperatives from competition thus
  dampening the incentives for efficiency and
  increasing the returns to rent-seeking

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Analytical Model

• Brief Summary
• Large expected rents increase incentive for
  corrupt candidates to buy their way into office
• Voters accept any bribe at least equal to the
  expected loss of welfare should they be pivotal
  voter.
• Likelihood of being pivotal voter decreases with
  increasing members.

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Data Analysis

• Nine of 19 Coffee Cooperatives in Muranga
  District purposively selected.
• Random selection of factories and coop members
  serving these factories for farm level surveys.

Empirical Strategy

• Goal To test for the presence of rent-seeking
  behavior in cooperatives and show that it has a
  detrimental effect of the technical efficiency of
  members.
• The separate but interrelated tests
• Stochastic production frontier estimation to
  extract farm-specific technical efficiency
• Determinants of Payments to Farmers
• Determinants of Farm-Specific Technical Efficiency

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Stochastic Production Frontier Estimates
- Significant at the 99 level -
Significant at the 95 level - Significant
at the 90 level
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Density
Technical Efficiency
Gaturi
Kamacharia
Weithega
Kanyenyaini
Iyego
Kahuhia
Kanguno
Kiru
Kiriti
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Determinants of Payments to Farmers
- Significant at the 99 level -
Significant at the 95 level - Significant
at the 90 level
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Mean Cooperative Payments by Average Members per
Factory
Mean Cooperative Payments by Total Members per
Cooperative
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Sources of Inefficiency
- Significant at the 99 level -
Significant at the 95 level - Significant
at the 90 level
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• Summary
• A portion of the decline in cooperative
  performance can be attributed to the gross level
  of corruption/management incompetency present
• Certain features of institutional environment
  underlying coffee cooperatives undermine its
  effectiveness
• Collective organizations do not always lead to
  pareto-improvements for their members.
• Policy Implications
• Require that elections are carried out by
  secret-ballot in the presence of objective
  election supervisors
• Remove legal monopsony protection and allow
  farmers to sell to highest bidder
• Creation of effective formal regulatory
  mechanisms with prosecuting powers
• Improved access to credit and extension advice

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Thank you for your attention
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Testing the Hypothesis

• Crisis of Kenyas coffee sector cannot be
  explained by poor world prices
• Highlighting vulnerabilities in components of
  Institutional Design
• Mlolongo Voting Tradition
• Local Monopsony Power
• Analytical Model
• Empirical Evidence

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Role of Weak International Markets
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Descriptive Statistics for Frontier Estimation
Model
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Descriptive Statistics for Payment Determinants
Regression
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Descriptive Statistics for Sources of
Inefficiency Regression
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Descriptive Statistics for Selected Cooperatives