Imperfections in Membership Based Organizations for the Poor An Explanation for the Dismal Performance of Kenya’s Coffee Cooperatives

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. 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. I highlight this issue from the prospective of the smallholder coffee industry in Kenya.

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

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. 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.

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

Analytical Model Brief Summary Brief Summary Large expected rents increase incentive for corrupt candidates to buy their way into office 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. 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. Likelihood of being pivotal voter decreases with increasing members.

Data Analysis Nine of 19 Coffee Cooperatives in Murang’a District purposively selected. Nine of 19 Coffee Cooperatives in Murang’a District purposively selected. Random selection of factories and coop members serving these factories for farm level surveys. 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. 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 The separate but interrelated tests Stochastic production frontier estimation to extract farm- specific technical efficiency Stochastic production frontier estimation to extract farm- specific technical efficiency Determinants of Payments to Farmers Determinants of Payments to Farmers Determinants of Farm-Specific Technical Efficiency Determinants of Farm-Specific Technical Efficiency

Stochastic Production Frontier Estimates *** - 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

Kamacharia WeithegaKanyenyaini Kahuhia Iyego Kiru Gaturi Kanguno Kiriti Technical Efficiency Density

Determinants of Payments to Farmers *** - 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

Mean Cooperative Payments by Average Members per Factory Mean Cooperative Payments by Total Members per Cooperative

Sources of Inefficiency *** - 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

Summary Summary A portion of the decline in cooperative performance can be attributed to the gross level of corruption/management incompetency present 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 Certain features of institutional environment underlying coffee cooperatives undermine its effectiveness Collective organizations do not always lead to pareto- improvements for their members. Collective organizations do not always lead to pareto- improvements for their members. Policy Implications Policy Implications Require that elections are carried out by secret-ballot in the presence of objective election supervisors 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 Remove legal monopsony protection and allow farmers to sell to highest bidder Creation of effective formal regulatory mechanisms with prosecuting powers Creation of effective formal regulatory mechanisms with prosecuting powers Improved access to credit and extension advice Improved access to credit and extension advice

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Testing the Hypothesis Crisis of Kenya’s coffee sector cannot be explained by poor world prices Crisis of Kenya’s coffee sector cannot be explained by poor world prices Highlighting vulnerabilities in components of Institutional Design Highlighting vulnerabilities in components of Institutional Design Mlolongo Voting Tradition Mlolongo Voting Tradition Local Monopsony Power Local Monopsony Power Analytical Model Analytical Model Empirical Evidence Empirical Evidence

Role of Weak International Markets

Descriptive Statistics for Frontier Estimation Model

Descriptive Statistics for Payment Determinants Regression

Descriptive Statistics for Sources of Inefficiency Regression

Descriptive Statistics for Selected Cooperatives