Report No. 10715-UG

UgandaAgricultural Sector Memorandum(In Three Volumes) Volume I: Executive SummaryMarch 3, 1993

Agriculture and Environment Operations DivisionEastern Africa DepartmentAfrica Region

FOR OFFICIAL USE ONLY

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Report No.: 10715-UG Type: (SEC)Title: AGRI CULTURAL coECTOR MEMORANDUMAut,hor: COATS, JExt. :34190 Room:J10069 Dept. :AF2AG

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UGANDA

AGRICULTURE SECTOR MEIORANDUM

ABBREVIATIONS AND ACRONYMS

AEL Agriculture Enterprises LimitedAfDB African Development BankAPC Agriculture Policy Committee, Government of UgandaAS Ammonium SulphateASAC Agriculture Sector Adjustment CreditASN Ammonium Sulphate NitrateBCGA British Cotton Growers AssociationBOU Bank of UgandaCAN Calcium Ammonium NitrateCBPP Contagious Bovine PleuropneumoniaCDC Commonwealth Development CorporationCMB Coffee Marketing BoardCMBL Coffee Marketing Board LimitedCPI Consumer Price IndexDANIDA Danish International Development AgencyDFCU Development Finance Company of UgandaDRC Domestic Resource CostEEC European Economic CommunityEPADU Export Policy Analysis and Development UnitEPC Export Promotion CouncilFAO Food and Agricultural OrganizationGTZ German Agency for Technical CooperationIDA International Development AssociationIDRC International Development Research CenterIFAD International Fund for Agricultural DevelopmentIFPRI International Food Policy and Research InstituteIMF Inteinational Monetary FundLTC Land Tenure Center, University of WisconsinMAAIF Ministry of Agriculture, Animal Industry & ForestryMCIC Ministry of Commerce, Industry and CooperativesMPED Ministry of Planning and Economic DevelopmentMISR Makerere Institute of Social ResearchNARO National Agricultural Research OrganizationNGO non-governmental organizationNICU National Inputs Coordination UnitNTAE Non Traditional Agricultural ExportsOECD Organization of Economic Cooperation and DevelopmentPTA Preferential Trade AreaSDR Special Drawing RightTAMTECO Toro and Mityana Tea CompanyUCB Uganda Commercial BankUCA Uganda Coooperative AflianceUCDA Uganda Coffee Development AuthorityUDC Uganda Development CooperationUNDP United National Development ProgramUNEP United National Environmental ProgramUSAID United States Agency for International DevelopmentUTGC Uganda Tea Growers CorporationWFP World Food Program

Volume }:EXECUTIVE S

Volume II:PREFACE

I. AGRICULTUIA. SectoralB. Agricult,

AgrAgr

C. Macroeconomi

H. THE RESOURCE BA. Natural Resow

SoilsFarni

B. Land UseCurren,Trends

C. Land UseD. Forests....E. Land Tenure

Current,A Strate

F. The Rural PoConsulFarr

G. Rural Lab.q!:m

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H. RuralWI. RegionalJ. Social Ind

MI. AGRICULTURALA. Governme

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Page No.

B. Farmer Cooperatives .............. ,.,.,,.,,,,,... 51Comparative Advantages .51The Cooperative Societies Statute .52Restructuring Primary Societies . ................................ 53Union Restructuring . ...................................... 53

C. The Rural Financial System .54Current Status . .......................................... 54A Proposal for Reform. 5

D. The Supply of Agricultural Inputs .60Chemical Inputs, Implements and Machinery: Current Status .60Chemical Inputs, Implements and Machinery: A Strategy for Reform .61Draft Power Use and Potential .62

E. Rural Infrastructure .64

IV. SOURCES OF GROWTH .. 66A. Market Prospects for Uganda's Produce .66

Traditional International Markets and Prospects. 66Regional Markets .67Domestic Markets .68

B. Diversificat:on and Expansion of Exports .69Comparative Advantage and Competitiveness .70Supply Response for Agriculture .71Crop Returns .72Coffee .73Cotton .82Tea .92N..iitraditional Agricultural Exports .99Food .104Sugar . 111Livestock and Dairy .114Fish .120

V. AN AGRICULTURAL DEVELOPMENT STRATEGY .124A. Previous Bank Strategy Proposals .124

The 1960 Bank Review and Recommendations .124The Agriculture Sector Memorandum 1984 .125

B. The Macroeconomic Framework ..................... 126C. Government Objectives for the Agricultural Sector .127

ASAC Letter of Development Poliq .127Way Forward I ........ .......... ...................... 127

D. Lessons from this Review .129Growth in Food Production .129Expansion in Area Cultivated .130Competition in Inte.-mational Markets .130

E. Structural Adjustment in Agriculture and Canstraints to Growth .131Agriculture Rehaoilitation Project .131Agriculture Sector Adjustment Credit .131Constraints to Growth .132

Page No.

F. An Agricultural Sector Strategy ................................... 133Development Objectives and Priorities ........ 133Short Term Strategy: An Export Action Plan ........ 135Miedium-Term Agricultural Development Strategy ........ 137

G. Envi;onmental Impact of Agricultural Growth .......................... 145H. The Alleviation of Rural Poverty .................................. 145

VI. IMPLICATIONS FOR PUBLIC EXPENDITURE AND GROWTH PROSPECTS .... .... 147

A. Public Expendi!-ire ........................................ . 147B. Prospects for Growth in Agriculture ................................ 148

Food ....... 149Export Crops ..... . ......................................... 151

Volume HI:

Statistical Annex

MAPS: Rural Population Density (IBRD 24185), Farming Systems (IBRD 24186), Administration andInfrastructure (IBRD 24187), Annual Rainfall (IBRD 24188), and Agricultural Areas (IBRD24189).

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PREFACE

Tbis report is the result uf a collaborative effort between the Government of Ugaida,and the World Bank. The Government team, crganized under the Agricultural PolicyCommittee, was coordinated by Mr. Lawrence Eturu of the Agricultural Secretariat in theBank of Uganda. The collaboration of staff in the various ministries involved in supportingdevelopment in the agriculture sector, led by the Ministry of Agriculture, Animal Industryand Fisheries and the Ministry of Finance and Economic Planning, is gratefiriyacknowledged

This report draw3 on two major Government/Donor reviews of the agricultural sectorundertaken in recent years. The first was the Agricultural Task Force of 1986/87, whichproduced working papers on all aspects of t'ie agricultural economy. The second was theWorking Groups exercise of 1989/90 which produced 10 papers on selected aspects of theagricultural sector, and underpinned the reforms supported under the Agricultural SectorAdjustment Credit (Cr 2190-UG) approved in December 1990. In addition, there have beensector specific studies used in the preparation of IDA operations in the Livestock and Forestrysubsectors.

The report synthesizes the findings of previous studies anl projects, !nd presents avision of opportunities open to Government (and donors) for stimulating sustainableagricultural growth. The analysis uses a careful review of specific cases to make generalizedpolicy recommendations. Firstly the stage is set for the analysis with a brief review ofagricultural growth since independence, and a description of the macroeconomic framework(Section 1). The report then sets the parameters for action, with a description of the naturalresource base and characteristics of rural Uganda (Section II). The analysis of constraints,and hence opportunities for change and progress, is woven into the detailed review ofinstitutions and subsectoral performance. Thus, Section m provides a review of thoseinstitutions: Govermnental, cooperative, financial and private, which interact with the farmingcommunity and through which change can be promoted. Problem areas, and measure neededto overcome these problems are identified for each case. Similarly, in Section IV, the reportgoes through the review of each of the productive subsectors in agriculture. The section islabeled "Sources of Growth", because it looks into the problems affecting each productivesector, identifying constraints, and proposing measures to overcome these problems, andobtain growth. This section begins with an evaluation of export competitiveness and marketpotential. The limits to expansion and profitability are then established for each of the sub-sectors. The detailed review of the "micro" problems affecting each crop and animal product,then leads naturally to Section V, where the problems are categorized, general conclusionsdrawn, and priorities and sequencing established according to Government's developmentpriorities, and the flexibility of the response from each sub-3ector.

The sector strategy provided in Section V is the result of "sifting" the variousmeasures available to Government to stimulate agricultural growth through a "sieve" ofnational priorities. The costs and benefits of the various various policies, rapidity of results,effects on the balance of payments, regional growth, rural poverty, the environment, are thenused to formulate a short term, export oriented stratcgy based primarily on the revival :cotton production. The medium term strategy proposes a series of actions on a broad rangeof production and institutional issues. Effects on the environment, the consequences for thealleviation of rural poverty, and the potential increases in exports which could result from thestrategy (Section VI), are then evaluated.

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The short term strategy advocates continued efforts to regain market share intraditional exports: cotton, coffee and tea. While production margins are very thin, andinternational prices low, out analysis shows that Uganda due to its exceilent naturalconditions, is a low zost producer of these products, and can compete in internationalmarkets, even at depressed prices, if processing and marketing efficiency is restored. Thereis need for a rapid restructuring and liberalization of the cotton ginning and export marketingindustry. In coffee, choice of export routes should be liberalized. In tea, Government shoulddivest itself of parastatal factories and estates, and conclude the Custodian Board reviewprocess, which is keeping a significant number of the estates out of production. Thesechanges would generate significant increases in foreign exchange, and have a broad basedincome generatioli esfect in rural areas.

At the same time, short term measures should be taken to support the process ofexport diversification, which can grow very rapidly, as experience with sesame and fishexports in recent years indicates. Priority should be given to dry goods such as sesame,tobacco, bides and skins, spices and other products which do not rely too heavily onspecialized packaging, critical transportation timing, expensive cooling infrastructure, and acommitment to constant, standardized quality deliveries.

In the medium term, the report argues that a series of measures are needed to supportfiurther diversification in agricultural exports. Development of high value specialized cropexports will increase returns and taxable profits, and stabilize export revenue. Government'srole in developing these new activities should be indirect. Its focus should be on reducingunnecessary regulation, improving transport infrastructure and telecommunications, andsmoothing the responsiveness of the land, labor and financial markets to profitable productionopportunities. In addition, to raise rural incomes and ease the growth in food production,Government should take indirect measures to improve migration into underutilized areas ofgood agricultural potential. Careful management of this process will be needed to minimizeenviromnental costs. Growth in yields is another key element of the agricultural strategy.Many traditional food and cash crops face disease and husbandry problems. Experimentationwith new high value crops will require a high class, responsive research and extensionservice. Continued support for agricultural research and extension services is argued for, asis the need to provide improved monitoring and regulation of the use of natural resources-grazing lands, forests and fish-as population pressures are exacerbated.

AGRICULTURE SECTOR MEMORANDUM FOR UGANDA

EXECUTIVE SUMMARY

Sectoral Background

1. Agriculture is the mainstay of the Ugauldan economy. Eighty-nine percent of thepopulation is rural. The sector accounts for 51 percent of GDP (1991) and over 90 percent ofexports, and employs 80 percent of the employed household population. Agricultural outputcomes almost exclusively from about 2.5 million smallholders--80 percent of whom have less than2 hectares eachl. Only tea and sugar are grown on large estates, which total 40,000 ha. Thepredominance of smallholder farming implies that the benefits from sectoral growth will beequitably distributed. Income per capita in 1990 vas estimated at US$ 140 using the marketexchange rate.

2. Food crop production carries the agricultural sector in Uganda--totaling 71 percent ofagricultural GDP, with livestock products another 17 percent (average 1989-91). Export cropproduction is only 5 percent of agricultural GDP, the fisheries subsector accounts for 4 percent,and forestry for 3 percent. Only one-third of food crop prod.c.ion is marketed, compared withtwo-thirds of livestock production, and all export crop output.

3. Although the agricultural sector has grown rapidly in recent years-achieving a 4.9percent average annual growth rate between 1986 and 1991--this should be seen in the context ofthe past twenty years. Economic development in Uganda since the early 1970s has been hostageto the effects of armed conflicts, the disintegration of public infrastructure and services, thecollapse of Government regulation, and the uncertainties of high inflation and scarcities of foreignexchange. Agricultural output has only recently reached the levels achieved in the late 1970s.Indeed, if the average annual agricultural growth rate of 2.7 percent achieved between 1963 and1978-a rate above the average for sub-Saharan Africa then-had been sustained through 1991,agricultural output would be about 26 percent higher than present levels. A s it was, agriculturaloutput has grown at only 0.9 percent per annum since 1968. Total GDP increased at 0.4 percentper annum in the same period. With population growing at 2.6 percent per annum, GDP percapita has declined markedly.

Lessons From This Review

4. As a prelude to proposing a strategy to support growth in agriculture, this sectionsummarizes the main conclusions of this report, and lists the market and production constraintsthat determine Uganda's alternatives in its drive to promote growth and alleviate poverty.

5. Three main conclusions on the nature of past performance--and the possibilities for futureexpansion emerge from this report: agricultural expansion has resulted from the rapid increase inthe production of food for a resurgent domestic market, the increase in food production hasresulted from expansion in area cultivated, and the international markets for Uganda's traditionalexport crops have become much more competitive than in the early 1970s.

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Growth In Food Produsdion

6. The engine of growth in the 1980s bas been the re-establishment of peace and security,combined with release of the foreign exchange constraint, rehabilitation of key infrastructure, andthe adoption of free-market policies-including the decontrol of food prices and trade. This hasresulted in an expansion in food production as production and marketing costs fell and thepopulation tried to recapture consumption levels of the mid-1970s. Food production has been thelead sector in agriculture, both in 1980-83 and since the advent of the current Government in1986. Trend growth in food production was 3.2 percent per annum for the decade, and 4.8percent per annum since 1986. Since 1986, growth in agricultural demand has been led by theurban demand for food. The rapid rise in urban incomes-and demand-resulted in part from therefurbishment of Industries, services and Government, which was undertaken with high levels ofdonor support.

7. Food has become an attractive cash crop. For fifteen years-with the exception of theearly 1980s and 1991 (Figure 40)-the relative returns c- s -- duction of food versus cash cropshas been above the levels of the early 1970s. Because r & to land is almost universal, wagesneeded to hire labor away from own production have risen as well. The rise of labor costs hassqueezed profit margins on estates. With lower returns to export-crop production, farmers' timedevoted to export crops has declined, affecting yields and quality. The main cash earners forrural families are now food crops or dairy products sold in urban areas, rather than the exportcrops of the 1970s.

8. One consequence of having food as the engine of agricultural growth is the dependence onthe growth in domestic demand for continued impetus. Based on projected population and incomeincreases (para 51) the domestic market is expected to increase at no more than 3 to 4 percent peryear over the next decade. Much of the potential for growth through import substitution in thedairy, sugar, md tobacco subsectors has already been exploited. During 1991 and early 1992, themarkets for " natoke" (banana.-the main foodcrop), milk, sugar, beef, and maize has been soft.And real for d prices have been falling in the last half of the decade, except for a sharp increase in1989. If current levels of growth in the domestic market are to continue, the focus will have tobe on raising rural incomes through technological change and increases in labor productivity,diversifying of export markets, and raising urban incomes through increased import substitutionand processing of local raw materials.

9. Growth in agricultural output slowed considerably in 1990. From increases of 8.7 and6.4 percent in 1988 and 1989, growth dropped to 2.9 and 2.5 percent in 1990 and 1991. Themain cause of the slowdown was slow growth in food crop production, down to 2.5 in 1990 and1.0 percent in 1991 from a high of 7.6 percent in 1989. Export crop GDP actually declinedbetween 1986 and 1990 at -0.8 percent per annum, reflecting poor incentives for coffe6production. A -harp recovery in 1991 brought the average rate of growth in traditional exportcrops since 1986 up to 3.6 percent per annum. In response to the incentives for diversification,fish products grew at 12 percent per year between 1986-91. The drop in growth in the foodsector could have resulted from a several factors: completion of the reoccupation of the cultivatedareas abandoned in the 1970s; the successful substitution for imported foods, such as sugar andmilk; the saturation of the domestic market for food, given income levels; and the slow growth inincomes in nonfood sectors of the economy.

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Table 1: Rural Population and Land Availabilit by District

AreaAvgo Area Required Percent

Region Rural Cultivable Cultivated for 1991 Cultivable Broadand Pop'n Land Agea Density per Person Pop'n Land Usd SoilDistrict 1991 il Kn 1) 2/ 1991 (ha) 3/ (KQ ) in 1991 ClaS

Central

Mpigi 796 4,406 181 0.38 3,025 69% 1Mukono 717 4,061 177 0.38 2,725 67% 1Luwero q08 7,986 51 0.38 1,550 19% nMasaka 747 5,542 135 0.34 2,540 46% nRakai 366 3,500 105 0.34 1.244 36% mMubende 463 8,963 52 0.32 1,482 17% n

Easwtem

Iganga 899 4,489 200 0.328 2,949 66% mJirza 208 619 336 0.328 682 110% nKanuti 473 3,694 128 0.328 1,551 42% mKapohorwa 112 1,064 105 0.386 432 41% aKumi 225 2,454 92 0.787 1,771 72%f mMbalo 645 2,022 319 0.384 2,477 122% nISoroti 384 8,407 46 0.787 3,022 36% HmTororo S/ 842 3,887 217 0.387 3,259 84% m

Northern

Apac 454 4,962 91 0.542 2,461 50% mAnm 598 6,578 91 0.255 1,525 23% mGulu 296 11,321 26 0.533 1,578 14% IVKitgum 340 13,536 25 0.533 1,812 13% IVKotido 181 10,352 17 N/A mLim 471 6,950 68 0.542 2,553 37% UMoroto 158 7,540 21 N/A IVMoyo 168 4,313 39 0.255 428 10% IVNebbi 292 2,689 109 0.255 745 28% n

Wetern

Bundibugyo 116 394 294 0.2 232 59% mBusbenyi 735 3,559 207 0.25 1,838 52% 11Hoima S/ 395 6,633 60 0.316 1,248 19% H/mKabale 5t 598 2,353 254 0.286 1,710 73% WimKabarole 741 7,607 97 0.25 1,853 24% W/mKasese 343 1,478 232 0.2 686 46% nMasindi 275 5,369 51 0.316 869 16% nMbarara 930 9,477 98 0.174 1,618 17% mRukungiri 388 1,391 279 0.286 1,110 80% I/I

Total 14,764 167,596 88 50,973 30%

1/ National Census Figures.V B. W. Langlands, 'Soil Productivity and Land Availability Studies', Makerere 1974.3/ Report on Uganda Census of Agricultum; Langlands, op cit.4/ Langlands: I = Very good; H = Good; m = Moderate; IV - Poor.5/ 1991 Census: Tororo + Pallisa, Hoimna + Kibale, Kabale + Kisoro

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Expansion of Area Cultivated

10. Agricultural growth this decade has been due to an expansion In cultivated area, ratherthan an Increase in yields. The area under cultivation-4.6 million ha-is still below the level ofthe late 1970s. Food crop cultivation, at 4.3 million ha, is at the levels of the early 1970s.Cashcrop cultivation-at 0.3 million ha, due to the decline of cotton-is less than half the level of the1960s. Agricultural lau.d, while not limiting growth for the country as a whole, is a constraint incertain, high-potential, high-population regions in the Southwest and Northeast (table 1). There isa gradual inter-regional migration, from the most densely populated areas to less-populatedregions of good potential. Reestablishing peace north of Lake Kyoga will make largeunderutilized areas available for cuiltivation. The area cuTrently under cultivation, while utilizingthe regions of hI'ghest potential, is still l1 ss than 30 percent of potentially cultivable areas.

Competition in International Markets

11. There has been a sea change in the internatlonal prices of Uganda's traditional exportcrops: coffee, tea, and cotton face much lower prices in real terms now than in the early 1970's.Prospects for trend improvements ar limited. ;3fits and rents from these crops, most of whichwere captured by Government, have been severely reduced to keep the country competitive ininternational markets. Successful international competition now requires continued increases inthe efficiency of export production and processing, with little margin for taxation. Uganda, dueto its excellent agricultural resources, is a low-cost producer in these three crops and withimproved efficiency in the processing industries can expect to profitably sell all it can produce.

12. The regional market for food, especially maize and beans, can be expected to increase.Uganda's landlocked status and reliable rainfall provide it with the opportunity to supply foodcheaply to several of neighbors-one of whom, in any given year, can be expected to beundergoing a drought. Growth in this market depends however, on the annual food importrequirements of a client country in a given poor agricultural year, and may not go beyond300,000 to 400,000 tons of food per year.

Structural Adjustment in Agriculture and Constraints to Growth

Agriculture Rehabilitation Project

13. Government's efforts to reform the production and marketing arrangements in agriculturesince 1980 have received support from two IDA funded projects supporting sectoral adjustment:a) the Agriculture Rehabilitation Project (ARP) Cr 1328-UG of February 1983, and b) theAgriculture Sector Adjustment Credit, (ASAC), Cr 2190-UG of Decemb.r 1990. Under the ARPthe physical rehabilitation of export processing facilities in the cotton, coffee and tea sectors wassuccessfully financed. No provision had been made for supporting operational reforms, however,ane l ot all of the facilities have been used profitably. The ARP also financed a large share ofagri.altural imports between 1983 and 1992, when it closed. Perhaps the mo,: importantcontribution was support for the newly established Interministerial Agricultural Policy Committeeand its executive arm, the Agricultural Secretariat in the Bank of Ug? ida. Through this structure,Government kept in touch with production and incentives problems facing farms and processingindustries and was able to implement ARP conditionality which required that farmgate prices forexport crops be adjusted to maintain production incentives. While still administered by

Government, prices and margins for export crop purchase and processing were adjusted upwardsduring the early 1980s to maintain production and export incentives within a monopolistic, statecontrolled system. There was some response in the coffee, tea, cotton, and tobacco sectors,subsequently dampened by security problems in the mid 1980s, the collapse of internationalmarkets (Figure 6), and a decline in real farmgate prices.

Agriculture Sector Adjustnent Credit

14. ASAC was designed in 1990 to address the salient issues in adjustment of agriculture andtheir macroeconomic ramifications. ASAC's main focus was to control credit expansion for cropfinance and imsprove export marketing efficiency and production incentives for coffee - which in1990 provided over 90 percent of export revenue. Its share has since declined, due to the growthin non-traditional exports, and the drop In coffee prices. In addition, funds were provided toimprove policy making in the ag.icultural sector and strengthen agricultural research andextension capacity. The project has been successful and provides a model for how to proceed inthe liberalization of other export crop marketing systems. Government has gone beyond theconditionality set forth in the operation in order to achieve the agreed objectives. Control ofcredit expansion to finance the purchase of the coffee crop, the largest single source of demandfor funds in the financial system (Figure 9), has been achieved by shifting the responsibility forproviding this credit to the commercial banks, thus removing the Bank of Uganda from itsposition as financier of last resort and improving Government's capacity to monitor developmentsin the subsector. Inflation declined from around 240 percent per annum in FY 1988 to around 30percent in FY 1990 (Main Report, para 5.11). Coffee exports have been maintained in a time ofdeclining world prices (Figure 29) by improving processing efficiency and farmgate productionincentives. First, this was achieved through the promotion of competition. The monopolycontrol on exports held by CMB was dismantled. Participation by cooperative unions and privatesector expor=rs was promoted. Government-imposed farmgate prices and marketing marginshave been discontinued. The farmgate price of coffee, which had been declining in real termssince 1986, rose in May 1991 (Figure 10) when Government set the procurement price for thelast time. Since then the market determined price for coffee at the farmgate has been marketdetermined, and has fallen from its May 1991 level. CMB's regulatory functions were shifted toa separate Uganda Coffee Development Authority (Main Report paras 4.294.56). Second,Government has significant;y reduced its tax on coffee exports. At present coffee exportearnings are converted at the market rate of exchange, and the tax rate-having dropped to a flat 5percent on export value in late 1991-is now zero. In addition to conditionality on coffeemarketing and rural credit policy, ASAC is strengthening Government's policy formulatiuncapacity for agriculture with technical assistance and training in the three main Ministries:MAAIF, MCIC and MPED. The Agricultural Secretariat, the locus for policy analysis inagriculture, continues to be assisted, although its role has shifted from administration of exportprices and margins towards monitoring of product and inputs markets and prices, and providinganalytical support for further adjustment and regulatory initiatives of Government. Agriculturalresearch and extension are scheduled to receive long term support under two IDA fundedprojects, recently appraised, prepared with resources provided under ASAC. Also, ASACprovides support for the promulgation of a new Land Law which would extend freehold tenure.ASAC has addressed the first tier of constraints to agricultural growth. There is still an agendafor adjustment in agriculture, which is discussed below.

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Constraints to Growth

15. Growth in agriculture in Uganda has been hampered during the 1980s by a series ofstructural constraints related to: (i) Government control of food and export crop marketing andpricing which inhibited incentives to improve the quality and quantity of output in the farm andfactory; (ii) ir-"'ecuate transportation infrastructure and shortage of vehicles; (iii) shortages offoreign exchange, and high and unpredictable inflation; and (iv) physical insecurity. In addition,agricultural growth has been held back by a series of institutional factors which include: (v)ineffective Government research and extension services; and (vi) segmented, inefficient anddiscriminatory markets for capital, labor, and agricultural inputs. The effects of the abovementioned constraints on the development of each subsector are described, by institution and bycrop, in Sections III and IV of the Main Report.

16. Over the past six years, many of the structural constraints to growth in agriculture listedabove have been removed. As the sectoral analysis undertaken in the Main Report indicates,since 1986 growth in the agricultural sector has been due, at different times, to: (i) the re-establishment of peace and security in the Center, South and West, which resulted mainly inincreases in cultivated area under food; (ii) the decontrol of food marketing; (ii) improvements intransportation infrastructure between food producing areas and Kampala; (iv) rehabilitation ofproduction and processing capacity for estate-based cash crops (tea, sugar); (v) decontrol of coffeeprocessing and export marketing-which prevented serious declines in output, and (vi) theestablishment of an open market in foreign exchange, which has provided an incentive for thedevelopment of non-traditional agricultural exports. The effects of the structural changes in theframework for agricultural growth undertaken over the past 6 years will continue to workthemselves out during the 1990's. Increased competition in the coffee industry should result inimproved processing and export marketing efficiency. Open markets in foreign exchange willresult in investment export oriented industries. The rehabilitation of the tea sector will proceedslowly, helped by the resolution of Custodian Board cases.

17. There is still an agenda for structural change in agriculture. Rapid increases in output inthe cotton sector should result from changes in ownership and the introduction of more efficientmanagement, improved access to credit, and increased competition amongst ginneries and exportmarketing agents. Adjustment in the cotton sector will be fairly complex and cumbersomehowever, given the dispersed location and ownership of ginneries, and the significant changes inownership, management and finances involved. In tea, half of the gardens and many factorieshave yet to be rehabilitated. However, this is contingent on progress in the divestiture ofGovernment-owned enterprises, the resolution of ownership claims for tea estates held by theCustodian Board, and the restructuring of factory ownership and management in the smallholdertea sector.

18. The quickest gains from structural change have already been captured. The constraints toeconomic growth now facing the agricultural economy are not so easily dealt with. This point hasalready been made for food (para 9). Continued growth in agriculture will have to come fromjoint improvements in: (i) technology generation and dissemination; (ii) the responsiveness of thecapital market, and the availability of long term finance; (iii) access and infrastructure to hithertounder-utilized areas; (iv) the re-establishment of peace and security North of Lake Kyoga; (v) thefluidity of the labor market; and (vi) tenure security, and the establishment of freehold tenure.The gradual release of constraints to growth in these areas will result from improvements in the

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effectiveness of Government in the provision of essential public goods and establishing indirectregulatory mechanisms. All these efforts require a long term commitment to slow, steady change.

An Agriculture Sector Strategy

Development Objectives and Priorities

19. In designing a development strategy for agriculture, priorities in the use of scarcefinancial and managerial resources should be set. The Government's objectives in stimulatinggrowth in the agricultural sector are to meet the country's food requirements, generate foreignexchange, and improve living standards (Main Report, paras 5.13-5.14). Rapid growth in thefood sector since 1986 has returned the country to food self sufficiency and brought about a broadbased increase in rural incomes. The most fragile aspect of the recovery program in Ugandanow is the lack of response in exports-which must grow in value in the next few years ifeconomic growth is to be sustained. The capacity to finance imports has declined sharply due tothe drop in coffee prices. Imports in 1990 were 3.5 times export revenue (Main Report, para1.21). The availability of concessional donor funding to continue to bridge this gap is unlikely tobe sustained at current levels,1/ and additional private sector finance is practically unavailable.

20. The strategy to be followed must also acknowledge that the nature of agricultural growthwill have to change over the next ten years. The lead will have to shift, from food productionfor the domestic market, to production of raw materials for processing and/or direct e.xport.Over the past 6 years improvements in physical security in rural areas, reductions :'- --conomicuncertainty and inflation, increased availability of foreign exchange, and reductions in transportcosts have driven the increases in agricultural GDP. The most responsive secto- was foodproduction, for the market and for own consumption, where marketing and pricing controls hadbeen removed early on. Food production, excluding livestock, grew at 5.9 percent per annumbetween 1986 and 1990. Growth in export crop production languished due to continuedGovernmental interference, depressed world markets, and financial and managerial weaknesses inthe marketing and processing industries.

21. The scope for continued rapid growth in food production will be limited in future, due toits dependence on the size of the domestic market. Growth in domestic demand for food will beconstrained to the increase in population, and increases in per capita income induced by expansionin urban based industries and services, and revitalized agricultural exports, the new leadsubsector. If these factors produce a growth rate of 1.5 percent per annum in per capita income,then the demand for food is likely to be in the order of 3 to 4.5 percent per annum, in order toalso cater for population growth (Main Report paras 4.13-4.16). Projections on this and othervariables are developed in Section VI of the Main Report.

22. In light of these imperatives, the report argues for a two pronged agriculturaldevelopment strategy. In the short term, the agenda for adjustment and investment shouldcontinue to focus on increasing agricultural exports in traditional cash crops as rapidly aspossible, while seeking diversification amongst the least investment-intensive non-traditional

/1 Mr. F.X. Colaco, Director, Eastem Africa Depariment, assessing the outcome of the Annual Meetings of September1992 at Departmental Meeting of September 25, 1992.

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agricultural exports. This will provide for a new source of growth in the sector, not limited toexpansion of the internal market, and will address one of the key macroeconomic disequilibria andconstraints to sustainable growth. In the medium term, deeper measures should be taken todiversify agricultural exports, improve technology generation and dissemination in the sector, andreduce transactions costs, entry barriers and market failures in the land, labor and capital marketsas described below.

23. The short term strategy advocates continued efforts to regain market share in traditionalexports: cotton, coffee and tea. While production margins are very tcin, and international priceslow, our analysis shows that Uganda due to its excellent natural conditions, is a low cost producerof these products, and can compete in international markets, even at depressed prices, ifprocessing and marketing efficiency is restored (Main Report, paras 4.184.21). There is needfor a rapid restructuring and liberalizati: A of the cotton ginning and export marketing industry.In cohi,e, choice of export routes shouh; be liberalized. In tea, Government should divest itselfof parastatal factories and estates, and conclude the Custodian Board review process, which iskeeping a significant number of the estates out of production. These changes would generatesignificant increases in foreign exchange, and have a broad based income generation effect inrural areas.

24. At the same time, short term measures should be taken to support the process of exportdiversification, which can grow very rapidly, as experience with sesame and fish exports in recentyears indicates. Priority should be given to dry goods such as sesame, tobacco, hides and skins,spices and other products which do not rely too heavily on specialized packaging, criticaltransportation timing, expensive cooling infrastructure, and a commitment to constant,standardized quality deliveries. While the contribution to agriculture GDP from these crops issmall (under 5 percent) their contribution to exports has been rising rapidly, and reached 20percent in 1990, with the collapse in the price of coffee.

25. In the medium term, the report argues that a series of measures are needed to supportfurther diversification in agricultural exports. Development of high value specialized cropexports will increase returns and taxable profits, and stabilize export revenue. Government'srole in developing these new activities should be indirect. Its focus should be on reducingunnecessary regulation, improving transport infrastructure and telecommunications, and smoothingthe responsiveness of the land, labor and financial markets to profitable production opportunities.In addition, to raise rural incomes and ease the growth in food production, Government shouldtake indirect measures to improve migration into underutilized areas of good agriculturalpotential. This will reduce the hunger for land in the densely populated districts of the Southwestand the Northeast, and permit labor augmenting technology to be used, increasing output perperson. Careful management of this process will be needed to minimize environmental costs.Growth in yields is another key element of the agricultural strategy. Many traditional food andcash crops face disease and husbandry problems. Experimentation with new high value crops willrequire a high class, responsive research and extension service. Continued support foragricultural research and extension services is argued for, as is the need to provide improvedmonitoring and regulation of the use of natural resources -grazing lands, forests and fish - aspopulation pressures are exacerbated.

26. The growth strategy advocated in this report should take place within bounds set byacceptable levels of environmental impact. self determination and equity. The approach utilizedin promoting growth should lead to sustainable use of natural resources, enable local communitiesto participate and direct the development process, and provide the largest number of employment

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opportunities possible to the rural poor. Uninhibited pursuit of a strategy to expand cultivatedarea could result in the mining of poor soils and the devastation of natural vegetation withoutproviding a base for sustained increase in crop or livestock agriculture. Under the proposedstrategy, policies which lead to increased internal migration should take into consideration therights of the residents of the receiving areas, as well as the difficulties of adjustment faced byboth incoming as well as resident families. Decisions on how production-processing-marketingrelationships are structured, and the use of smallholder outgrower production schemes, can havebroad beneficial effects. Prevention of concentration of land ownership through judiciousmanagement of titling and tenure of public lands will also benefit the rural poor. The effects ofthe proposed strategy on the alleviation of rural poverty, and the development of sustainablefarming systems and participatory production relationships are noted below (paras 59 and 60),following the description of the growth strategy.

Short Term Strategy: An Export Action Plan

27. Coffee. With coffee exports 80 to 100 percent of annual exports in the past fifteen years,it has been the clear initial target for improvements. As described in Main Report paras 4.29-4.56, and para 14 above, over the past two years there have been a series of radical reforms inthe structure of the domestic coffee processing and export business-opening the industry tocompetition, reducing governmental control, and taxation. The policy reforms have gone as faras was necessary to set the stage for a competitive, aggressive attempt to win back some of thecountry's share of the world coffee market. No furer basic changes in export policy in thecoffee sector should be made for at least three ye_ars While continuing evaluation of theeffectiveness of current policies should continue, the industry should be allowed to adjust to themarket-oriented framework established to date. With a no tax, and exports converted at thebureau exchange rate, there are strong incentives for exporters to raise quality and volume asmuch as possible. It will take time for the incentives to raise export output and quality-to filterback through the processing industry to the producers. There is, however, one area where actionin the short term will significantly improve export incentives, and reduce uncertainty:

- Coffee exporters should be allowed to select the most competitive export channeland route (road or rail), and export inspections and customs procedures should bestreamlined to reduce wasted time-and resulting cost increases.

28. Cotton. The third largest export earner (after sesame seed) in 1990-91, cotton should bethe focus of the Government's efforts to raise export earnings. The reasons are compelling.

* At market-based prices and reasonable levels of ginning efficiency-well abovecurrent levels-even low-input, low-output cotton production as practiced inUganda is profitable;

* An important constraint to increased efficiency and growth in the sector is the lackof competition in ginning and export marketing. This can be solved with changesin policy, adjustments in laws and regulations, and assistance in rationalizingginnery ownership, now held entirely by cooperative unions of which many areinsolvent;

* The production response from farmers is expected to be rapid. In spite of theunsat.sfactory system of cotton purchases and payment now in place-with

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routinely long delays-some 70,000 ha were planted in 1991. When payment isadequate and prompt, the incentives for increased production should be strong;

* The regions north of Lake Kyoga, where cotton has traditionally been grown, arenot as severely affected by security problems as they were one or two years ago,and the situation is improving,

* Capital has already been invested in a partial refurbishing of nominal ginningcapacity, which far exceeds current output;

* The three key ingredients to improving operations in the cotton sector-workingcapital finance, managerial and technical skills-can be provided by privateentrepreneurs, without additional Governmental involvement, once it is clear that astable policy based on freely convertible export earnings and a competitive ginningand export marketing environment is put in place.

29. The steps necessary to revitalize the cotton sector include:

* The re-establishment of peace and security in production regions North of LakeKyoga;

* The revocation of the Lint Marketing Board's monopoly on cotton exports, andother restrictive provisions of the LMB Act,

* The revocation of area monopsony power provided to cooperatives in the purchiaseof seed cotton, and other restrictive provisions of the Cotton Act,

* Provision of assistance to cooperat;ve unions to enable them to solve financial andmanagerial constraints, and increase use of their ginaing facilities. Sale, leaseand/or management contracts with viable private sector entities are envisaged;

* The establishment of a cotton development authority, funded by a small cess-lessthan 1 percent-on cotton exports, to assure quality standards, to promote theindustry at home and abroad, and to fund research and extension once industryprofitability has been established.

30. Tea. Whereas the estate sector has by and large been privatized, there remains thequestion of the tea estates and factories of the Government owned Agriculture Enterprises Ltd(AEL). These estates are inefficiently run at well under capacity. Privatization of their operationswould permit these resources to be brought back into operation, with gains in employment andforeign exchange to the country.

* The Government should divest itself of AEL holdings in the tea sector as soon asprivate sector buyers with capacity to make full and profitable use of the assetshave been identified.

31. Nontraditional Agricultural Exports. The other area for immediate attention, andwhere the production response can be rapid, is in nontraditional agricultural exports. Growth canbe rapid, as the evolution from 1989 through 1992 showed when NTAEs jumped from US$2.1million to US$23.8 million in 1990 to US$ 42.6 million in 1991. The most important products

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include sesame seed, beans, maize, other cereals, hides and skins, fish, and fruit and vegeta.bles.This rapid growth must be supported. But markets for these products are small and volatile. Themeasures to foster this type of growth are indirect, and focus on the need to improve thereliability and efficiency of export channels, and facilitate access to term finance. Support fromMAAIF and NARO on resolution of production problems for !ittle known crops of high potential(spices, silk) is also needed. Priority measures would include:

* Review of the functions of the Export Policy Analysis and Development Unit. theExport Promotion Council and the Investment Authority, to harmonize their policymaking, promotional and regulatory activities, and simplify the array of reviewand approval procedures faced by potential investors and entrepreneurs. Theseagencies should jointly develop a plan to address potential constraints to newinvestors in Uganda: improve export facilities, including regular air freightavailability to Europe, reduce license and approval procedures, provide specializedcommunication services, and provide specialized export processing and storageinfrastructure, targeted at key industries.

* Design of a mechanism to improve the availability of local and foreign funding toqualified investors. While the financial sector is under adjustment, the need forexports in the short term may justify the creation of a dedicated line of credit, orthe establishment of an organization capable of providing ventlire capital financeand reducing the business risk to investors with likely new projects.

Medium-Term Agricultural Development Strategy

32. The medium-term strategy outlines Government's role in inducing structural change andinvestment in agriculture until the turn of the century. The framework for the strategy cites theneed for Government intervention in three main areas: (a) improving incentives for agriculturalproduction and processing, (b) improving the efficiency of the land, labor, and capital markets,and (c) inducing technological change through improvements in agricultural research andextension, and strengthening management of natural resources. Recommendations, which areprovided by crop or institution, synthesis the most important of the detailed recommendationscontained in Section IV.

33. Incentive Framework. Government administration of prices and processing andmarketing margins in the agricultural sector has been almost completely discontinued. Onlycotton, tobacco, cocoa and tea continue to have farmgate prices set by flat. Governmentintervention in the sector will be justified to: (a) take direct or indirect measures to increaseefficiency in processing, mainly through the promotion of competition, and (b) enter the marketon the side of the producer in cases where processing industries exercise monopsony control oncrop purchase prices. The cotton, tea and sugar subsectors are cases in point. Theimplementation of these measures is very dependant on accurately designed policies and programswhich achieve desired objectives without diminishing production and investment incentives.

34. The key entity in the formulation of Goverrnent policy in the sector is the AgriculturePolicy Committee, which brings together the top civil servants in the Agriculture, Finance andEconomic Planning, Commerce and related ministries, the Bank of Uganda and the UgandaCommercial Bank. Much effort has been made in recent years (under ARP, ASAC and variousdonor funded Technical Assistance projects) to develop Government's policy analysis andformulation capacity. The agriculture planning departments in the MAAIF, MCIC and MFEP

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have all received support, as has the Agricultural Secretariat of the Bank of Uganda, the executivearm of the Agriculture Policy Committee. The system has worked well to date. Many of themajor reforms liberalizing marketing, processing and exports have been successfully carried outunder this structure. The system has now to be redesigned to play a role in the more indirectmanagement appropriate in a market based economy. A Task Force constituted under the APChas addressed the question of planning and policy formulation for the agricultural sector. 2/Points made in this report include the need to:

* Establish comprehensive and reliable sources of regular data on product and factorprices across the country;

* Strengthen policy analysis and strategic thinking in the Ministry of Agriculture,Animal Industry and Fisheries, to enable it to lead in the formulation of sectoraldevelopment policy;

* Consolidate the interministerial planning framework for annual budgeting anwpublic investment program review in the agricultural sector, under the leadershipof MFEP;

* Encourage producers and agro-industries to organize their own associations torepresent their points of view before the policy makers. Such associations shouldbe encouraged to "self regulate' their industry in their own interest;

3 Maintain, for the present, the use of an Agricultural Policy Committee for theformulation of agricultural development policy, with the Agricultural Secretariat asan executive arm. This system is flexible and efficient and has proven well able tobring about consensus and produce results to date.

35. In the coffee industry, competition is developing in export processing and marketingfollowing the recent structural adjustment process (para 14). The recent Cabinet decisions freeingproducer prices and processing and marketing margins to market forces, and allowing exporters toconvert coffee export proceeds at the bureau exchange rate should fundamentally improve theincentive environment in the industry, assure fair competition between cooperatives and private-sector operators, and improve the responsiveness of the coffee industry to international conditions.In addition to the recommendations made for the short term plan, the report notes that:

* Coffee sector incentive policies, on pricing, taxation and licensing should bestabilized for at least three years, to allow the industry to adjust to the new rules.Monitoring of industry parameters should be constant, to permit a Governmentresponse to unpredictable destabilising events;

* Measures should be designed and enforced by UCDA to prevent collusion andmaintain competition among coffee processors and exporters,

* Privatization of the Coffee Marketing Board Limited should be completed, withownership st --s gradually sold off to the private sector,

2/ Goverment of Uganda, APC, Progsmme for Strengthening Agiulul Sector PHannig (PASP)W, Rpont of theTask Force on Agdculaue Sector Planning, Kampa. lauy 1922.

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° Alternative export sale procedures should be assessed-including an auction-tomaximize medium-term export revenue, establish a fair basis for tax assessment,provide an open, fair pricing process, and encourage buyer commitment to theUgandan product.

36. Measures to revitalize the processing side of the coton industr have been spelled out inthe short term plan. In the medium term. attention should be given to the production side.Cotton yields and acreage will respond to the efforts made to strengthen the inputs supply market,the rural financial market and to improve the responsiveness and relevance of Government'sagricultural research and extension services. A resurgence of oxen based ploughing andcultivation will occur when the security situation in the Teso, Lango and Acholi areas improvessufficiently for farmers to hold animals without fear of rustlers. In addLon, particular attentionshould be given to:

* Assistance in restocking with animals for draft powered land preparation andcultivation;

* Refinement and improvement of the cotton seed varieties by agroecological area.Previously adapted varieties have been mixed.

37. In the X industry, to improve processing efficiency and increase output in estate andUTGC factories, the following measures are recommended, in addition to those noted under theshort term plan:

* For the UTGC and its factories, reform should follow the plan outlined by theproposed EEC project, whereby factory management is separated from theextension and overhead-support functions ef UTGC, and put in the hands of aprofessional management concern, and factories are eventually sold off to thefarmers who use them;

* Retention accounts for foreign exchange earned from tea exports should bebrought under strict supervision of the Bank of Uganda, and gradually phased outin favor of the open market in foreign exchange;

* UTGC's monopoly over procurement of green leaf should be removed. Factoriesshould be encouraged to enter directly into contracts with outgrowers, whichinclude leaf collection, input supply, and credit recovery. UTGC should play therole of "buyer of last resort" in order to maintain an equitable farmgate greenleafprice;

* Deliberations by the Custodian Board on ownership of private sector tea estatesshould be concluded, under the framework provided by the IDA-funded StructuralAdjustment Credit, and incentives provided for the rapid rehabilitation of privatelyowned factories and gardens,

38. In the suga industry, incentives for domestic production-with freely determined domesticmarket prices and competing privately owned producers-will be determined by trade policy.While the sugar industry is being rehabilitated-which may last another five years-competitionfrom imports should be regulated through tariffs to permit the sugar producers to realize prices of

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more than US$400 per ton needed to permit profitable factory operation and self-financing of therehabilitation works.

39. Product- and Factor-Market EMcincy and Infrastructure. Government influence onthe functioning of markets supporting agricultural growth will, for the most part, be indirect. Thekey indirect instruments will be reforms in the financial market, a retreat from the inputs market,and investments in transportation and communication infrastructure, as discussed below. Directintervention and change will need to be fostered amongst farmer cooperatives and in landmarkets.

40. The major player in rural factor and product markets in Uganda over the past twentyyears has been the farmer cooperative network. The existence of this network, its infrastructure,and the loyalty of its customers, means that rural cooperatives and their unions can continue toplay an important role. Increased liberalization in rural trade and processing means, however,that these organizations will have to compete with other private sector entrants. Steps should betaken to assist cooperatives to emerge from their protected environment and take advantage oftrade and processing opportunities. In this regard:

3 Market protection for cooperatives should be reduced to force competition withprivate enterprises. At the same time, special social taxes and obligations imposedon cooperatives should be reviewed to avoid raising operating costs and placingcooperatives at a competitive disadvantage;

- Legislation governing the democratic operation of cooperatives should be used byRegistrar to make the management cadres of primary societies and their unionsmore responsive to the majorities in the membership. At the same time, theRegistrar's powers of direct intervention in the cooperative system should bediminished;

* Technical assistance in finance and management will be needed in the cooperativesystem to assist in the rationalization and divestiture of businesses, the negotiationof joint ventures with private entrepreneurs (especially in cotton), and theimprovement of operating efficiency and profitability. Subsidies on this technicalassistance may be needed in its initial phases to achieve the necessary restructuringof these entities;

41. The market for agricultural inputs is distorted by Govermnent participation, and by thedifficulties of operating an import-based business in a rapidly changing macroeconomicenvironment. Steps should be taken to reduce market distortions and improve industryresponsiveness by having:

* MAAIF withdraw from the physical distribution and sale of agricultural inputs.Donated fertilizer should be made available at commercial prices ex Kampala tothe private trade for sale to farmers,

* Inputs-including donations of fertilizer-made available through donor fundedagricultural piojects should be sold by the Government through auctions, or inways that will develop the private trade.

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* MkAIF should to identify and promote the importing of products which,consistent with agronomic requirements of variou s soils and crops, can provide therequired nutrients or active ingredients at minimum cost to the country and thefarmer.

42. The development of rural financial marketS will have to follow on the measures beingtaken under the recently appraised Financial Sector Adjustment Credit (FSAC), proposed for IDAsupport. In addition to reestablishing confidence in the financial system and improving prudentialcapabilities of the Bank of Uganda, the following measures advocated under FSAC shouldimprove the responsivenes of rural financial markets:

Restructuring and recapitalizing the Cooperative Bank and the Uganda CommercialBank-both of which have wide rural branch networks that can mobilize ruralsavings and supply finance to rural enterprises. Effective use of the branchnetwork will depend on the development of a "branch orientation" in thecommercial financial system which emphasizes the development of a lendingrelationsLip, and a deposit-taking relationship with customers. Branch managersshould be encouraged (within the bounds of prudence) to identify and encouragelocal business development.

* Restructuring the development finance institutions. The supply of medium-termfinance is crucial in the modernization of agroprocessing infrastructure.

e Maintenance of positive savings and lending rates leading toward a freely floatingsystem.

e Continued testing of innovative approaches to market-based rural lending andsaving. These pilot approaches should combine group-based savings and lendingschemes with crop marketing and production ffnance, while targeting programs toneedy areas, the rural poor, and rural women, in an attempt to ise informal-finance methods to create sustainable village-level financial contracts andorganizations. Such community-based pilot schemes should interact effectivelywith the 'informal' financial network, make it more liquid, and link it moreclosely to commercial finance.

43. The operation of land markets is a delicate area, confused by the existence of a reformdecree passed in 1975, whose provisions have been only partly implemented. The approachproposed in this report is to:

* Focus tenure-related efforts on the mechanisms for the resolution of tenure-relateddisputes in the short term. The land market appears to work well in most areas,under traditional tenure systems.

* Regulate access to hitherto unoccupied-or underdeveloped-areas and public landsin ways which foster smallholder occupancy and ownership by persons committedto making the land produce. Speculative concentration of land holding in publiclands and unoccupied areas should be avoided. Supportive treatment forsmallholder immigrants, and extension of squatters rights where appropriate,should be provided.

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* After sufficient national discussion to obtain broad agreement, new land legislationshould be passed which would re-stablish freehold tenure. Mailo I/ tenantsholdings would be separated from the mailo estate and vested in the LandCommission in freehold. The Commission may then grant this freehold to themailo tenant. The rights of customary tenants on public lands would be restored,and tenants permitted to obtain freehold tenure. Freehold tenure will reduce theland-related barriers to migration by labor and small farmers which are inherent inmany customary tenure systems.

* Once agreement on the new land legislation and regulation has been reached, theLand Offlces through which the legislation will be implemented should bestrengthened.

44. Whether there are obstacles to the functionina, of the rural labor market is not clear.Cursory observation indicates that it functions fairly well and that labor responds predictably toemployment opportunities around the country by migrating when the expected returns outweighremuneration from local jobs and the costs of moving. The absence of migrant workers ofRwandan origin since the early 1980s has affected production relationships and wages for exportcrop production in estates and on smallholder farms. Migration of poorer farmers from the land-poor Southwest to the western and central areas continues. Mi,,rants often work on existing farmswhile struggling to establish their own holdings-especially in the West. When the returns to foodproduction improved in the latter half of the 1980s, the flow of migrant labor diminished. Theflow of labor into urban areas has only gradually started again. Urban incomes are, on average,69 percent higher than in rural Uganda, and rural areas have grown at 5.9 percent per annum,above the national average growth rate of 2.5 percent. Further work is needed to identify laborflows, the nature of the work contract, the influence of customary tenure arrangements indifferent regions, and ways Government can influence the efficiency of this market. The locationof improvements in schools, hospitals, and rural feeder and access roads combined with improvedaccess to land and tenure security under a freehold system can facilitate the flow of families fromoverpopulated areas into areas of labor shortage, where land is still available for smallholder use.

45. The role of Government in developing strategically placed al in ctur cannot beoveremphasized. The efficiency of all the markets discussed above depends on the availability ofreliable, low-cost transport and effective power and communications networks. Rural feeder andaccess roads play a vital role in determining whether and how a region is developed. Thelocation and design of rural infrastructure can determine whether development of an area isenvironmentally benign. The availability of health and schooling facilities seriously affectspopulation movements, and the human costs of migration and development. For this reason, thisreport recommends:

* Planning of rural infrastructure-roads, schools, and health care facilities-shouldbe closely coordinated with agricultural development expectations, andenvironmental degradation considerations in regional and district-leveldevelopment plans. Such plans, which could be developed with full communityparticipation as part of the 'decentralization to the districts' initiative, wouldsmooth the flow of labor to areas of opportunity. The negotiation of these 'zoning

I/ Mailo refen to frehold tonancies etblished in th BugWa rgion In the edy 1900I.

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plans" would crystalize the tradeoffs between environmental preservation andeconomic growth;

* Rural infrastructure development should be planned-and executed-with the fullknowledge and cooperation of the communities affected. Such communitiesshould be encouraged to participate in operation, maintenance, and rehabilitationof this infrastructure.

46. Research and Extension Services and Natural Resource Management. Research Isvital to the development strategy identified for the agricultural sector. Although expansion ofcultivated areas Is expected to continue in the medium-term, technological change will play anincreasingly important role in agricultural growth. For resource-poor smallholder farmers facedwith limited cropping alternatives, technological change, embodied in higher-yielding-or disease-resistant-seed or planting stock, a chemical, or a husbandry technique, can provide one of the fewaffordable means of raising Incomes. Government is moving, with IDA assistance, toward theestablishment of a centralizing National Agricultural Research Organization, which will set theresearch agenda and stabilize funding. Existing research institutes will belong to thisorganization. Funding-and the agenda-for research will come from: (a) Government, for workon the broad array of food and livestock problems, where cost recovery is difficult; (b) exportcrop-related "cesses"-in coffee, tea, sugar, and cotton-to support crop-specific researchprograms; and (c) privately funded requests to resolve specific production problems. Measureswould be taken under the IDA financed proiect to improve the incentives for collaboration withfarmers and extension staff in finding research results which are relevant and profitable.

47. Increased agricultural output and rural incomes are important Government objectives.The country cannot wait for the gradual dissemination of technological improvements throughword of mouth and curiosity. To speed technological change, the Government shoid continue tooperate an extension service dedicated to the dissemination of appropriate profit-enhancing,environmentally-appropriate technology. Linking the widely dispersed, broadly diversified usersof this service to its costs is difficult. For this, and equity reasons, the Government, with IDAassistance, wil continue to fund a redesigned, streamlined, national extension service. The focuswill be to provide intensive, high quality technical assistance through a "unified" service on allaspects of agricultural production. Management will be compatible with the "T & V" system.Extension staff will initially cover select portions of priority districts, extending coverage whereeconomically justified, and as budgetary funding permits. Private operations-especially one suchas tobacco production-with tightly linked input finance, production, and marketing, can beexpected to finance their own, crop-specific extension agents.

48. On natural resource management Governmental departments charged with controlling theuse of forest and fish resources, and with management of wildlife, are notoriously weak andunderfunded. These organizations should be restructured and performance incentives provided sothat the regulatory legislation and framework can begin to function. Natural resources andwildlife are under severe pressure due to population growth and fuelwood needs (forests), and dueto incentives to export (fish).

49. For the above-mentioned Government services to be effective in rural areas, personnelshould have strong performance incentives, as well as the vehicles and equipment and suppliesnecessary for operation in difficult and taxing enviromnents. For this reason:

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* Funding for Government agricultural research, extension and natural resourcemanagement services should be given high priority within the National Budget.Annual budgetary allocations of locally generated resources in support ofagriculture-related services, with emphasis on research and extension, be increasedto at least 0.75 percent of GDP (about US$ 17 million in 1990);

* The NARO, the extension service and the natura' resource management servicesshould have terms of service remunerative enough to strongly motivate innovativeand responsive performance;

* A portion of the funding by the NARO of its institutes be provided on a 'results'basis, with continued funding contingent on the production of usable conclusions.

Prospects and Consequences of Agrlcultural Growth

Prospects for Growth In Agriculture

50. Growth in the sector should raise incomes and consumer demand in the country. Mostimportant is the effect that growt in agricultural exports could have on the economy. Thissection provides a brief treatment of growth prospects in the food sector, broadly defined toinclude livestock products, and the export sector. These two sectors contribute about ninetypercent to agriculture GDP.

51. Food. Growth in food output, will in large part determine sectoral growth. The fastestgrowing agricultural subsector in the past decade has in fact been food production. There are,however, limits to how rapidly production for the domestic market can grow. Using 0.95 as theincome elasticity of demand for all food, a projected population growth rate of about 3.15percent, a per capita income growth rate of 1.5 percent per annum (the trend since 1986), andassuming constant relative prices, the demand for food is estimated to grow at 4 to 5 percent.This is also the rate at which supply would have to grow, to keep relative prices constant. Withno growth in per capita income, food pruduction would still have to grow at 3.1 percent perannum, to keep up with the projected population increase. To put this in perspective, the annualincrease in the value of food crop production between 1981 and 1990 has averaged 3.3 percent.Since 1986, growth in food crop production has been 5.9 percent per annum.

52. Growth in the demand for food could see a shift out of root crops into livestock products,as incomes rise. The Rwanda study and the Uganda Household Budget Survey both support thehypothesis that the income elasticity of demand for livestock products is much higher than forfood as a whole, well above 1 and perhaps as high as 2. As incomes improve, the demand forlivestock products should increase significantly. Convers-ly, the demand for starchy foods Islikely to decline. The income elasticity of demand for bananas, cassava, and other root crops, thebasis of the Ugandan diet, is estimated to be well below 1.

53. Exports. While the prices for traditional export crops are low, the markets are veryelastic for Uganda: its market share in a given commodity is small, and it will be able to sell all itcan profitably produce without influencing the price. An optimistic scenario for the largest exportsectors is se-t forth in table 2 below, and shows how the value of exports could be more thandoubled over the next five to seven years. It assumes that the action programs put forward in

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this report are implemented and succeed. Base prices and exports are for 1990, and theprojections are for seven years.

Table 2: Projection of Potential Export Performance Under Export Action Plan, through 1997

1990 1997 Annual Growth Rate

Volumes ('000 MT7)

Coffee Beans 142.40 195.00 4.6 X

Cotton Lint 3.80 45.00 42.3 %

Made Tea 4.80 16.00 18.8 %

Value (mill.on USS) Incremental Value (USS M)

Coffee Beans 141.60 193.90 52.30

Cotton Lint 5.80 68.70 62.90

Made Tea 3.60 15.50 11.90

Non Traditional Agricultural Exports 20.00 100.00 80.00

TOTAL 171.00 378.10 207.10

54. The cotton sector should grow rapidly, if the liberalization measures advocated above aresuccessfully put in place, and substantial amounts of private sector capital and managerialexpertise--both local and foreign--enter the industry. A major precondition for growth in thissubsector is the continued reduction in security problems north of Lake Kyoga, in the traditionalcotton growing areas. The projection is that, if the program is successPul, cotton exports could gofrorr 20,000 to 250,000 bales in five years. While this is well within ginning capacity andhistorical limits, it would be a huge undertaking. The implied growth rate is about 40 percent perannum over seven years. Were this successful, exports would increase by some US$60 millionper year at current prices.

55. The coffee sector, with the liberalization of processing and export marketing that hastaken place, and improvemen;s in the production and dissemination of the new planting stock,should rise to perhaps 4 to 5 percent per annum. A return to export levels of 3.2 million bags, alevel that was reached in the early 1970's, would add another US$ 50 million to exports atcurrent prices.

56. In the nontraditional agricultural exports, a careful review of growth possibilities, giv,acurrent production, shipping, and marketing constraints, indicates that total annual exports fromthis subsector could reach US$100 million in 7 years, an additional US$80 million over 1990levels. Exports from this sector almost doubled to about US$ 43 million in 1991. Most of thegrowth would come initially from sesame seed, maize, hides and skins, and spices and essentialoils. Floriculture, fruits, and vegetables would come later in the period.

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57. Longer term projections (through the year 2005) have been developed in the context ofthe World Bank Country Economic Memorandum 4/. These projections of economic resultsfocus on what could be achieved, ;f all goes well. These projections thus represent a feasibletarget. A summary of the results of these projections is provided in Table 3 below:

Table 3: Projected Average Annual Compound Growth Rates for Agriculture GDP for the Period1992-2005 (in percentages)

Subsector 1 Actual Growth Rate" Ptojected GrowthI_______ _______ ~~Rat"s

1981-1991 1986-1991 1992-2005

Foodcrops (Domestic) 3.2 4.8 3.2

Lvestock Products (Domesic) 1.3 4.6 4.6

Horticulture, Spio-s, High Value Non- 11.2traditional Crops for Export

Traditional Export Crops 23 3.6 3.1

Food (Domestic Crops plus Livestock) 3.5

Exports (Traditional plus Non- 9.5Tradidonal)

Agriculture GDP (Monetary ad Non- 2.9 4.9 5.0Monetay) II_ _

58. If these targets are met, it will mean that a series of profound and positive changes willhave taken place in export agriculture in Uganda, enabling it to play its role of generating theforeign exchange needed to support continued development in agriclfture and other sectors withhigher returns to labor.

Environental Impact of Agricultural Growth

59. There has been a clear environmental cost to the years of civil disorder from which thecountry is emerging. Uganda's wildlife, forests, fish, grazing lands and other natural resourcesare in danger of being overused, polluted and driven to extinction. Soil erosion is a problem inhigh-population density, high rainfall areas. Natural resource management programs and policieshave broken down during the period of civil wnrest, and have yet to be re-established. Thestrengthening of the Government services related to regulating natural resource use, wildlifemanagement and conservation, as mentioned above, will have to be accomplished quickly if theirretrievable loss of high forests and wildlife is to be avoided. Measures taken in this regardshould incorporate the needs, interests and participation of the local residents. Theencouragement of natural migration patterns into under-utilized areas will have to be undertakenfollowing careful assessment of soil quality and sustainable agricultural potential to preventsettlement in regions unsuitable for stable development. These measures have been describedabove, and are contingent on the development of a strong management and regulatory capacity fornatural resources within Government, as well as on the use of environmental, agricultural andsocial criteria in the planning of new roads, schools and hospitals. Within crop agriculture,environmental criteria will have to be used by the research and extension services to develop

Wodd P* oCounwl Economic MemrndumL, Repast No. 1071S-UG, Green Covet vrdon, Capter S.

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solutions to pest ar.I disease problems that are as benign as possible. The rapid development ofcotton advocated in the report is based on the continued use of the traditional low-input, low-output methods. As productivity and input use rise, care should be taken by the extensionservice and Government to limit pesticides to those with minimal environmental consequences.

The Alleviation of Rural Poverty

60. The strategy developed above is intended to cause agricultural GDP to grow as rapidly aspossible in the next five to ten years, within the bounds imposed by climate, soils, markets, andthe capacities of Uganda's institutions. Food production is widely dispersed, with all smallholderfarmers producing food both for own consumption and the cash market. The structure of exportcrop production is also based on the use of large numbers of farmers, each of whom producessmall quantities of the crop for a central processing center. The implication is that, once theprocessing industries have become competitive, growth in exports will carry with it strongbackward linkages to the rural population. For this reason there is, in broad terms, a closecorrelation between measures that produce agricultural growth, and those that willcontribute to a reduction In rural poverty. But, some aspects of the growth strategy are likelyto have a greater effect on rural poverty-and gender differences-than others. For example:

S The rehabilitation of the cotton Industry is likely to have a broad rural-povertymitigation effect.

O Cotton was grown by thousands of smallholder farmers in the North andNortheast. These areas have been under severe security-relatedrestrictions until recently, which significantly diminished economicactivity. Although grown using low-input low-output-environmentallyneutral-techniques, cotton provides cash and an excellent seed bed for thefollow-on crop of millet;

o Cotton ginning is labor intensive, and can generate substantial wageemployment;

O Cotton can be produced easily in certain areas in the West, contributing tothe opening of new areas there;

* The enforcement of carefully designed minimum cane and greenleaf prices,guaranteeing farmers a share of the export parity price, can prevent factoryowners from exploiting their strong monopsony positions in these industries.There may be a case for such a system in the cotton industry. This would dependon an assessment of the ability of farmers to sell to competing ginneries. Thereappears to be sufficient competition in the coffee industry not to warrant suchinterference.

* The use of outgrower production strategies for rainfed industrial crops such astea and sugar, can include more families (as families) in the export industry, andin the cash generation possible from such an industry. A detailed assessmentwould be warranted in each case, however. While riskier for factories than fornucleus estates-in that supplies are not as secure or well regulated-such anapproach could save an estate the costs of recruitment, supervision, andinvestments in living facilities.

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* The inclusion of Inheritance rights for women in the newly designed landlegislation can permit women to continue to raise families and pursue their ownlives upon the death of a spouse.

* The formalization of squatter rights, within well-defined circumstances takinginto consideration ethnic differences and customary land rights-and the facilitatingof smallholder occupancy of environmentally suitable public lands and unoccupiedareas-can give smallholders from the poorer, crowded areas easier legal access tothe underutilized regions in the West and North.

* The use of rural women's groups in the design of pilot rural savings and creditschemes can help incorporate women into the financial system, and providefinance for trade and food production, activities that rural women specialize in.

* The maintenance of an open, unregulated market In liquid fresh milk permitssmall one-and two-cow operations on the periphery of Kampala and near otherurban areas to participate in a lucrative market.

* Support for small rural processing and service enterprises-sewing,brickmaking, metalwork, carpentry, and bicycle repair-provides additional ruralemployment in the production of articles and services that would otherwise beimported from the metropolis.

61. If the projected rates of agricultural growth take place and the rural institutions andrelationships noted above are developed, then the benefits of agricultural development will besustainable, and will improve living standards for a broad spectrum of the rural population.