Political Economy of Agricultural Growth in East Africa: Institutional Quality and Distortion of Agricultural Incentives

Abstract

Agriculture is the main source of livelihoods for a substantial section of the impoverished in East Africa. In this region, many agricultural products lack adequate support and protection. Consequently, although policy reforms are imperative, understanding the prior political economy of agricultural growth is vital for effective future agricultural policy design that enhances agricultural incomes. This study examines the political economy of agricultural growth in East Africa. Specifically, it investigates the effect of institutional quality on agricultural value added, the effect of distortion of agricultural incentives on agricultural value-added, the determinants of the distortion of agricultural incentives, and its welfare effects comparatively. The employed data covers seven East African countries and spans from 1981 to 2020. The datasets were obtained from the World Bank, International Food Policy Research Institute, Food and Agriculture Organization, Mo Ibrahim Foundation, United Nations University World Institute for Development Economics Research, and Centre for Systematic Peace data bases. Both descriptive statistics and econometric models were used for data analyses. The bias corrected least squares dummy variable model was used to analyze the first two specific objectives, while a Prais-Winsten linear regression model with a panel-corrected standard error procedure and the generalized least squares model were used to analyze the third and fourth specific objectives, respectively. The results show that the variable voice and accountability has a significant negative effect on agricultural value-added, while government effectiveness has a significant positive effect. Agricultural incentives had significantly increased agricultural value-added regardless of its types. The results further showed that the progressive performance of the polity index had significantly improved agricultural protection. Similarly, a higher local currency per unit of USD has significantly improved agricultural incentive provisions, while a larger population size in the agricultural sector has significantly reduced aggregate nominal assistance coefficient. Gross fixed capital formation has significantly improved output oriented aggregate agricultural assistance, where the association turns negative when assistances targeting value addition segments were considered. Arable land had negative association with exportable products assistance coefficient and nominal rate of protection. In this region, the distortion of agricultural ix incentives has continued to influence welfare, and the effects vary significantly across countries. Improving sectoral incentives were associated with improvement in the level of income distribution in most countries. In some countries, improved agricultural price incentives had an exacerbating effect on income inequality backed with a number of policy variables including exchange rate. The results generally imply that institutional quality and agricultural incentives have a vital role in the growth of agricultural value-added in East Africa. It also suggests the heterogeneity of factors that contribute to the distortion of agricultural incentives, which depend on the product type and incentives proposed. In this region, stakeholders should thrive to enhance governance effectiveness for a sustained increase of agricultural value-added. A favorable agricultural incentive needs to be a crucial element of agricultural policy revisions. Besides these, given the prevailing democratic institutions in each country, efforts towards improving government effectiveness are vital. Complementing this with a slightly depreciating domestic currency could be helpful to minimize the negative welfare consequences that may arise due to the implementation of agricultural incentive policies.