A recent article in the East African got me thinking about the flower industry in Kenya. In the article, the chairman of the Kenya Flower Council (KFC) hmmm... Mr. Erastus Mureithi was agonising over the lack of "sector specific incentives" for the Kenyan flower industry, given the discomforting rise in the Ethiopian flower industry. In the article, Mr. Mureithi wants special economic zones with their own special tax treatments and incentives to be set up akin to the Export Processing Zones (EPZ's) that the textile industry benefits from.

I beg to differ on his position, in my humble opinion. The Kenyan flower industry should have the tag "helping unfaithful European men since 1960". What I mean is that the Kenyan flower industry is a good example of our outward looking national psyche. In terms of value addition to the local economy, it is not as significant as they would like you to think. Of course, people in the flower business will suggest that horticulture is one of Kenya's largest single foreign currency earner, however despite that, earning foreign currency is an over hyped statistic in my view. Foreign currency earning is hard to analyse from a welfare perspective, what the KFC should be quoting are the mutliplier effects of their industries and the factor returns to labour and capital. Furthermore, I will want to highlight the effects of import substitution against export substitution in regards to the flower industry.

Data from Kenya Institute of Public Policy Research and Analysis (KIPPRA), suggests that horticulture doesn't measure up to dairy farming as well as beef and poultry farming in regards to the multiplier effect. The multiplier effect measures the effect of a unit increase in the production of one good on the production of other goods, for example if radio production has a multiplier of 4.5, then the production of a radio helps increase productivity in other sectors by a factor of 4.5. This then means that production of a good with a high production multiplier is beneficial since it improves welfare by a higher proportion. From their studies, a unit increase in dairy farming produces a 4.01 increase in production from other sectors, for beef and poultry the multiplier is 3.83 and 3.91 respectively. Horticulture falls behind with 3.70. In terms of the added effect of consumption, the multipliers for dairy farming, beef, poultry and horticulture are 8.44, 7.95,8.86 and 8.46 to be exact. The consumption effect for horticulture therefore is higher than that for beef and dairy production. However, since we are more interested in production rather than consumption, it is clear to see that the government if they are to provide "sector specific incentives" should focus more on livestock than horticulture.

To take the analysis further, one should further analyse the sector given the factor returns to both capital and labour, and for labour we subdivide this into rural and urban labour. A product given our economy would be more beneficial if it had higher returns to labour especially rural labour than higher returns to capital. A higher return to capital shows that only the wealthy capital owners benefit from its production. Given that Kenya is a poor country, higher returns to rural labour are preferred as this will help alleviate poverty. From the Kippra data, horticulture production has higher returns for capital vis a vis livestock production. Furthermore, the labour returns are higher for urban labour rather than rural labour. In terms of livestock production, the return is higher for rural unskilled labour. This then means that livestock production is more beneficial in terms of poverty alleviation as compared to horticulture.

The last issue is one to do with trade economics. The Ethiopian government seems to be more than willing to pump tax payers money to boost their flower industry. If this is the case, then why shouldn't Kenyan flower lovers piggy back on the Ethiopian governments benevolence?. My view is that we should let flower farming be an Ethiopian venture. What Mr. Mureithi is suggesting is what is known as import substitution i.e. setting up trade barriers to replace cheaper imports with local products. By setting up government incentives for local producers, we are locking out cheaper flowers from Ethiopia with more expensive Kenyan flowers. Import substitution is not a good policy. What we should focus on is export substitution, the same policy that has seen the Asian Tiger economies roar as loud as they have over these last couple of decades. The Kenyan government should direct their efforts at developing local industries e.g. manufacturing and Jua Kali so as to increase their exports. This has proven to be a more successful strategy given that international competition demands that we increase our efficiency in production.

In conclusion, we should not spend a dime of tax payer money helping out the flower industry. That would be a waste of resources, if anyone wants to buy flowers, import them from Ethiopia.