AN ASSESSMENT OF EFFECT OF AGRICULTURAL

SUBSIDIES ON ECONOMIC EFFICIENCY OF CROP

PRODUCERS IN KENYA

A REASEARCH PROPOSAL SUBMITTED IN PARTIAL FULFILMENT OF THE

REQUIREMENTS FOR THE AWARD OF BACHELOR OF ECONOMICS AND

FINANCE DEGREE OF KENYATTA UNIVERSITY

NOVEMBER 21ST 2022

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DECLARATION

I declare that this is my original work and has not been submitted at any academic institution

Nickson K. Njuguna K16/4765/2020 Signature. …………………

Dickens Omondi K16/3488/2020 Signature….………………..

Regina Ndanu K16/4792/2020 Signature…………………….

Moses Githaiga K16S/12226/2020 Signature………………………

Vivian Cheruiyot K16/4826/2020 Signature……………………..

Stacy Gisemba K16/4834/2020 Signature……………………..

This research proposal will be submitted for presentation with approval from the supervisor

Signature: ………………………. Date: ……………………….

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Dr. Forah Obebo

Lecturer

School Of Economics

DEDICATION

We dedicate this work to our parents for their support in our academic journey.

ACKNOWLEDGEMENTS

We would like to thank God for providing us with the energy to complete this thesis. Our sincere

gratitude goes to our lecturer, Dr. Forah Obebo for his guidance throughout this project. His

dedication and effort towards ensuring that we attain the best throughout the study of this course

is highly appreciated. He gave a listening ear and offered guidance when needed. I also

acknowledge the Kenyatta University post-modern library for their provision and availability of

journals which helped in our research. Our gratitude goes to our parents, for the support they

provided throughout our academic journey. Much gratitude also goes to my colleagues and

friends who gave me the necessary encouragement during proposal development, data collection

and analysis, and thesis write up. While I thank everyone who contributed to the success of this

thesis, all errors of omission or commission remain solely mine.

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Table of Content
Declaration……………………………………………………………………………………….i
Acknowledgement………………………………………………………………………………………..ii
Table of contents ……………………………………………………………………………….……….iii
Abbreviations ………………………………………………………………………………….………..iv
Definition of terms ………………………………………………………………………………………v
Abstract ………………………………………………………………………..………………………..vi
CHAPTER ONE
1.1 Introduction……………………………………………………………………………. 1
1.2 Subsidies policies on agricultural products.…………………………………………….2
1.3 Problem statement……………………...………………………………………………. 3
1.4 Objectives ………………………...……………………………………………………. 4
1.5 Research questions………………………………………………………………………5
1.6 Significance of the study ……………………………………………………………….. 6
1.7 Scope and limitations of the study …………………………………………………….. 7
1.8 Organisation of the study ………………………………………………………………..8

CHAPTER TWO
2.1 Introduction …………………………………………………………………………………………... 9
2.2 Theoretical literature ………………………………………………………………………………… 10
2.3 Empirical review …………………………………………………………………………………… 11
2.4 Overview of literature review ………………………………………………………………………. 12
CHAPTER THREE
3.1 Introduction …………………………………………………………………………………………. 13
3.2 Research design …………………………………………………………………….………………. 14
3.3 Theoretical foundation and Conceptual framework ………..………………………………………. 15
3.4 Working Hypothesis ………………………………………………………………………………. 16
3.5 Data type and source ……………………………………………………………………………….17
3.8 Data collection ………………………………………………………………………………………. 18
3.9 Data analysis ………………………………………………………………………………………….19
REFERENCES …………………………………………………………………………………………20

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ABBREVIATIONS

1. KSH- Kenya Shillings

2. KNBS- Kenya National Beareau of Statistics

3. MMT- Million metric tonnes

4. NCPB- National Cereal and Produce Board

DEFINITION OF TERMS
Inflation-refers to the rate of increase in prices over a given period of time.

Subsidy program-refers to indirect payment to firms of cash payments from the government.

Maize productivity-its an act of measuring the quantity of maize produced with a given quantity
of inputs.

Government expenditure-refers to all government spending in an economy.

Agricultural subsidies- refers to government incentive paid to farms to supplement their income
and influence their cost of production.

Economic Efficiency- a measure of how well a market or the firms within it are perfoming.
Market inefficiency- a situation in which a financial market does not operate as well as it
should.
Externalities- situations when effect of production or consumption of goods and services
imposes costs or benefits on others which are not reflected in the prices charged forgoods and
services being provided

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ABSTRACT
This study will seek to assess the effects of agricultural subsidies on economic efficiency of
maize producers in Kenya. For the longest time maize has been a staple food in Kenya which is
widely grown all over the country. Due to various outstanding macro economic factors, the price
of maize has increased drastically.
To increase productivity, the GOK implemented an input/agricultural subsidy program to
mitigate the rising cost of agricultural outputs.
The purpose of the study, therefore, was to evaluate the effect of agricultural subsidies on the
economic efficiency of maize producers in Kenya as a means to evaluate whether input subsidy
has positive or negative effect on the economic efficiency of maize producers.
We seek to substantiate these effects using secondary data collected from 2017-2022.

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 CHAPTER ONE

INTRODUCTION

1.1Background of the Study

The agricultural sector has been and continues to be a pillar for most economies in
developing nations and provides livelihoods to millions of people (Geffersa
, 2019).
This industry has repeatedly shown that it is essential for reducing poverty and
fostering socioeconomic change. In both industrialized and developing nations,
agriculture is expected to be a key industry for long-term sustainable development.
By 2050, the global population is expected to rise by more than 9 billion. This has
raised an alarm globally on since food sustainability projects has become an urgent
issue to be addressed especially in Africa which is mainly faced by hunger. In
kenya, most of food shortages problems are due to illiteracy in farming activities.
The government ought to implement the introduction of higher farm productivity
techniques which would reduce both the absolute as well as relative poverty
among rural households in Kenya. In terms of production, apart from wheat and
rice, maize is the largest crop grown contributing to 24% of the cereals produced
globally. Approximately 1.5 billion people depend on maize directly as a staple
food. It has been largely classified into white and yellow maize and the two
categories are produced under similar climatic conditions. The rate at which maize
is consumed in developing countries exceed many other regions. In Africa, maize
was introduced by the portugese in the 16th century and gradually it has become the
African staple food. South Africa is the leading producer of maize in the
continent, its closely followed by Nigeria, Ethiopia and Tanzania
Kenya ranks 20th in production of maize in Africa and its competitors are doig pretty well in east
Africa.

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1.2. Overview of Government Subsidies
Government subsidies are tax breaks or other forms of economic support given by
governments to certain economic sectors i.e agricultural subsidies. Agricultural
subsidies are government incentives paid to agricultural organisations and firms to
supplement their income and manage the supply of agricultural commodities. The
GOK has implemented various agricultural subsidies to help cushion maize
producers from economic shocks. In the past, back in 2008 kenya established a
national fertilizer subsidy program in response to the oil price shock that tripled
retail fertiliser prices. This program provided all verified farmers discounted
fertilisers from the NCPB

1.2.1Relation Between Subsidies and Economic Efficiency

Subsidies are usually introduced in the form of cash payment from the government to
agricultural sectors or in the form of a target tax cut. In kenya agricultural sector, subsidies
implementation has played a major role in offsetting market failures and externalities enabling
the sector to achieve greater economic efficiency. It clears out market failures by reducing the
price paid by buyers and increasing the quantity of fertilizer sold to farmers. This increases the
overall supply of fertilizer which in turn increases the its quantity demanded, hence lowering the
overall price of fertilisers in the country.

1.2.2Agricultural Subsidies Policies In Kenya

A number of agricultural subsidies have been implemented by the Siaya county government
since the devolution of agriculture in 2013. The county distributed maize and sorghum seeds
worth ksh 4.9 million. Fertilizers worth ksh8.6 million were subsidized by the county in the same
year. The county also spent ksh3.6 million on maize seed subsidies in 2015. Between 2014-2016,
the county has invested Ksh37,110,800 in subsidies, not including significant costs incurred in

8
procuring tractors for subsidized ploughing activities.

1.3Problem Statement
The production of maize as a staple crop from 2010 to 2015 is depicted in the table below. In
2013, the devolved system became operational. Records that are currently available do not
indicate that the central government had previously provided agricultural subsidies.

Year 2010 2011 2012 2013 2014 2015 2016

Hectarage 68,800 72,000 79,861 84,000 84,500 85,000 -
Metric 100,145 117,818 130,682 129,818 145,955 146,81 -
Tons(MT) 8
Source; Siaya county department of agriculture
According to the aforementioned statistics, there was an increase in production between the years
of 2010 and 2012, which can be ascribed to farmers planting more land in the crop. Election-
related effects and below-average rainfall may be to blame for the dip in 2013. The county
managed to raise production by 16,137 MT in 2014 by issuing its first agricultural inputs subsidy
(seeds and fertilizers) for Ksh 13,530,800. The subsidies were Ksh 3.6 million the next year, and
maize production rose by 863 MT.
Siaya County has seen annual gains in production, but it is important to proceed with care before
asisuming that fertiliser and seed subsidies alone are helping farmers produce more food. To give
an example, the addition of 863 MT in 2015, even with the subsidies in 2014 and 2015, is
insufficient to warrant subsidies. Furthermore, it might be argued that fertilizer subsidies reduced
output because crops would simply wither if fertilizer were applied without enough moisture.
Other elements that are crucial to the production and accessibility of food include the provision
of irrigation infrastructure, functioning supply-driven extension services, soil monitoring and
testing services, and others.

Tegemeo Institute reports that Kenya has imported 1,019,920 MT of fertilizers since 2008 in
order to carry out a fertilizer subsidy program. Nevertheless, the nation struggles with food

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insecurity still. The Global Food Security Index places 113 countries, with Kenya coming in at
position 83. (GFSI, The Economist Intelligence Unit, 2016). This demonstrates the need for a
comprehensive strategy to agriculture in order to boost significant output. More may be done to
ensure maximum production and the consequent availability and affordability of food at the
source in Siaya, which is normally a food deficit county (Comprehensive Food Security and
Vulnerability Survey, WFP, 2016).

1.4Objectives of the Study

1) To determine the extent to which time of distribution of subsidies influence economic efficiency.
2) To establish the extent to which training of farmers on the use of subsidies influence economic
efficiency.
3) To determine how access to information of the subsidy programme influence economic efficiency of
crop production.
. 4) To establish the extent to which provision of farm inputs influence economic efficiency..

1.5Research Questions
1) To what extent does time of distribution of subsidies influence economic efficiency?
2) How does training of farmers on use of the subsidies influence economic efficiency?
3) How does access to information of the subsidy programme influence economic efficiency?
4) To what extent does provision of farm inputs influence economic efficiency?

1.6Significance of the Study

The use of government’s agricultural subsidies to farmers can only promote economic efficiency
when factors influencing self-food sufficiency are identified. we hope that the findings of our
study provides beneficial information for use by government ministry of agriculture in
development of policies aimed at attaining economic efficiency through the use of agricultural
subsidies. This study aims at instilling awareness among crop producers on how government
agricultural subsidies can promote economic efficiency in kenya. This study also offers
insightful ideas to stakeholders in the field of agriculture to recognize the need of planning
inorder to promote socio economic welfare of the nation.
1.7Scope and Limitations of the Study

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Our study is limited in terms of coverage owing to financial resources available. The greatest
limitation we discovered with this our study was that the introduction of agricultural subsidies
reduces the amount of crop diversity within the country, this is because the fertilizers are
manufactured with certain specific chemicals that only favours growth of certain plants while
inhibiting growth of other plants. Also, introduction of agricultural subsidies creates more
government influence in the economy. Much government intervention leads to lack of efficient
resource allocation and lack of innovation thus ignoring societal needs. Though the sample size
remains remains manageable by not covering all counties, its still a better representation of the
target population.
1.8Organization of the Study
This research proposal is specific and purposive, it is also structured systematically and step to
be taken are in sequence so at to achieve the objective through an organization of three chapters.
Chapter one covers the introduction,
subsidies policies on agricultural products, problem statement, objectives, research questions,
significance of the study, scope and limitations of the study, organization of the study. The
second chapter reviews the literature related to this study. Chapter 3 details the methodology of
the study. The last part provides references where this information was gathered from.

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 CHAPTER TWO
LITERATURE REVIEW
2.1: Introduction
This chapter compiles the various information from various researchers who executed research
in the same field of study. Two specific areas will be covered here. This are the theoretical
literature and empirical review on the effects of subsidies on agricultural products.
2.2 : Theoretical Literature
This study was anchored based on the political based view, technological based view,
economical based view and the social based view.
2.2.1: Political based view
This theory entails that subsidies introduced on agricultural products affect a country's civic and
legislative structure. Agriculture provides about 60% of all employment, and it constitutes the
backbone of most African economies as it is the largest contributor to its GDP. Political based
theory,suggests that Agricultural Input Subsidy Programme increased support for the ruling party
in western province over the two-year study period. This is because majority of the population in
western consisted of small-scale farmers. This result was cohered with those from (Brazus et al
2015) which showed a positive association between subsidy coupon and vote share at
consistency level in kenya. This is due to the increased level of production in the chosen
constituency as it cut down on production cost.
However this theory had weaknesses where there was a sharp contrast from the Mason et Al

12
(2013) which shows that are similar subsidy program in kenya which had no effect on support
for the incumbent party. This may have been due to the fact that the program was targeted
towards existing strongholds.
2.2.2: Economic based view
Subsidizing agricultural products has both positive and negative consequences according to the
journal on the Guardian ,Jason clay (2013).He came to a conclusion that in rapidly developing
countries like kenya, agricultural investment could support innovation and help build stronger
middle-class, feed the hungry and produce surplus for export and pull millions of the rural poor
out of poverty and into better lifestyle. However, such spending should be very targeted and
short-term. The study showed that introduction of subsidies on agricultural products would help
in cutting down of costs on production.
However subsidies may also lead producers to overuse fertilizers or pesticides which may result
in soil degradation, groundwater depletion and other negative environmental impacts. Moreover,
introduction of subsidies has led to price distortion in global commodity markets which affects
the global economy and may lead to national food security and poverty.
Global economic progress requires re-calibration of how we face today's challenges.
can be a blunt instrument that can impede progress and slow economic growth if they are
wielded without precision and a specific cut-off date.
2.2.3: Technological Based View
Modern farms and agricultural operations work differently than those of a few decades ago.
Today technical efficiency has been introduced in order to increase production and to also
decrease the workload needed for production of agricultural products. Technical efficiency
means the capacity of a farm to make efficient use of the existing technology, that is, to either
produce at the maximum level with a given set of inputs or to use the minimum level of inputs
to produce a specific level of output.
Note that the aim of the technical subsidies is to increase production and to support farmers
income.However, these subsidies may have side effects such as decreasing farm technical
efficiency. According to Martin and Page (1983) technological subsidies may reduce farmers

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efforts . Sara, Zilberman and Gill (2008) also found out that other risks may be introduced due to
use of newly-introduced machines which results to technical inefficiency. Generally,
subsidization on technical efficiency may result from an income effect meaning income
stabilization resulting from subsidies may distort farmers incentives to produce efficiently.
2.2.4: Social Based View
Introduction of subsidies on agricultural product supports an increase in production of food
which proves to be beneficial in terms of health and environmental characteristics. Studies have
suggested that reforming agricultural subsidy schemes based on health and climatic changes can
be economically feasible and contribute to transitions towards health and sustainable food
system.
Modern-based analysis suggests that introduction of technological innovation and changes in
farming practices also causes large scale dietary changes and concomitant changes in agricultural
production. This will be needed to achieve healthy diets for growing population while staying
within the environmental limits of food systems.
Subsidization should consider the health of its people in that more forms of subsidies should be
allocated towards healthy foods such as fruits and vegetables rather than unhealthy foods such
as alcohol and even the meat products like red meat. Under environmental analysis the
government should strive to ensure that subsidy is allocated towards technological innovation
should not emit toxic gases such as methane and nitrous oxides.
Therefore there should be repurposing and risk structuring of subsidies towards what is more
beneficial to the society.
2.2.5: Empirical Review
 Dion and Harrowits (2016) did research and came to a conclusion that ruling parties in

African countries got political dominance over a two-year period of study due to the fact

 That they provided subsidies to agricultural products. This was effective since majority of

the population was made up of small-scale farmers.

 According to Brazyl et Al (2015), there was a positive association between subsidy

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 coupon and vote share at constituency-level in kenya. This was due to the fact that there

was increased production and also cut down on costs of production brought about by the

subsidies.

 Mason et Al (2013) however, disagrees with the above findings since a research done in

Zambia shows that the subsidy program had no effect on the support of the incumbent

party.

 Martin and Page (1983) did research and came to a conclusion that technological

subsidies reduced farmers efforts. Serra, Zilberman and Gill (2008) also researched and

found that new technology brought about new risks thus causing technological

inefficiency.

 Jason Clay (2013) researched and found that rapidly developing countries agricultural

investment could support innovation and thus through subsidies there would be an

increase in production of agricultural products.

 Damian Carrington (2021) an environmental editor of the guardian came to the

conclusion that the biggest source of greenhouse emissions such as beef and milk

received the biggest subsidies. These were often produced by large industrialized groups.

This not only affected the environment but also the health of the masses.

2.2.6 :Overview of Literature

From the empirical view it is evident that the different researchers had different views

concerning the allocation of subsidies to agricultural products creating economic

efficiency. This may have been due to the different approaches pertaining to this issue.

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 In conclusion the government should allocate subsidies to agricultural products while

taking into account the effects it had on the environment and the society at large.

CHAPTER THREE
RESEARCH METHODOLOGY

3.1 Introduction
The research techniques that will be applied during the study are covered in this chapter. The
research design, conceptual framework, model specification, working hypothesis, definition and
measurement of variables, data type and source, data collection method, and data analysis will
be the main points of emphasis
3.2 Research Design
This study aims to look into how subsidies affect agricultural products to promote economic
efficiency. The study will make use of information from 2010 to 2015. The goal of the study
was to ascertain how government input subsidy programs affected farmers in the counties of
Kakamega, and Uasin Gishu. To establish stationarity, co-intergretation, and casualty

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correlations between the various variables, data was gathered from a variety of sources and put
through time series property tests.
3.3 Theoretical Foundation and Conceptual Framework
The credit channel theory will serve as the main theoretical underpinning for this investigation.
In both the developed and developing worlds, the credit channel theory (Bougheas, Mizen, and
Yalcin, 2006) is frequently used to explain how changes in the monetary policies of a central
regulating bank affect the flow of money to commercial banks and how the commercial banks
adjust the terms of their credit lending to borrowers. The credit channel theory (Bougheas,
Mizen, and Yalcin, 2006) explains how specific monetary policies adopted by governments can
impact the real economy of a country. Its fundamental tenet is recognition of imperfections
caused by asymmetric information and enforcements of contracts in the credit market.
For instance, a recent study by Black and Rosen (2016) revealed that modifications to the federal
funds' monetary policies in the United States of America had an impact on the supply of loans to
commercial banks, which in turn had an impact on the rate at which the banks lent out their
funds, the repayment period, and the overall accessibility of credit to consumers. According to
Black and Rosen (2016), commercial banks in Chicago reduced the maturity of their loan supply
by 3.3% and the number of loans that were available to borrowers by 8.2% as a result of a small
increase in federal funds of just 1%.According to a study by Archarya et al. (2014) conducted
through the lens of the credit channel theory, commercial banks have a tendency to extend more
credit to 42 borrowers under more lax and risky conditions when they experience increased
liquidity as a result of the regulator's favorable monetary policies.
Additionally, De Fiore and Tristani (2013) explained how credit defaulters may result in a
banking crisis using the credit channel theory. When manufacturers of goods borrow money
from financial institutions to pay for their factors of production, such as labor, and then turn a
profit using the borrowed credit, De Fiore and Tristani (2013) explained, they will deposit some
of the earnings with the financial institutions. These deposits improve the bank's liquidity, which
encourages them to extend the additional liquidity to more borrowers (Duff & Einig, 2015). But
on the other side, if these manufacturers don't earn the anticipated profits with the borrowed
credit, they'll stop making loan payments, which will force the banks to take legal action to get
17
their money back from the defaulters (De Fiore & Tristani, 2013; Duff & Einig, 2015). Such
deposits help the bank become more liquid, which encourages them to extend the additional
liquidity to more loan seekers (Duff & Einig, 2015). However, if such manufacturers don't
generate the anticipated profits from the lent money, they will fail to return the loan, which will
force the banks to take legal action to recoup their losses.
The usage of farm inputs like fertilizers and improved seeds has reportedly expanded in the
agricultural environment thanks to creative financial policies that have helped farmers' access to
inexpensive credit, which has subsequently led to greater food output and revenue (AGRA,
2016). As an example, the Kenyan government worked with AGRA and IFAD to support the
Kilimo Biashara NAAIAP sub-program, which allowed farmers to get credit through Equity
Bank without a guarantee and at interest rates that were lower than the market rates (AGRA,
2011). The farmers were given credit by Equity Bank in order to assist them in purchasing
fertilizer and other crucial farm inputs for raising food output. The credit channel theory was
used as a lens to examine how NAAIAP helped farmers get the credit they needed to buy
fertilizer, which would boost agricultural output and income.
According to numerous studies, where individual farmers choose to apply fertilizers at the
suggested rates, mass fertilizer use at higher rates resulted in increased crop yields, surplus food
production, and food and nutritional security (Government of Kakamega County; 2013; Mutoko
et al., 2014; Nambiro & Okoth, 2013). According to Duflo et al. (2011; 2008) and Jain and Jha
(2015), higher usage of farm inputs such fertilizers, improved seeds, herbicides, and pesticides,
among others, is directly related to the efficiency of agricultural production. The usage of
fertilizers and other agricultural inputs is significantly hampered by the lack of affordable
finance, particularly among resource-poor farmers in Africa (Cabannes, 2012; Duflo et al., 2011;
2008).
Narrow bank lending and large credit channel are two main perspectives on the credit channel
theory (Madestam, 2014). From the perspective of the bank lending channel, monetary policies
like the NAAIAP's Kilimo Biashara have an impact on loanable money that banks can offer to
specific groups of residents, which has an impact on the supply of credit. According to the
hypothesis of the bank lending channel, a country's economy may suffer as a result of increased
18
moral issues brought on by distorted bank interest rates (Archarya et al., 2014; Madestam, 2014;
Jiménez et al., 2012).
Studies in other African countries like Zambia and Malawi showed that government subsidies
are typically plagued with unreliability issues that make fertilizers unavailable to farmers at
planting time. This is despite the fact that government subsidies and bank guarantee schemes
help farmers get around the restriction of credit access to purchase farm inputs (Cabannes,
2012). According to Alkins (2009), there is typically a waste of funds that could have been used
to solve other social issues when governments or non-governmental groups donate money to
financial institutions like banks to subsidize financial loans to a certain population.
Because they don't sufficiently address societal problems, such solutions may not be long-lasting
(Alkins, 2009). According to Harrigan (2008), farmers are discouraged from using fertilizers
because of their high cost, particularly if the rate of return on investment is not favorable. Further
research indicated that if farmers are successful in their farming endeavors, they will be able to
obtain loans from commercial banks (Harrigan, 2008; Jain & Jha, 2015).
3.4 Working Hypothesis
1) In Kakamega County, there is no discernible difference in the rates of fertilizers used between
NAAIAP beneficiaries and non-beneficiaries.
2) In Kakamega County, there is a large disparity in the rates of fertilizers used by NAAIAP
grantees and non-beneficiaries.
3) More maize is being produced as a result of the rising cost of fertilizer.
4) Farmer-friendly procedures are used when purchasing subsidized fertilizer from distribution
centers.
3.7 Data Type and Source
The study will make use of information from 2010 to 2015. The Siaya County Department of
Agriculture, the Journal of Public Policy and Administration, and the Kakamega County
Government will be used to extract the data.
3.8 Data Collection
The secondary sources for the study will be used in a way that guarantees information
consistency.
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3.9 Data Analysis
3.9.1 Inferential Statistics
The weight of the relationship between the government's input subsidy program and maize
production was assessed using a univariate regression analysis.
3.9.2 Regression Analysis
The R2 coefficient of multiple determinants, which represents the percentage of the regress's
variation that can be explained by the corresponding explanatory variables. R2 has a value
between 0 and 1, where 0≤R2≥1. A value of unity indicates that the explanatory factors have
fully explained all of the fluctuations in Y. Additionally, univariate analysis was employed in the
study to evaluate the impact of government input subsidies on maize production in the County of
Uasin-Gishu.

20
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