Uganda - Agriculture

AdA- - >1 ~~4' ##~~ ; ; | - | !  : >t_ . : C S~~~~~~~~~~~~~~~~*   A W O RL D B AN K CO UN TRY STUDY Uganda __ Agriculture The World Bank Washington, D.C.  Copyright O 1993 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing June 1993 World Bank Country Studies are among the many reports originally prepared for internal use as part of the continuing analysis by the Bank of the economic and related conditions of its developing member countries and of its dialogues with the governments. Some of the reports are published in this series with the least possible delay for the use of governments and the academic, business and financial, and development communities. 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ISSN: 0253-2123 Library of Congress Cataloging-in-Publication Data Uganda: agriculture. p. cm. - (A World Bank country study, ISSN 0253-2123) ISBN 0-8213-2461-6 1. Agriculture-Economic aspects-Uganda. 2. Agriculture and state-Uganda. I. International Bank for Reconstruction and Development II. Series. HD2127.U37 1993 338.1'096761-dc2O 93-1591 CIP  PRiEFACE This report is the result of a collaborative effort between the Government of Uganda and the World Bank. The Government team, organized under the Agricultural Policy Committee, was coordinated by Mr. Lawrence Eturu of the Agricultural Secretariat in the Bank of Uganda. The collaboration of staff in the various ministries involved in supporting development in the agriculture sector, led by the Ministry of Agriculture, Animal Industry and Fisheries and the Ministry of Finance and Economic Planning, is gratefully acknowledged. This report draws on two major Government/Donor reviews of the agricultural sector undertaken in recent years. The first was the Agricultural Task Force of 1986/87, which produced working papers on all aspects of the agricultural economy. The second was the Working Groups exercise of 1989/90 which produced 10 papers on selected aspects of the agricultural sector, and underpinned the reforms supported under the Agricultural Sector Adjustment Credit (Cr 2190-UG) approved in December 1990. In addition, there have been sector specific studies used in the preparation of IDA operations in the Livestock and Forestry subsectors. The report synthesizes the findings of previous studies and projects, and presents a vision of opportunities open to Government (and donors) for stimulating sustainable agricultural growth. The analysis uses a careful review of specific cases to make generalized policy recommendations. Firstly the stage is set for the analysis with a brief review of agricultural 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 natural resource 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 of institutions and subsectoral performance. Thus, Section III provides a review of those institutions: Govermmental, cooperative, financial and private, which interact with the farming community and through which change can be promoted. Problem areas, and measure needed to overcome these problems are identified for each case. Similarly, in Section IV, the report goes through the review of each of the productive subsectors in agriculture. The section is labeled "Sources of Growth", because it looks into the problems affecting each productive sector, identifying constraints, and proposing measures to overcome these problems, and obtain growth. This section begins with an evaluation of export competitiveness and market potential. 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 conclusions drawn, and priorities and sequencing established according to Government's development priorities, and the flexibility of the response from each sub-sector. The sector strategy provided in Section V is the result of "sifting" the various measures available to Government to stimulate agricultural growth through a "sieve" of nationial 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 then used to formulate a short term, export oriented strategy based primarily on the revival of cotton production. The medium term strategy proposes a series of actions on a broad range of production and institutional issues. Effects on the environment, the consequences for the alleviation of rural poverty, and the potential increases in exports which could result from the strategy (Section VI), are then evaluated.  - iv - The short term strategy advocates continued efforts to regain market share in traditional exports: cotton, coffee and tea. While production margins are very thin, and international prices low, our analysis shows that Uganda due to its excellent natural conditions, is a low cost producer of these products, and can compete in international markets, even at depressed prices, if processing and marketing efficiency is restored. There is need for a rapid restructuring and liberalization of the cotton ginning and export marketing industry. In coffee, choice of export routes should be liberalized. In tea, Government should divest itself of parastatal factories and estates, and conclude the Custodian Board review process, which is keeping a significant number of the estates out of production. These changes would generate significant increases in foreign exchange, and have a broad based income generation effect in rural areas. At the same time, short term measures should be taken to support the process of export diversification, which can grow very rapidly, as experience with sesame and fish exports in recent years 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, critical transportation timing, expensive cooling infrastructure, and a commitment to constant, standardized quality deliveries. In the medium term, the report argues that a series of measures are needed to support further diversification in agricultural exports. Development of high value specialized crop exports will increase returns and taxable profits, and stabilize export revenue. Government's role in developing these new activities should be indirect. Its focus should be on reducing unnecessary regulation, improving transport infrastructure and telecommunications, and smoothing the 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 should take indirect measures to improve migration into underutilized areas of good agricultural potential. 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 and cash crops face disease and husbandry problems. Experimentation with new high value crops will require a high class, responsive research and extension service. Continued support for agricultural research and extension services is argued for, as is the need to provide improved monitoring and regulation of the use of natural resources- grazing lands, forests and fish-as population pressures are exacerbated.  CONTENTS ABBREVIATIONS AND ACRONYMS ................................. vii EXECUTIVE SUMMARY ......................................... viii I. AGRICULTURE AND THE ECONOMY ................................ 1 Sectoral Growth . ............................................ I Agricultural Exports and Imports .................................. 5 Macroeconomics and the Agricultural Sector ........................... 8 H. THE RESOURCE BASE AND THE RURAL POPULATION .................... 12 Natural Resources . ........................................... 12 Land Use ................................................ 13 Land Use and the Enviromnent .......... .......................... 17 Forests ................................................. 21 Land Tenure ............................................... 22 The Rural Population . ......................................... 25 Rural Labor Markets ........................................... 30 Rural Women .............................................. 34 Regional Differences and Migration ................................. 36 Social Indicators and Food Security ................................. 40 Ill. AGRICULTURAL SERVICES . ...................................... 42 Govermment Services for Agriculture ................................ 42 Farmer Cooperatives .......................................... 51 'Te Rural Financial System ............ .......................... 54 The Supply of Agricultural Inputs .................................. 60 Rural Infrastructure ............................................ 64 TV. SOURCES OF GROWTH ........................................... 66 Market Prospects for Uganda's Produce .............................. 66 Diversification and Expansion of Exports ............................. 69 V. AN AGRICULTURAL DEVELOPMENT STRATEGY .124 Previous Bank Strategy Proposals .124 The Macroeconomic Framework .126 Govermnent Objectives for the Agricultural Sector .127 Lessons from This Review .129 Structural Adjustment in Agriculture and Constraints to Growth .131 An Agricultural Sector Strategy .133 Environmental Impact of Agricultural Growth .145 Ihe Alleviation of Rural Poverty .145  vi VI. IMPLICATIONS FOR PUBLIC EXPENDITURE AND GROWTH PROSPECTS ... ..... 147 Public Expenditure ........................................... 147 Prospects for Growth in Agriculture ................................ 148 STATISTICAL ANNEX ........................................... 153 MAPS: Rural Population Density (IBRD 24793), Farming Systems (IBRD 24794), Administration and Infrastructure (IBRD 24795), Annual Rainfall (IBRD 24796), and Agricultural Areas (IBRD 24797). ......................... ......... .. :........ ::q . ........ . ..... . .4 :-: e by Mr. Lwrnc Er, Dire:o f: the Arc4iwa ceaiat BakoUana and included : r. . E. S.. . ............ .r. .N.. S...ty. Mr. I : M .AM. or.w Mr. 3. Katunze, Dr. C. TiZIIWrR, Pr. 1 .. ..... . .. ...ga .. .. Msemakwelli, Mr. jC : - ..... Coopera e A , M. r. Aof Mr. -~IC. Busingyc, Mr. LB.. Kahangirwe, Mr.DG. ;:or ec c Mr. I. Ewanik........, Mr. LP.E. Mws~~gye (Miniatry of C mmerce~~ Inutyad opetie)Mr J.M 'aimi r Ift.M.'RimeKakuna N : - i- - --; - :- f --:--... ...- ......... ..... .. ..... .. . .. ..... ... ............... .. ..... .. ..... ........-fi;:-: :.r . .... A.b. y of n and .... .n M. ... Tii... (M.itr .. : ....,. ...... :Aa' ": " ' 1' '''- Lands, Housing a . ...... .... . .. . . . .Mr..I.. .mo..n.,.Mr..R...u..... M. S a.JR . Ttyiikyo M...P...bkeje E..1 .1.......... Mr.. SE kao, r K i r. ........... -Eirake. Pr. T.S. Kiiryapawo (Ministry o- Agriculture, Mimal Industry and Pisheiles), . . -. atngize (Uganda Coffee - Deve t Authority). The f k -hMXion aS leder b D Mr.!. C t an inclnde:Wd Mr. B. Ashwortb (food2: prod tion), Mr. A. R. ~u*e (coopratives), i. Mr S. .:iger (non- .'.,-'.,-'.'-.,'..'''.'-.'.''''.''..'''',X'';''''' l''-'"D''f'""l' ''' ")~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.9 ... ~~..... tr.,t, na a.iulua :xot) Mr.!. Camr: (coton) Mr A. F,ne (coffee) Mr.f:E; S.! flarri*i (non-ETj tenure) Mr. A Ordu needs nd coton), M . . A .... .oh ..gricultur. .n~r. a..d. Mr. M.Wlh Mr. S.Can (enera *griultur). Th Gree Cove reviw mision.o ..ece.ber .....a...e by M.... Coateg. The assistance of Ma. M Ounawardan. w the preparation of the report is gratefully~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~...... .................. .......... .. acknowledged. There has been extensive discussion of.............. thi ....... repor with........ .enet and......... ..he.. ..ai... dtioeg and conclusions reflect a consensus of opinion~~~~~~.......a.ly howev.r,.th..s........t.... report are the responsibility of the flank mission.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.0 06 aAfi"Md  ABBREVIATIONS AND ACRONYMS AEL Agriculture Enterprises Lirnited AfDB African Development Bank APC Agriculture Policy Committee, Government of Uganda AS Ammonium Sulphate ASAC Agriculture Sector Adjustment Credit ASN Ammonium Sulphate Nitrate BCGA British Cotton Growers Association BOU Bank of Uganda CAN Calcium Ammonium Nitrate CBPP Contagious Bovine Pleuropneumonia CDC Commonwealth Development Corporation CMB Coffee Marketing Board CMBL Coffee Marketing Board Limited CPI Consumer Price Index DANIDA Danish International Development Agency DFCU Development Finance Company of Uganda DRC Domestic Resource Cost EEC European Economic Community EPADU Export Policy Analysis and Development Unit EPC Export Promotion Council FAO Food and Agricultural Organization GTZ German Agency for Technical Cooperation IDA International Development Association IDRC International Development Research Center IFAD International Fund for Agricultural Development IFPRI International Food Policy and Research Institute IMF International Monetary Fund LTC Land Tenure Center, University of Wisconsin MAAIF Ministry of Agriculture, Animal Industry & Forestry MCIC Ministry of Commerce, Industry and Cooperatives MPED Ministry of Planning and Economic Development MISR Makerere Institute of Social Research NARO National Agricultural Research Organization NGO non-governmental organization NICU National Inputs Coordination Unit NTAE Non Traditional Agricultural Exports OECD Organization of Economic Cooperation and Development PTA Preferential Trade Area SDR Special Drawing Right TAMTECO Toro and Mityana Tea Company UCB Uganda Commercial Bank UCA Uganda Coooperative Alliance UCDA Uganda Coffee Development Authority UDC Uganda Development Cooperation UNDP United National Development Program UNEP United National Environmental Program USAID United States Agency for International Development UTGC Uganda Tea Growers Corporation WFP World Food Program  EXECUTIVE SUhMMARY Sectoral Background 1. Agriculture is the mainstay of the Ugandan economy. Eighty-nine percent of the population is rural. The sector accounts for 51 percent of GDP (1991) and over 90 percent of exports, and employs 80 percent of the employed household population. Agricultural output comes almost exclusively from about 2.5 million smallholders-80 percent of whom have less than 2 hectares each. Only tea and sugar are grown on large estates, which total 40,000 ha. The predominance of smallholder farming implies that the benefits from sectoral growth will be equitably distributed. Income per capita in 1990 was estimated at US$ 140 using the market exchange rate. 2. Food crop production carries the agricultural sector in Uganda-totaling 71 percent of agricultural GDP, with livestock products another 17 percent (average 1989-91). Export crop production 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 production is marketed, compared with two-thirds of livestock production, and all export crop output. 3. Although the agricultural sector has grown rapidly in recent years-achieving a 4.9 percent average annual growth rate between 1986 and 1991-this should be seen in the context of the past twenty years. Economic development in Uganda since the early 1970s has been hostage to the effects of armed conflicts, the disintegration of public infrastructure and services, the collapse of Government regulation, and the uncertainties of high inflation and scarcities of foreign exchange. 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 and 1978-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. As it was, agricultural output has grown at only 0.9 percent per annum since 1968. Total GDP increased at 0.4 percent per annum in the same period. With population growing at 2.6 percent per annum, GDP per capita has declined markedly. Lessons From This Review 4. As a prelude to proposing a strategy to support growth in agriculture, this section summarizes the main conclusions of this report, and lists the market and production constraints that 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 future expansion emerge from this report: agricultural expansion has resulted from the rapid increase in the production of food for a resurgent domestic market, the increase in food production has resulted from expansion in area cultivated, and the international markets for Uganda's traditional export crops have become much more competitive than in the early 1970s. Growth in Food Production 6. The engine of growth in the 1980s has been the re-establishment of peace and security, combined with release of the foreign exchange constraint, rehabilitation of key infrastructure, and the adoption of free-market policies-including the decontrol of food prices and trade. This has  - ix - resulted in an expansion in food production as production and marketing costs fell and the population tried to recapture consumption levels of the mid-1970s. Food production has been the lead sector in agriculture, both in 1980-83 and since the advent of the current Government in 1986. Trend growth in food production was 3.2 percent per annum for the decade, and 4.8 percent per annum since 1986. Since 1986, growth in agricultural demand has been led by the urban demand for food. The rapid rise in urban incomes-and demand-resulted in part from the refurbishment of industries, services and Government, which was undertaken with high levels of donor support. 7. Food has become an attractive cash crop. For fifteen years-with the exception of the early 1980s and 1991 (Figure 40)-the relative returns on production of food versus cash crops has been above the levels of the early 1970s. Because access to land is almost universal, wages needed to hire labor away from own production have risen as well. The rise of labor costs has squeezed profit margins on estates. With lower returns to export-crop production, farmers' time devoted to export crops has declined, affecting yields and quality. The main cash earners for rural families are now food crops or dairy products sold in urban areas, rather than the export crops of the 1970s. 8. One consequence of having food as the engine of agricultural growth is the dependence on the growth in domestic demand for continued impetus. Based on projected population and income increases (para 51) the domestic market is expected to increase at no more than 3 to 4 percent per year over the next decade. Much of the potential for growth through import substitution in the dairy, sugar, and tobacco subsectors has already been exploited. During 1991 and early 1992, the markets for "matoke" (bananas-the main foodcrop), milk, sugar, beef, and maize has been soft. And real food prices have been falling in the last half of the decade, except for a sharp increase in 1989. If current levels of growth in the domestic market are to continue, the focus will have to be on raising rural incomes through technological change and increases in labor productivity, diversifying of export markets, and raising urban incomes through increased import substitution and processing of local raw materials. 9. Growth in agricultural output slowed considerably in 1990. From increases of 8.7 and 6.4 percent in 1988 and 1989, growth dropped to 2.9 and 2.5 percent in 1990 and 1991. The main cause of the slowdown was slow growth in food crop production, down to 2.5 in 1990 and 1.0 percent in 1991 from a high of 7.6 percent in 1989. Export crop GDP actually declined between 1986 and 1990 at -0.8 percent per annum, reflecting poor incentives for coffee production. A sharp recovery in 1991 brought the average rate of growth in traditional export crops 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 food sector could have resulted from a several factors: completion of the reoccupation of the cultivated areas abandoned in the 1970s; the successful substitution for imported foods, such as sugar and milk; the saturation of the domestic market for food, given income levels; and the slow growth in incomes in nonfood sectors of the economy.  Tae 1: Rual Popualatie and Land Availabilit by Distict Ara Avge Area Required Percent Region Rual Cultivable Cultivated for 1991 Cultivable Broad and Pop'n Land At Density per Person Pop'n Land Uwed Soil District 1991 1/ (X') 2/ 1991 (ha) 3/ (1Cmn) in 1991 Class Cenral Mpigi 796 4,406 181 0.38 3,025 69% I Mukono 717 4,061 177 0.38 2,725 67% 1 Luwero 408 7,986 S1 0.38 1,550 19% II Maska 747 5,542 135 0.34 2,540 46% 1 RAi 366 3,500 105 0.34 1,244 36% m Mubende 463 8,963 52 0.32 1,482 17% U Eatern Igangs 899 4,489 200 0.328 2,949 66% m Jinja 208 619 336 0.32S 682 110% H Kanmuli 473 3,694 128 0.328 1,551 42% m Kapchorwa 112 1,064 105 0.386 432 41% 11 Kumi 225 2,454 92 0.787 1,771 72% m Mbale 645 2,022 319 0.384 2,477 122% 1 Soroti 384 8,407 46 0.787 3,022 36% Wm Tororo 5/ 842 3,887 217 0.387 3,259 84% m Northern Apac 454 4,962 91 0.542 2,461 50% m Ama 593 6,578 91 0.255 1,525 23% m Gulu 296 11,321 26 0.533 1,578 14% IV Kitgum 340 13,536 25 0.533 1,812 13% IV Kotido 181 10,352 17 N/A m Urn 471 6,950 68 0.542 2,553 37% U Moroto 153 7,540 21 N/A IV Moyo 168 4,313 39 0.255 428 10% IV Nebbi 292 2,689 109 0.255 745 28% H Western Bundibugyo 116 394 294 0.2 232 59% El[ Bushenyi 735 3,559 207 0.25 1,838 52% H Hoima 5/ 395 6,633 60 0.316 1,243 19% H/m KAbale 51 593 2,353 254 0.286 1,710 73% WI/ Kebarole 741 7,607 97 0.25 1,353 24% UI Ksesee 343 1,478 232 0.2 686 46% 1 Masindi 275 5,369 51 0.316 869 16% 1 Mbaran 930 9,477 98 0.174 1,618 17% m Rukungiui 388 1,391 279 0.286 1,110 80% Wm Total 14,764 167,596 88 50,973 30% ---_ _ _ __------_ _----------- --------- ===--- = . _ . .________,_ 11 National Ceno Figure. 2/ B. W. LAIgA1nd, Soil Productivity and Land Availability Studies', Makerere 1974. 3/ Report on Uganda Census of Agiculture; Langlands, op cit. 4t Langland: I-Very good; 11-Good; m - Moderate; IV -Poor. 5/ 1991 Census: Toomm + PalliA, Hoim + Kibale, Kabale + Kisoro  - xi - Expansion of Area Cultivated 10. Agricultural growth this decade has been due to an expansion in cultivated area, rather than an increase in yields. The area under cultivation-4.6 million ha-is still below the level of the late 1970s. Food crop cultivation, at 4.3 million ha, is at the levels of the early 1970s.Cash crop cultivation-at 0.3 million ha, due to the decline of cotton-is less than half the level of the 1960s. Agricultural land, while not limiting growth for the country as a whole, is a constraint in certain, high-potential, high-population regions in the Southwest and Northeast (table 1). There is a gradual inter-regional migration, from the most densely populated areas to less-populated regions of good potential. Reestablishing peace north of Lake Kyoga will make large underutilized areas available for cultivation. The area currently under cultivation, while utilizing the regions of highest potential, is still less than 30 percent of potentially cultivable areas. Competition in International Markets 11. There has been a sea change in the international prices of Uganda's traditional export crops: coffee, tea, and cotton face much lower prices in real terms now than in the early 1970's. Prospects for trend improvements are limited. Profits and rents from these crops, most of which were captured by Government, have been severely reduced to keep the country competitive in international markets. Successful international competition now requires continued increases in the efficiency of export production and processing, with little margin for taxation. Uganda, due to its excellent agricultural resources, is a low-cost producer in these three crops and with improved 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 food cheaply to several of neighbors-one of whom, in any given year, can be expected to be undergoing a drought. Growth in this market depends however, on the annual food import requirements of a client country in a given poor agricultural year, and may not go beyond 300,000 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 agriculture since 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) the Agriculture Sector Adjustment Credit, (ASAC), Cr 2190-UG of December 1990. Under the ARP the physical rehabilitation of export processing facilities in the cotton, coffee and tea sectors was successfully financed. No provision had been made for supporting operational reforms, however, and not all of the facilities have been used profitably. The ARP also financed a large share of agricultural imports between 1983 and 1992, when it closed. Perhaps the most important contribution was support for the newly established Interministerial Agricultural Policy Committee and its executive arm, the Agricultural Secretariat in the Bank of Uganda. Through this structure, Government kept in touch with production and incentives problems facing farms and processing industries and was able to implement ARP conditionality which required that farmgate prices for export crops be adjusted to maintain production incentives. While still administered by  - xii - Government, prices and margins for export crop purchase and processing were adjusted upwards during the early 1980s to maintain production and export incentives within a monopolistic, state controlled 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 international markets (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 and their macroeconomic ramifications. ASAC's main focus was to control credit expansion for crop finance and improve export marketing efficiency and production incentives for coffee - which in 1990 provided over 90 percent of export revenue. Its share has since declined, due to the growth in non-traditional exports, and the drop in coffee prices. In addition, funds were provided to improve policy making in the agricultural sector and strengthen agricultural research and extension capacity. The project has been successful and provides a model for how to proceed in the liberalization of other export crop marketing systems. Government has gone beyond the conditionality set forth in the operation in order to achieve the agreed objectives. Control of credit expansion to finance the purchase of the coffee crop, the largest single source of demand for funds in the financial system (Figure 9), has been achieved by shifting the responsibility for providing this credit to the commercial banks, thus removing the Bank of Uganda from its position as financier of last resort and improving Govermnent's capacity to monitor developments in the subsector. Inflation declined from around 240 percent per annum in FY 1988 to around 30 percent in FY 1990 (Main Report, para 5.11). Coffee exports have been maintained in a time of declining world prices (Figure 29) by improving processing efficiency and farmgate production incentives. First, this was achieved through the promotion of competition. The monopoly control on exports held by CMB was dismantled. Participation by cooperative unions and private sector exporters was promoted. Government-imposed farmgate prices and marketing margins have been discontinued. The farmgate price of coffee, which had been declining in real terms since 1986, rose in May 1991 (Figure 10) when Government set the procurement price for the last time. Since then the market determined price for coffee at the farmgate has been market determined, and has fallen from its May 1991 level. CMB's regulatory functions were shifted to a separate Uganda Coffee Development Authority (Main Report paras 4.29-4.56). Second, Government has significantly reduced its tax on coffee exports. At present coffee export earnings are converted at the market rate of exchange, and the tax rate--having dropped to a flat 5 percent on export value in late 1991-is now zero. In addition to conditionality on coffee marketing and rural credit policy, ASAC is strengthening Government's policy formulation capacity for agriculture with technical assistance and training in the three main Ministries: MAAIF, MCIC and MPED. The Agricultural Secretariat, the locus for policy analysis in agriculture, continues to be assisted, although its role has shifted from administration of export prrces and margins towards monitoring of product and inputs markets and prices, and providing analytical support for further adjustment and regulatory initiatives of Government. Agricultural research and extension are scheduled to receive long term support under two IDA funded projects, recently appraised, prepared with resources provided under ASAC. Also, ASAC provides 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 agenda for adjustment in agriculture, which is discussed below.  - xiii - Constraints to Growth 15. Growth in agriculture in Uganda has been hampered during the 1980s by a series of structural constraints related to: (i) Government control of food and export crop marketing and pricing which inhibited incentives to improve the quality and quantity of output in the farm and factory; (ii) inadequate transportation infrastructure and shortage of vehicles; (iii) shortages of foreign 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 and discriminatory markets for capital, labor, and agricultural inputs. The effects of the above mentioned constraints on the development of each subsector are described, by institution and by crop, in Sections Im and IV of the Main Report. 16. Over the past six years, many of the structural constraints to growth in agriculture listed above 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 in increases in cultivated area under food; (ii) the decontrol of food marketing; (ii) improvements in transportation infrastructure between food producing areas and Kampala; (iv) rehabilitation of production and processing capacity for estate-based cash crops (tea, sugar); (v) decontrol of coffee processing and export marketing-which prevented serious declines in output, and (vi) the establishment of an open market in foreign exchange, which has provided an incentive for the development of non-traditional agricultural exports. The effects of the structural changes in the framework for agricultural growth undertaken over the past 6 years will continue to work themselves out during the 1990's. Increased competition in the coffee industry should result in improved processing and export marketing efficiency. Open markets in foreign exchange will result in investment export oriented industries. The rehabilitation of the tea sector will proceed slowly, helped by the resolution of Custodian Board cases. 17. There is still an agenda for structural change in agriculture. Rapid increases in output in the cotton sector should result from changes in ownership and the introduction of more efficient management, improved access to credit, and increased competition amongst ginneries and export marketing agents. Adjustment in the cotton sector will be fairly complex and cumbersome however, given the dispersed location and ownership of ginneries, and the significant changes in ownership, management and finances involved. In tea, half of the gardens and many factories have yet to be rehabilitated. However, this is contingent on progress in the divestiture of Governnent-owned enterprises, the resolution of ownership claims for tea estates held by the Custodian Board, and the restructuring of factory ownership and management in the smallholder tea sector. 18. The quickest gains from structural change have already been captured. The constraints to economic growth now facing the agricultural economy are not so easily dealt with. This point has already been made for food (para 9). Continued growth in agriculture will have to come from joint improvements in: (i) technology generation and dissemination; (ii) the responsiveness of the capital market, and the availability of long term finance; (iii) access and infrastructure to hitherto under-utilized areas; (iv) the re-establishment of peace and security North of Lake Kyoga; (v) the fluidity 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  - xiv - effectiveness of Government in the provision of essential public goods and establishing indirect regulatory 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 scarce financial and managerial resources should be set. The Government's objectives in stimulating growth in the agricultural sector are to meet the country's food requirements, generate foreign exchange, and improve living standards (Main Report, paras 5.13-5.14). Rapid growth in the food sector since 1986 has returned the country to food self sufficiency and brought about a broad based increase in rural incomes. The most fragile aspect of the recovery program in Uganda now is the lack of response in exports-which must grow in value in the next few years if economic growth is to be sustained. The capacity to finance imports has declined sharply due to the drop in coffee prices. Imports in 1990 were 3.5 times export revenue (Main Report, para 1.21). The availability of concessional donor funding to continue to bridge this gap is unlikely to be 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 growth will have to change over the next ten years. The lead will have to shift, from food production for the domestic market, to production of raw materials for processing and/or direct export. Over the past 6 years improvements in physical security in rural areas, reductions in economic uncertainty and inflation, increased availability of foreign exchange, and reductions in transport costs have driven the increases in agricultural GDP. The most responsive sector was food production, for the market and for own consumption, where marketing and pricing controls had been removed early on. Food production, excluding livestock, grew at 5.9 percent per annum between 1986 and 1990. Growth in export crop production languished due to continued Governmental interference, depressed world markets, and financial and managerial weaknesses in the marketing and processing industries. 21. The scope for continued rapid growth in food production will be limited in future, due to its dependence on the size of the domestic market. Growth in domestic demand for food will be constrained to the increase in population, and increases in per capita income induced by expansion in urban based industries and services, and revitalized agricultural exports, the new lead subsector. 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 to also cater for population growth (Main Report paras 4.13-4.16). Projections on this and other variables are developed in Section VI of the Main Report. 22. In light of these imperatives, the report argues for a two pronged agricultural development strategy. In the short term, the agenda for adjustment and investment should continue to focus on increasing agricultural exports in traditional cash crops as rapidly as possible, while seeking diversification amongst the least investment-intensive non-traditional 1/ Mr. F.X. Colabo, Director, Eastern Africa Department, asesing the outcome of the Annual Meetings of September 1992 at Departmental Meeting of September 25, 1992.  - xv - agricultural exports. This will provide for a new source of growth in the sector, not limited to expansion of the internal market, and will address one of the key macroeconomic disequilibria and constraints to sustainable growth. In the medium term, deeper measures should be taken to diversify agricultural exports, improve technology generation and dissemination in the sector, and reduce transactions costs, entry barriers and market failures in the land, labor and capital markets as described below. 23. The short term strategy advocates continued efforts to regain market share in traditional exports: cotton, coffee and tea. While production margins are very thin, and international prices low, our analysis shows that Uganda due to its excellent natural conditions, is a low cost producer of these products, and can compete in international markets, even at depressed prices, if processing and marketing efficiency is restored (Main Report, paras 4.18-4.21). There is need for a rapid restructuring and liberalization of the cotton ginning and export marketing industry. In coffee, choice of export routes should be liberalized. In tea, Government should divest itself of parastatal factories and estates, and conclude the Custodian Board review process, which is keeping a significant number of the estates out of production. These changes would generate significant increases in foreign exchange, and have a broad based income generation effect in rural areas. 24. At the same time, short term measures should be taken to support the process of export diversification, which can grow very rapidly, as experience with sesame and fish exports in recent years 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, critical transportation timing, expensive cooling infrastructure, and a commitment to constant, standardized quality deliveries. While the contribution to agriculture GDP from these crops is small (under 5 percent) their contribution to exports has been rising rapidly, and reached 20 percent 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 support further diversification in agricultural exports. Development of high value specialized crop exports will increase returns and taxable profits, and stabilize export revenue. Government's role in developing these new activities should be indirect. Its focus should be on reducing unnecessary regulation, improving transport infrastructure and telecommunications, and smoothing the 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 should take indirect measures to improve migration into underutilized areas of good agricultural potential. This will reduce the hunger for land in the densely populated districts of the Southwest and the Northeast, and permit labor augmenting technology to be used, increasing output per person. 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 and cash crops face disease and husbandry problems. Experimentation with new high value crops will require a high class, responsive research and extension service. Continued support for agricultural research and extension services is argued for, as is the need to provide improved monitoring and regulation of the use of natural resources -grazing lands, forests and fish - as population pressures are exacerbated. 26. The growth strategy advocated in this report should take place within bounds set by acceptable levels of environmental impact. self determination and eguity. The approach utilized in promoting growth should lead to sustainable use of natural resources, enable local communities to participate and direct the development process, and provide the largest number of employment  - xvi - opportunities possible to the rural poor. Uninhibited pursuit of a strategy to expand cultivated area could result in the mining of poor soils and the devastation of natural vegetation without providing a base for sustained increase in crop or livestock agriculture. Under the proposed strategy, policies which lead to increased internal migration should take into consideration the rights of the residents of the receiving areas, as well as the difficulties of adjustment faced by both incoming as well as resident families. Decisions on how production-processing-marketing relationships are structured, and the use of smallholder outgrower production schemes, can have broad beneficial effects. Prevention of concentration of land ownership through judicious management of titling and tenure of public lands will also benefit the rural poor. The effects of the proposed strategy on the alleviation of rural poverty, and the development of sustainable farming systems and participatory production relationships are noted below (paras 59 and 60), following the description of the growth strategy. Short Tern 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 in the structure of the domestic coffee processing and export business-opening the industry to competition, reducing governmental control, and taxation. The policy reforms have gone as far as was necessary to set the stage for a competitive, aggressive attempt to win back some of the country's share of the world coffee market. No further basic changes in export policy in the coffee sector should be made for at least three years. While continuing evaluation of the effectiveness of current policies should continue, the industry should be allowed to adjust to the market-oriented framework established to date. With a no tax, and exports converted at the bureau exchange rate, there are strong incentives for exporters to raise quality and volume as much as possible. It will take time for the incentives to raise export output and quality-to filter back through the processing industry to the producers. There is, however, one area where action in the short term will significantly improve export incentives, and reduce uncertainty: * Coffee exporters should be allowed to select the most competitive export channel and route (road or rail), and export inspections and customs procedures should be streamlined to reduce wasted time-and resulting cost increases. 28. Cotton. The third largest export earner (after sesame seed) in 1990-91, cotton should be the 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 above current levels-even low-input, low-output cotton production as practiced in Uganda is profitable; * An important constraint to increased efficiency and growth in the sector is the lack of competition in ginning and export marketing. This can be solved with changes in policy, adjustments in laws and regulations, and assistance in rationalizing ginnery ownership, now held entirely by cooperative unions of which many are insolvent; * The production response from farmers is expected to be rapid. In spite of the unsatisfactory system of cotton purchases and payment now in place-with  - xvii - routinely long delays-some 70,000 ha were planted in 1991. When payment is adequate and prompt, the incentives for increased production should be strong; * The regions north of Lake Kyoga, where cotton has traditionally been grown, are not 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 ginning capacity, which far exceeds current output; * The three key ingredients to improving operations in the cotton sector-working capital finance, managerial and technical skills-can be provided by private entrepreneurs, without additional Governmental involvement, once it is clear that a stable policy based on freely convertible export earnings and a competitive ginning and 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 Lake Kyoga; * The revocation of the Lint Marketing Board's monopoly on cotton exports, and other restrictive provisions of the LMB Act, * The revocation of area monopsony power provided to cooperatives in the purchase of seed cotton, and other restrictive provisions of the Cotton Act, * Provision of assistance to cooperative unions to enable them to solve financial and managerial constraints, and increase use of their ginning facilities. Sale, lease and/or management contracts with viable private sector entities are envisaged; * The establishment of a cotton development authority, funded by a small cess-less than 1 percent-on cotton exports, to assure quality standards, to promote the industry at home and abroad, and to fund research and extension once industry profitability has been established. 30. Tea. Whereas the estate sector has by and large been privatized, there remains the question 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 operations would permit these resources to be brought back into operation, with gains in employment and foreign exchange to the country. * The Government should divest itself of AEL holdings in the tea sector as soon as private sector buyers with capacity to make full and profitable use of the assets have been identified. 31. Nontraditional Agricultural Exports. The other area for immediate attention, and where the production response can be rapid, is in nontraditional agricultural exports. Growth can be rapid, as the evolution from 1989 through 1992 showed when NTAEs jumped from US$2.1 million to US$23.8 million in 1990 to US$ 42.6 million in 1991. The most important products  - xviii - include sesame seed, beans, maize, other cereals, hides and skins, fish, and fruit and vegetables. This rapid growth must be supported. But markets for these products are small and volatile. The measures to foster this type of growth are indirect, and focus on the need to improve the reliability and efficiency of export channels, and facilitate access to term finance. Support from MAAIF and NARO on resolution of production problems for little 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, the Export Promotion Council and the Investment Authority, to harmonize their policy making, promotional and regulatory activities, and simplify the array of review and approval procedures faced by potential investors and entrepreneurs. These agencies should jointly develop a plan to address potential constraints to new investors in Uganda: improve export facilities, including regular air freight availability to Europe, reduce license and approval procedures, provide specialized communication services, and provide specialized export processing and storage infrastructure, targeted at key industries. * Design of a mechanism to improve the availability of local and foreign funding to qualified investors. While the financial sector is under adjustment, the need for exports in the short term may justify the creation of a dedicated line of credit, or the establishment of an organization capable of providing venture capital finance and 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 and investment in agriculture until the turn of the century. The framework for the strategy cites the need for Government intervention in three main areas: (a) improving incentives for agricultural production and processing, (b) improving the efficiency of the land, labor, and capital markets, and (c) inducing technological change through improvements in agricultural research and extension, and strengthening management of natural resources. Recommendations, which are provided by crop or institution, synthesis the most important of the detailed recommendations contained in Section IV. 33. Incentive Framework. Government administration of prices and processing and marketing margins in the agricultural sector has been almost completely discontinued. Only cotton, tobacco, cocoa and tea continue to have farmgate prices set by fiat. Government intervention in the sector will be justified to: (a) take direct or indirect measures to increase efficiency in processing, mainly through the promotion of competition, and (b) enter the market on the side of the producer in cases where processing industries exercise monopsony control on crop purchase prices. The cotton, tea and sugar subsectors are cases in point. The implementation of these measures is very dependant on accurately designed policies and programs which achieve desired objectives without diminishing production and investment incentives. 34. The key entity in the formulation of Government policy in the sector is the Agriculture Policy Committee, which brings together the top civil servants in the Agriculture, Finance and Economic Planning, Commerce and related ministries, the Bank of Uganda and the Uganda Commercial Bank. Much effort has been made in recent years (under ARP, ASAC and various donor funded Technical Assistance projects) to develop Govermnent's policy analysis and formulation capacity. The agriculture planning departments in the MAAIF, MCIC and MFEP  - xix - have all received support, as has the Agricultural Secretariat of the Bank of Uganda, the executive arm of the Agriculture Policy Committee. The system has worked well to date. Many of the major reforms liberalizing marketing, processing and exports have been successfully carried out under this structure. The system has now to be redesigned to play a role in the more indirect management appropriate in a market based economy. A Task Force constituted under the APC has 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 factor prices 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 sectoral development policy; * Consolidate the interministerial planning framework for annual budgeting and public investment program review in the agricultural sector, under the leadership of MFEP; * Encourage producers and agro-industries to organize their own associations to represent their points of view before the policy makers. Such associations should be encouraged to 'self regulate' their industry in their own interest; * Maintain, for the present, the use of an Agricultural Policy Committee for the formulation of agricultural development policy, with the Agricultural Secretariat as an executive arm. This system is flexible and efficient and has proven well able to bring about consensus and produce results to date. 35. In the coffee indusiy, competition is developing in export processing and marketing following the recent structural adjustment process (para 14). The recent Cabinet decisions freeing producer prices and processing and marketing margins to market forces, and allowing exporters to convert coffee export proceeds at the bureau exchange rate should fundamentally improve the incentive 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 be stabilized 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 Government response to unpredictable destabilising events; * Measures should be designed and enforced by UCDA to prevent collusion and maintain competition among coffee processors and exporters, * Privatization of the Coffee Marketing Board Limited should be completed, with ownership shares gradually sold off to the private sector, 2/ Govmmmk w of Ugarda, APC, 'Progrmn for Suregthening Agricultral Sector Planning (PASF)', Report of the Task Force on Agriculture Sector Panning, Kampala, January 1922.  - xx - * Alternative export sale procedures should be assessed-including an auction-to maximize medium-term export revenue, establish a fair basis for tax assessment, provide an open, fair pricing process, and encourage buyer commitment to the Ugandan product. 36. Measures to revitalize the processing side of the cotton indusry have been spelled out in the 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's agricultural research and extension services. A resurgence of oxen based ploughing and cultivation will occur when the security situation in the Teso, Lango and Acholi areas improves sufficiently for farmers to hold animals without fear of rustlers. In addition, particular attention should be given to: * Assistance in restocking with animals for draft powered land preparation and cultivation; * Refinement and improvement of the cotton seed varieties by agroecological area. Previously adapted varieties have been mixed. 37. In the te industry, to improve processing efficiency and increase output in estate and UTGC factories, the following measures are recommended, in addition to those noted under the short term plan: * For the UTGC and its factories, reform should follow the plan outlined by the proposed EEC project, whereby factory management is separated from the extension and overhead-support functions of UTGC, and put in the hands of a professional management concern, and factories are eventually sold off to the farmers who use them; * Retention accounts for foreign exchange earned from tea exports should be brought under strict supervision of the Bank of Uganda, and gradually phased out in favor of the open market in foreign exchange; * UTGC's monopoly over procurement of green leaf should be removed. Factories should be encouraged to enter directly into contracts with outgrowers, which include leaf collection, input supply, and credit recovery. UTGC should play the role of 'buyer of last resort" in order to maintain an equitable farmgate greenleaf price; * Deliberations by the Custodian Board on ownership of private sector tea estates should be concluded, under the framework provided by the IDA-funded Structural Adjustment Credit, and incentives provided for the rapid rehabilitation of privately owned factories and gardens, 38. In the sujgr industry, incentives for domestic production-with freely determined domestic market 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-competition from imports should be regulated through tariffs to permit the sugar producers to realize prices of  - xxi - more than US$400 per ton needed to permit profitable factory operation and self-financing of the rehabilitation works. 39. Product- and Factor-Market Efficiency and Infrastructure. Govermnent influence on the functioning of markets supporting agricultural growth will, for the most part, be indirect. The key 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. Direct intervention and change will need to be fostered amongst farmer cooperatives and in land markets. 40. The major player in rural factor and product markets in Uganda over the past twenty years 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 to play 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 be taken to assist cooperatives to emerge from their protected environment and take advantage of trade and processing opportunities. In this regard: * Market protection for cooperatives should be reduced to force competition with private enterprises. At the same time, special social taxes and obligations imposed on cooperatives should be reviewed to avoid raising operating costs and placing cooperatives at a competitive disadvantage; * Legislation governing the democratic operation of cooperatives should be used by Registrar to make the management cadres of primary societies and their unions more responsive to the majorities in the membership. At the same time, the Registrar's powers of direct intervention in the cooperative system should be diminished; _ Technical assistance in finance and management will be needed in the cooperative system to assist in the rationalization and divestiture of businesses, the negotiation of joint ventures with private entrepreneurs (especially in cotton), and the improvement of operating efficiency and profitability. Subsidies on this technical assistance may be needed in its initial phases to achieve the necessary restructuring of these entities; 41. The market for agricultural in= is distorted by Government participation, and by the difficulties of operating an import-based business in a rapidly changing macroeconomic environment. Steps should be taken to reduce market distortions and improve industry responsiveness by having: * MAAIF withdraw from the physical distribution and sale of agricultural inputs. Donated fertilizer should be made available at commercial prices ex Kampala to the private trade for sale to farmers, * Inputs-including donations of fertilizer-made available through donor funded agricultural projects should be sold by the Government through auctions, or in ways that will develop the private trade.  - xxii - * MAAIF should to identify and promote the importing of products which, consistent with agronomic requirements of various soils and crops, can provide the required nutrients or active ingredients at minimum cost to the country and the farmer. 42. The development of rural financial markets will have to follow on the measures being taken under the recently appraised Financial Sector Adjustment Credit (FSAC), proposed for IDA support. In addition to reestablishing confidence in the financial system and improving prudential capabilities of the Bank of Uganda, the following measures advocated under FSAC should improve the responsiveness of rural financial markets: * Restructuring and recapitalizing the Cooperative Bank and the Uganda Commercial Bank-both of which have wide rural branch networks that can mobilize rural savings and supply finance to rural enterprises. Effective use of the branch network will depend on the development of a 'branch orientation" in the commercial financial system which emphasizes the development of a lending relationship, and a deposit-taking relationship with customers. Branch managers should be encouraged (within the bounds of prudence) to identify and encourage local business development. * Restructuring the development finance institutions. The supply of medium-term finance is crucial in the modernization of agroprocessing infrastructure. * Maintenance of positive savings and lending rates leading toward a freely floating system. * Continued testing of innovative approaches to market-based rural lending and saving. These pilot approaches should combine group-based savings and lending schemes with crop marketing and production finance, while targeting programs to needy areas, the rural poor, and rural women, in an attempt to use informal- finance methods to create sustainable village-level financial contracts and organizations. Such community-based pilot schemes should interact effectively with the 'informal' financial network, make it more liquid, and link it more closely to commercial finance. 43. The operation of land markets is a delicate area, confused by the existence of a reform decree passed in 1975, whose provisions have been only partly implemented. The approach proposed in this report is to: * Focus tenure-related efforts on the mechanisms for the resolution of tenure-related disputes 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 lands in ways which foster smallholder occupancy and ownership by persons committed to making the land produce. Speculative concentration of land holding in public lands and unoccupied areas should be avoided. Supportive treatment for smallholder immigrants, and extension of squatters rights where appropriate, should be provided.  - xxiii - * After sufficient national discussion to obtain broad agreement, new land legislation should be passed which would re-establish freehold tenure. Maio I/ tenants holdings would be separated from the mailo estate and vested in the Land Commission in freehold. The Commission may then grant this freehold to the mailo tenant. The rights of customary tenants on public lands would be restored, and tenants permitted to obtain freehold tenure. Freehold tenure will reduce the land-related barriers to migration by labor and small farmers which are inherent in many customary tenure systems. * Once agreement on the new land legislation and regulation has been reached, the Land Offices through which the legislation will be implemented should be strengthened. 44. Whether there are obstacles to the functioning of the rural labor market is not clear. Cursory observation indicates that it functions fairly well and that labor responds predictably to employment opportunities around the country by migrating when the expected returns outweigh remuneration from local jobs and the costs of moving. The absence of migrant workers of Rwandan origin since the early 1980s has affected production relationships and wages for export crop production in estates and on smallholder farms. Migration of poorer farmers from the land- poor Southwest to the western and central areas continues. Migrants often work on existing farms while struggling to establish their own holdings-especially in the West. When the returns to food production improved in the latter half of the 1980s, the flow of migrant labor diminished. The flow 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 labor flows, the nature of the work contract, the influence of customary tenure arrangements in different regions, and ways Government can influence the efficiency of this market. The location of improvements in schools, hospitals, and rural feeder and access roads combined with improved access to land and tenure security under a freehold system can facilitate the flow of families from overpopulated areas into areas of labor shortage, where land is still available for smallholder use. 45. The role of Government in developing strategically placed rural infrastructure cannot be overemphasized. The efficiency of all the markets discussed above depends on the availability of reliable, low-cost transport and effective power and communications networks. Rural feeder and access roads play a vital role in determining whether and how a region is developed. The location and design of rural infrastructure can determine whether development of an area is environmentally benign. The availability of health and schooling facilities seriously affects population movements, and the human costs of migration and development. For this reason, this report recommends: * Planning of rural infrastructure-roads, schools, and health care facilities-should be closely coordinated with agricultural development expectations, and environmental degradation considerations in regional and district-level development plans. Such plans, which could be developed with full community participation as part of the "decentralization to the districts' initiative, would smooth the flow of labor to areas of opportunity. The negotiation of these "zoning 31 Mailo refer to freehold tenancies esablished in the Buganda region in the early 1900s.  - xxiv - plans' would crystalize the tradeoffs between environmental preservation and economic growth; * Rural infrastructure development should be planned-and executed-with the full knowledge and cooperation of the communities affected. Such communities should be encouraged to participate in operation, maintenance, and rehabilitation of this infrastructure. 46. Research and Extension Services and Natural Resource Management. Research is vital to the development strategy identified for the agricultural sector. Although expansion of cultivated areas is expected to continue in the medium-term, technological change will play an increasingly important role in agricultural growth. For resource-poor smallholder farmers faced with 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 few affordable means of raising incomes. Government is moving, with IDA assistance, toward the establishment of a centralizing National Agricultural Research Organization, which will set the research agenda and stabilize funding. Existing research institutes will belong to this organization. Funding-and the agenda-for research will come from: (a) Government, for work on the broad array of food and livestock problems, where cost recovery is difficult; (b) export crop-related 'cesses'-in coffee, tea, sugar, and cotton-to support crop-specific research programs; and (c) privately funded requests to resolve specific production problems. Measures would be taken under the IDA financed project to improve the incentives for collaboration with farmers 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 through word of mouth and curiosity. To speed technological change, the Government should continue to operate an extension service dedicated to the dissemination of appropriate profit-enhancing, environmentally-appropriate technology. Linking the widely dispersed, broadly diversified users of this service to its costs is difficult. For this, and equity reasons, the Government, with IDA assistance, will continue to fund a redesigned, streamlined, national extension service. The focus will be to provide intensive, high quality technical assistance through a "unified" service on all aspects of agricultural production. Management will be compatible with the "T & V" system. Extension staff will initially cover select portions of priority districts, extending coverage where economically justified, and as budgetary funding permits. Private operations-especially one such as tobacco production-with tightly linked input finance, production, and marketing, can be expected to finance their own, crop-specific extension agents. 48. On natural resource management Governmental departments charged with controlling the use of forest and fish resources, and with management of wildlife, are notoriously weak and underfunded. These organizations should be restructured and performance incentives provided so that the regulatory legislation and framework can begin to function. Natural resources and wildlife are under severe pressure due to population growth and fuelwood needs (forests), and due to incentives to export (fish). 49. For the above-mentioned Government services to be effective in rural areas, personnel should have strong performance incentives, as well as the vehicles and equipment and supplies necessary for operation in difficult and taxing environments. For this reason:  - xxv - * Funding for Government agricultural research, extension and natural resource management services should be given high priority within the National Budget. Annual budgetary allocadons of locally generated resources in support of agriculture-related services, with emphasis on research and extension, be increased to at least 0.75 percent of GDP (about USS 17 million in 1990); * The NARO, the extension service and the natural resource management services should have terms of service remunerative enough to strongly motivate innovative and 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 Agricultural Growth Prospects for Growth in Agriculture 50. Growth in the sector should raise incomes and consumer demand in the country. Most important is the effect that growth in agricultural exports could have on the economy. This section provides a brief treatment of growth prospects in the food sector, broadly defined to include livestock products, and the export sector. These two sectors contribute about ninety percent to agriculture GDP. 51. Food. Growth in food output, will in large part determine sectoral growth. The fastest growing 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 the income elasticity of demand for all food, a projected population growth rate of about 3.15 percent, a per capita income growth rate of 1.5 percent per annum (the trend since 1986), and assuming 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. With no growth in per capita income, food production would still have to grow at 3.1 percent per annum, to keep up with the projected population increase. To put this in perspective, the annual increase 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 the hypothesis that the income elasticity of demand for livestock products is much higher than for food as a whole, well above 1 and perhaps as high as 2. As incomes improve, the demand for livestock products should increase significantly. Conversely, the demand for starchy foods is likely to decline. The income elasticity of demand for bananas, cassava, and other root crops, the basis 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 very elastic for Uganda: its market share in a given commodity is small, and it will be able to sell all it can profitably produce without influencing the price. An optimistic scenario for the largest export sectors is set forth in table 2 below, and shows how the value of exports could be more than doubled over the next five to seven years. It assumes that the action programs put forward in  - xxvi - this report are implemented and succeed. Base prices and exports are for 1990, and the projections are for seven years. Ta 2: Projciu of Pokl Export Perfnawce Uaw Export Acie PMa, twougb 1997 l 1 1990 1997 Annual Growth Rate Volume ('000 MT) Coffee Bean 142.40 195.00 4.6 % Cotton Lint 3.80 45.00 42.3 % Made Tea 4.80 16.00 18.8 % Value (million USS) Incremntal Value (USS M) Coffee Bean 141.60 193.90 52.30 Cotton int 5.80 68.70 62.90 Made Tea 3.60 15.50 11.90 Non Traditional Agriculunal Bxports 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 are successfully put in place, and substantial amounts of private sector capital and managerial expertise-both local and foreign-enter the industry. A major precondition for growth in this subsector is the continued reduction in security problems north of Lake Kyoga, in the traditional cotton growing areas. The projection is that, if the program is successful, cotton exports could go from 20,000 to 250,000 bales in five years. While this is well within ginning capacity and historical limits, it would be a huge undertaking. The implied growth rate is about 40 percent per annum over seven years. Were this successful, exports would increase by some US$60 million per year at current prices. 55. The coffee sector, with the liberalization of processing and export marketing that has taken place, and improvements in the production and dissemination of the new planting stock, should rise to perhaps 4 to 5 percent per annum. A return to export levels of 3.2 million bags, a level that was reached in the early 1970's, would add another US$ 50 million to exports at current prices. 56. In the nontraditional agricultural exports, a careful review of growth possibilities, given current production, shipping, and marketing constraints, indicates that total annual exports from this subsector could reach US$100 million in 7 years, an additional US$80 million over 1990 levels. Exports from this sector almost doubled to about US$ 43 million in 1991. Most of the growth would come initially from sesame seed, maize, hides and skins, and spices and essential oils. Floriculture, fruits, and vegetables would come later in the period.  - xxvii - 57. Longer term projections (through the year 2005) have been developed in the context of the World Bank Country Economic Memorandum F1. These projections of economic results focus on what could be achieved, if all goes well. These projections thus represent a feasible target. A summary of the results of these projections is provided in Table 3 below: Tabe 3: Prted Avesp Amu Cmpomd Grm Raie for Agricultr GDP for the F.h 1992-2005 (m pOesgea) Submetor Acua Growth Rast Projected Oaowth 19f t-1991 IM9619l19-2005 Foodoreps (Domtic) 3.2 4.98 3.2 livesock Prduct (Domedic) 1.3 4.6 4.6 Hoctculu, Spices, Nigb Vahl Non- 11.2 trad Crops fwt ERpoit Taditional Export Crops 2.3 3.6 3.1 Food (Doneetic Crop p Livetk) ___ 3.5 Export (Trditoal plus Non- 9.5 Traditional ..Agrioelstr GDP (Moatar and Nog.- 2.9 | 4.9 1 5.0 58. If these targets are met, it will mean that a series of profound and positive changes will have taken place in export agriculture in Uganda, enabling it to play its role of generating the foreign exchange needed to support continued development in agriculture and other sectors with higher returns to labor. Envfronmental Impact of Agricultural Growth 59. There has been a clear environmental cost to the years of civil disorder from which the country is emerging. Uganda's wildlife, forests, fish, grazing lands and other natural resources are in danger of being overused, polluted and driven to extinction. Soil erosion is a problem in high-population density, high rainfall areas. Natural resource management programs and policies have broken down during the period of civil unrest, and have yet to be re-established. The strengthening of the Government services related to regulating natural resource use, wildlife management and conservation, as mentioned above, will have to be accomplished quickly if the irretrievable loss of high forests and wildlife is to be avoided. Measures taken in this regard should incorporate the needs, interests and participation of the local residents. The encouragement of natural migration patterns into under-utilized areas will have to be undertaken following careful assessment of soil quality and sustainable agricultural potential to prevent settlement in regions unsuitable for stable development. These measures have been described above, and are contingent on the development of a strong management and regulatory capacity for natural resources within Goverment, as well as on the use of environmental, agricultural and social 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 I/ World Bank, 'Countr Economic Memoundum', Report No. 1071S-UG, Green Cover version, Chapter S.  - xxviii - solutions to pest and disease problems that are as benign as possible. The rapid development of cotton 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 extension service and Government to limit pesticides to those with minimal environmental consequences. The Alleviaton of Rural Poverty 60. The strategy developed above is intended to cause agricultural GDP to grow as rapidly as possible in the next five to ten years, within the bounds imposed by climate, soils, markets, and the capacities of Uganda's institutions. Food production is widely dispersed, with all smallholder farmers producing food both for own consumption and the cash market. The structure of export crop production is also based on the use of large numbers of farmers, each of whom produces small quantities of the crop for a central processing center. The implication is that, once the processing industries have become competitive, growth in exports will carry with it strong backward linkages to the rural population. For this reason there is, in broad terms, a close correlation betwoen measures that produce agriculturI growth, and those that will contribute to a reduction in rural poverty. But, some aspects of the growth strategy are likely to have a greater effect on rural poverty-and gender differences-than others. For example: 0 The rehabilitation of the cotton industry is likely to have a broad rural-poverty mitigation effect. o Cotton was grown by thousands of smallholder farmers in the North and Northeast. These areas have been under severe security-related restrictions until recently, which significantly diminished economic activity. Although grown using low-input low-output--enviromentally neutral-techniques, cotton provides cash and an excellent seed bed for the follow-on crop of millet; o Cotton ginning is labor intensive, and can generate substantial wage employment; o Cotton can be produced easily in certain areas in the West, contributing to the 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 factory owners from exploiting their strong monopsony positions in these industries. There may be a case for such a system in the cotton industry. This would depend on an assessment of the ability of farmers to sell to competing ginneries. There appears to be sufficient competition in the coffee industry not to warrant such interference. * The use of outgrower production strategies for rainfed industrial crops such as tea and sugar, can include more families (as families) in the export industry, and in the cash generation possible from such an industry. A detailed assessment would be warranted in each case, however. While riskier for factories than for nucleus estates-in that supplies are not as secure or well regulated-such an approach could save an estate the costs of recruitment, supervision, and investments in living facilities.  - xxix - * The inclusion of inheritance rights for women in the newly designed land legislation can permit women to continue to raise families and pursue their own lives upon the death of a spouse. * The formalization of squatter rights, within well-defined circumstances taking into consideration ethnic differences and customary land rights-and the facilitating of smallholder occupancy of environmentally suitable public lands and unoccupied areas-can give smallholders from the poorer, crowded areas easier legal access to the underutilized regions in the West and North. * The use of rural women's groups in the design of pilot rural savings and credit schemes can help incorporate women into the financial system, and provide finance for trade and food production, activities that rural women specialize in. * The maintenance of an open, unregulated market in liquid fresh milk permits small one-and two-cow operations on the periphery of Kampala and near other urban areas to participate in a lucrative market. * Support for small rural processing and service enterprises-sewing, brickmaking, metalwork, carpentry, and bicycle repair-provides additional rural employment in the production of articles and services that would otherwise be imported from the metropolis. 61. If the projected rates of agricultural growth take place and the rural institutions and relationships noted above are developed, then the benefits of agricultural development will be sustaiable, and will improve living standards for a broad spectrum of the rural population.   I. AGRICULTURE AND THE ECONOMY 1.1 Agriculture is the mainstay of the Ugandan economy. Eighty-nine percent of the population is rural. The sector accounts for 51 percent of GDP (1991) and over 90 percent of exports, and employs 80 percent of the employed household population. Agricultural output comes almost exclusively from about 2.5 million smallholders-80 percent of whom have less than 2 hectares each. Only tea and sugar are grown on large estates, which total 40,000 ha. The predominance of smallholder farming implies that the benefits from sectoral growth will be equitably distributed. Income per capita in 1990 was estimated at US$ 140 using the market exchange rate. 1.2 Food crop production carries the agricultural sector in Uganda-totaling 71 percent of agricultural GDP, with livestock products another 17 percent (average 1989-91). Export crop production is only 5 percent of agricultural GDP, the fisheries subsector accounts for 4 percent, and forestry for 3 percent (fig. 1). Only one-third of food crop production is marketed, compared with two-thirds of livestock production, and all export crop output. Sectoral Growth 1.3 The normal process of a structural transformation, from agriculture to other sectors, has not been smooth in Uganda. Agriculture's contribution to GDP declined from 48 percent in 1963 to 44 percent in 1968 (fig. 2). Then, in nine years, the agricultural share spiraled up to 73 percent of GDP, showing a virtual return to subsistence as the industry and service sectors broke down. Agriculture's share has declined unevenly since then. Since 1987, when agriculture's share of GDP was about 62 percent, the share has been declining gradually, in consonance with the normal process of industrialization, to reach 51 percent in 1991. About 56 percent of agricultural GDP-31 percent of GDP-consists of subsistence crops-for home consumption-that never enter the cash economy. 1.4 Although the agricultural sector has grown rapidly in recent years--achieving a 4.9 percent average annual growth rate between 1986 and 1991-this should be seen in the context of the past twenty years. Economic development in Uganda since the early 1970s has been hostage to the effects of armed conflicts, the disintegration of public infrastructure and services, the collapse of Government regulation, and the uncertainties of high inflation and scarcities of foreign exchange. The most serious internal conflicts occurred between 1979 and 1980--with recovery stretching to 1982-and between 1984 and 1986. These conflicts caused serious declines in agricultural output. 1.5 The rapid growth between 1980 and 1983, and between 1986 and 1991, is in effect a recovery from a very low base. Agricultural output has only recently gone above the levels achieved in the late 1970s (fig. 3). Indeed, if the average annual agricultural growth rate of 2.7 percent achieved between 1963 and 1978-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. As it was, agricultural output has grown at only 0.9 percent per annum since 1968. Total GDP increased at 0.4 percent per annum in the same period. With population growing at 2.6 percent per annum, GDP per capita has declined rapidly.  -2 - Flhing C4.2%) Cash crop. C5.1U) Livestock C17.1 t Forestry C3.2UM crops C 70.43 Figure 1 Shares in Agricultural GDP, Three-Year Average 1989-91 761 721 09 A 561- 541t 621 - 561 541 521 si 50 M ,0 4il 4-11 4 -19i53|115|bj196| 9|1971|1973 75t 1957 9|191|19bljlgb 5 9b7|19i19911S9 1964 1985 1968 19 0 1972 19 4 19 B 19 8 1980 1982 1984 1996 1998 1990 Figure 2 Share of Agriculture in GDP, 1963-91  1.6 Other lessons can be learned from the agricultural growth pattern between 1981 and 1990. The 2.9 percent annual growth in agricultural output achieved in 1981-91 was consistently led by higher growth in food crop production. Growth in the value of food production was 3.2 percent per annum for the decade (fig. 4). Export crop and livestock production grew more slowly, at between 1 and 2 percent per annum for the decade. 1.7 Between 1981 and 1991 there were two periods of recovery, and rapid growth-- 1981-83, and 1986-91. In the first period of recovery from the 1979-80 war--from 1981 to 1983- -growth in agriculture was led by an 8.2 percent-per-year increase in the food sector, and a 20 percent-per-year increase in the export sector. The smallholders' response to the return of stability and to sharply increased price incentives was to cover basic food needs and rapidly increase export crop production. 1.8 The decline in output in the internal conflict of 1984-85 was less dramatic. Subsistence needs were not as dramatically affected. The second period of recovery starting in 1986 was led by growth in food crops and livestock products for the domestic market. Food crop output led the sector with an average annual growth rate of 5.9 percent per annum through 1990. Slower growth in 1990 and 1991 brought the average annual rate of growth since 1986 to 4.8 percent (Fig. 4). 1/ Export crop GDP actually declined between 1986 and 1990 at -0.8 percent per annum. A sharp recovery in 1991 brought the average rate of growth in traditional export crops 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. 1.9 In comparison with other countries in Africa, Uganda did well during the decade. Between 1980 and 1989, agricultural output for Sub-Saharan Africa grew at 2 percent per annum- -below Uganda's 2.2 percent per annum, as it climbed back from the nadir of 1980. Growth in agriculture in Kenya (3.2 percent), Zimbabwe (2.9 percent) and Cote D'Ivoire (2.3 percent) was higher than in Uganda during this period. Agriculture in Ghana (0.9 percent) and Rwanda (-1.4 percent) grew more slowly. 1.10 Growth in agricultural output slowed considerably in 1990 and 1991. From annual increases of 8.7 and 6.4 percent in 1988 and 1989, growth dropped to 2.9 and 2.5 percent in 1990 and 1991. The main cause of the slowdown was slow growth in food crop production, down to 2.5 in 1990 and 1.0 percent in 1991 from a high of 7.6 percent in 1989. This could reflect the saturation of the domestic market, with much of the substitution for food imports completed, and slow growth in incomes from other subsectors. 1.11 The sources of growth in each subsector will be analyzed in this report. In food production, the substantial growth rate has resulted from area expansion, especially for bananas. For livestock, the main source of growth has been in the dairy industry. Perennial export crop production has been a function of increased yields (coffee, cocoa)-as husbandry levels improved with better production incentives-and of the rehabilitation of old stands, in the tea subsector. Annual export crops (tobacco, cotton) have expanded on the basis of increases in area cultivated. I/ Tec crops included caava, sweet potatoes, Irish potatoes, sorghum, finger millet, maize, beans, groundauts, umim (sesame), rice, and varieties of bananas suitable for cooking, brewing, and consumption as fruit.  -4 - 210 200 190 & 1800 170 ISO * ISO 140 130 * 120 110 U 100 90 so 19S3I19I5I196719b1971Q'7I1953 I 1 gb1 19b3j19b5 I 7 1981991 1984 1966 1968 19701 2 1974 196 19a 1980 1982 1994 1986 19e8 1990 a ActUO I Agr I c. GP - Tr-nd saced 1963- 7B Figure 3 Agriculture GDP, 1963-91 in Constant 1987 Prices, and Forecast Growth in Agriculture GDP, Based on 1963-78 Trend. 24.0OX 22.0Y r ~~~~~~~~~~~~~20.0 20.0CM8 * 15.08 14.0 9 16.08 U v 14.08 100 ti ~~~~~~~~~~~~~~8.2 *., 6.08~~~~~~~~~~~~~~~~~SX.6 0.08 1981-91 1981-83 ~~~~~1996-91 AgrIcuIture GDP Fooa LIve-tock ExPort Crops Figure 4 Annual Growth Rates in Agricultural GDP, 1981-91  1.12 This report is structured as follows. Section I provides background on the national economy and looks at trends in output. Section II reviews the natural resource base, and characterizes the rural population, farm ownership, and family living standards. Section III describes the services and institutions that support agricultural development. Section IV looks into constraints and opportunities in agriculture, reviewing export competitiveness and market prospects, before analyzing constraints and strategies for subsectoral growth. Section V considers the subsectoral strategies as part of an overall agricultural development. And Section VI suggests the implications of the strategy on public investment and on potential growth rates. Agricultural Exports and Imports 1.13 Uganda has recovered from its expansion of agricultural imports necessitated by past disruptions. But continuing declines in revenues from coffee-the key export--are hurting the trade balance, when imports are needed to underpin economic growth. Agricultural Exports 1.14 The health of Uganda's balance of payments in the 1980s depended almost exclusively on coffee exports. This was not always so. In 1970 coffee was only 50 percent of exports (fig. 5). Its share increased to more than 95 percent during the years of political instability and macroeconomic uncertainty. Only recently has coffee's share declined, due both to an increase in alternate exports, and a drop in the international price of coffee. Why this increased dependence on one crop? The answer lies in the production response to disruption and civil war. Coffee retained its importance as an export crop because of the low marginal costs of obtaining a crop, once the coffee trees are established. As a rainfed perennial, planted on family farms in the favorable Ugandan climate, the Robusta coffee tree-native to the northern shores of Lake Victoria--yields with minimal maintenance. Once the Robusta is well-established, low-level production can be maintained by family labor inputs for weeding, pruning, and harvesting. Hulling requirements are simple, cheap, and diversified. Export processing was centralized, until recently, in the Coffee Marketing Board. Since production is based on family labor and a simple manufacturing process, exports can be maintained for a few years even as production incentives decline. Continuously well-tended coffee trees are still productive after 60 years. But, the abandoning of weeding and pruning practices, as relative farmgate prices drop, weakens the coffee trees, which cannot regain their former vigor. 1.15 Although the tea tree is more robust, the tea industry is more fragile. A perennial crop, tea is grown on large estates and family farms. It requires constant attention. While marginal plucking and husbandry costs are all labor-based and low, tea has a more complex, centralized processing procedure than coffee. The effect of the political disorder and financial and economic uncertainty in the 1970s inhibited the functioning of the processing factories and export facilities, and forced the abandonment of plantations. Unlike coffee trees however, tea stands profit from a rest, and--if carefully rehabilitated-Uganda's tea gardens can yield as much as they did previously. 1.16 Cotton, the other important export in 1970, is an annual crop and hence has higher marginal costs of production. It competes directly with food and other annual cash crops in the annual planting decision. Reductions in returns on cotton can lead to a fairly rapid decline in production, as farmers switch into other crops. Cotton also requires a centralized capital-intensive ginning and marketing. Cotton's higher production costs, and its dependence on centralized  - 6 - capital-intensive ginning and marketing, have made it more vulnerable than coffee to political and economic uncertainty. Because cotton is an annual, however, the resurgence of production, in response to high relative prices and a revitalized ginning industry should be rapid. 1.17 Uganda's exports have been losing value rapidly. When export receipts are deflated by the index of prices of manufactured goods, 2/ then it becomes clear that exports have declined by - 5.4 percent per year from 1970 to 1990 (from relative economic prosperity, through the drop in coffee prices in the late 1980s). More recently, exports dropped by - 16.2 percent per annum from 1983 to 1990 (the beginning of the mid-1980s coffee boom through the 1989 dissolution of the ICO quotas). 1.18 Uganda's exports sold for just under $166.3 million 1990-91 (table 1). Table 1: Composition of Ugandan Exports by Volume (tbousands of tons) ad Value (millions of US$ FOB) for 1989-90 and 1990-91 Comodity 1989-90 1990-91 (t ousuds of MI) Value Volume Value l ~~~~~~~~~~~~~(million of US$) (tbomamn Of MT) (minions of US$) Coffee 165.2 180.432 115.8 118.63S Cotton 2.66 4.290 5.03 7.710 Tea 3.61 3.212 6.52 5.409 Tobacco - 1.00 3.743 Maize 13.31 1.464 13.52 1.634 Beans 1.08 0.631 N/A * 2.664 Sinaim - N/A 10.670 Other Pulses e N/A 0.582 Cereals . N/A 2.195 Fish producta - N/A 1.981 Fruit & . N/A 0.682 vegetables Hides & skins . N/A 3.102 rTinber - N/A 0.261 Minerls -b N/A 4.S72 Other . 1.470 N/A 2.146 TOTAL 192.847 166.289 N/A - Not available 2/ MUV Index: unit value index in US dollar tenrs of nanufactures exported from France, Germany, Japan, UK and USA weighted proportionately to the countries' exports to the developing countries, defined by the World Bank, International Econornics Department, International Trade Division.  -7 - 11a# 100k 90% 190098 19 U 60% 40U J 30% 20% -10 1970 1987 1990 0 Cof fee Cotton TO Otheer ExporTts Flgure 5 Shares of Agricultural Commodities in Total Expor 1S0 140- 130- 1203 110 10 90 180 40- x 30 20- 10 -10 1951) 195~2 j19%4 1d8 -19'78 1.910 19182 19984 1ier. 1998 1T'90) 1971 1973 1975 1977 1979 1981 1983 1995 1967 1989 1991 0 Coffee + Cotton 0 Tea A Tobacco Figure 6 Indices of Export Volumes of Agricultural Commodities, 1970-91  - 8 - 1.19 The story of Uganda's agricultural exports can be seen in volume and price indices (fig. 6 and fig. 7). As of 1978 exports of crops other than coffee dropped way off, due mainly to the disruption of production and processing industries. Prices for two of Uganda's main export crops-coffee and cotton-maintained their real value from 1970 into the mid-1980s before a decline set in. Tea and tobacco prices declined sharply in real terms between 1970 and 1980. Prices for these key exports are well below the levels of the early 1970s, and they are unlikely to recover in the medium term. It can be seen however, that the performance of agricultural export volumes has not been a function of international prices. Whereas the international prices of cotton and coffee have followed roughly the same trajectory, their export performances differ radically. Cotton exports dropped dramatically through the 1970s, and have not risen above 10 percent of the 1970 level during the 1980s. Coffee exports on the other hand, while falling during the 1970s, recovered after the 1979 conflict, and-in the 1980s have remained at or above 50 percent of the 1970 peak volumes. 1.20 The drop in value of Uganda's coffee exports has been because of both the decline in world coffee prices, and to a decrease in the quality of its Robusta and Arabica exports. The production of washed Arabica-formerly about 10 percent of the crop--has stopped as processing costs have outweighed the returns in a tightly controlled market. Robusta exports in the highest grade also have declined as a share of coffee exports. 1.21 Because coffee is Uganda's main export, the drop in its real value has meant that the terms of trade--which stayed even throughout the 1980s--have declined dramatically. With the demand for manufactured imports and petroleum products increasing as the economy starts to grow, the deficit in the balance of trade has increased to unsustainable levels. In 1990 imports of US$618 million were about 3.5 times the value of exports of US$178 million. Agricultural Imports 1.22 Domestic production can satisfy all Uganda's food and raw material needs. But, during the declines in production caused by two decades of economic and political disruption, urban food requirements-for milk, sugar, and wheat flour in particular-were met through imports. Imports of food and sugar totaled US$8.6 million in 1987, declined in 1988, totaling US$3.2 million in 1989 and US$1.4 million in 1990. Imports of milk powder were provided on a grant basis by donors, and these had dropped substantially in 1991 with the resurgence of the local dairy industry. Cereal imports of 16 thousand tons, and cereal aid of 17 thousand tons adds up to roughly the quantity of cereals received as food aid in 1974. By 1991 most of the imports or donations of sugar, cereals, and milk had been replaced with local production. Uganda's current food imports, at less than under 1 kg per capita, are well below the requirements of comparator sub-Saharan countries. Macroeconomics and the Agricultural Sector 1.23 The predominant role of agriculture--and the importance of coffee to the cash economy--link agricultural performance closely to key macroeconomic variables. First, exports of coffee--and of other crops to a lesser degree--determine import capacity, a key factor in growth and modernization. Second, the coffee export tax was a major contributor to Government recurrent revenues in the mid 1980s, but its share of tax revenues has been declining rapidly, until the tax was removed in 1992. A third linkage is that agricultural finance-especially for the purchase, processing, and marketing of coffee (and other crops to a lesser degree)--is a large  -9 - 380 340 320 300 280 -fi 20 _ 260 240 220 i X rS200 180 1403 120 100 so K 40- 20- 0 97 q S~ASL68 -194 1g96 I'8 119 91b0 1971 1973 1975 1977 "79 I1 1983 1985 1987 1989 1991 0 Coffee + Cotton o Tea a Tobacco FIgure 7 Indices of Real Export Prices for Agricultural Commodities, 1970-91 701 6019 I 22X *1_j 1981/ 82 1B84 19 6 19 as8 98 90 M Coffee Tax Customc Outloca Flgure 8 Coffee Export Taxes as Share of Recurrent Budget, 1980-81-1990-91  - 10- proportion of the total demand for credit, and determines the monetary aggregates. Fourth, in a less direct, but still crucial mechanism, efforts at budget containment and deficit reduction affect the availability of local funding for key agricultural services. 1.24 The decline in Uganda's terms of trade, and in the volume and value of its agricultural exports has been discussed above. 1.25 The decline in coffee revenues directly affected the recurrent budget (fig. 8). The windfall returns from the increases in the international price of coffee in the mid 1980s were siphoned off by Government-not into the Development Budget, but into the funding of recurrent expenditure. At the height of the international coffee boom in 1985-86, coffee tax receipts were more than 60 percent of recurrent budget revenues. It should be noted that the swings in coffee export tax revenue are counterbalanced in part by duties on imports. Imports are largely donor financed. This places in stark relief the country's dependence on donor funds, not only for imports but for budgetary support. 1.26 Other sources of revenue can affect agricultural incentives. An example is the annual sale of 20,000 to 30,000 tons of vegetable oil provided as a grant or long-term loan by the U.S. Such sales, while a useful source of Government revenue, lower the price of vegetable oil, a crop that Uganda produces and could export. 1.27 The financing of stocks of agricultural produce during export processing and marketing puts strains on the financial system. The main financing requirement is for the coffee crop. Crop finance has fluctuated between 16 and 57 percent of total credit outstanding during the decade (fig. 9). The peak for both the real value of crop finance and its share of total credit was reached in 1986. Then crop finance absorbed 92 percent of agricultural credit. Inflation in 1986 was 350 percent, the highest it has been during the decade. One step taken to contain inflation was to reduce credit creation by the banking system. To do this, and maintain the volume of coffee purchases, the Government-set minimum farmgate price for coffee was not changed in nominal terms during this inflationary period (1986-90) (fig. 10). The real price fell sharply, and has only recently started to climb back to previous levels. Production incentives in a key agricultural sector were sacrificed--in the short term-to contain inflation and monetary expansion. 1.28 Support for agricultural development has conflicted with macroeconomic objectives in one other area-the provision of local budgetary support for agricultural services. As will be shown in Section III, the real value of budgetary allocations for Government services that support agriculture has fallen throughout the decade-when the spread of disease in livestock and food crops and the need to expand export crop production have placed increasing pressure on the agricultural support system.  - 11 - 150 140 1135.3 110 E 120 115.2 110 _10.6 0* 100 96.1 so0 85. 8 85. 0 84.0 90~~~Be 70 _ 40 - 30- 20- 0 1930 19S 1 1982 1933 1954 1985 1986 1987 1ii8 1999 1990 1991 M Crop F1inance M Ag Production MuWon AgricutLere Figure 9 Credit for Crop Finance, Other Agriculture and Non-Agriculture (in constant 1980 Ush) 100 90 so 70 60 40 40- 20- 10 .1b lb 198101972 ~4491941 5188100131121l9 1936 198belo 1~ 1907 19L9 19~1 1 3'7319S19718'7 19b91g 19L3 191151 1387 1989 1891 1Igure 10 Real Farmgate Price for Robusta Coffee, 1966-91  II. THE RESOURCE BASE AND THE RURAL POPULATION Natural Resources 2.1 Uganda's agricultural potential is good. 3/ The country is on the equator, and temperatures average about 21 degrees Centigrade, ranging from 15 to 30 degrees. More than two-thirds of the country is 1,000 to 2,500 meters high. Precipitation is fairly reliable, and varies from 750 mm per year in the Karamajong pastoral areas in the Northeast, to 1,500 mm per year in the high-rainfall areas on the shores of Lake Victoria, around the highlands of Mt. Elgon in the East, the Ruwenzori in the Southwest, Masindi in the West, and Gulu in the North (see map). South of the equator there are two rainy seasons, providing two growing seasons. Soils 2.2 Soil type and topography are key determinants of land use. The soils have been classified in seven groups: * The Buganda surfaces (42,200 square kilometers) cover much of the region south of Lake Kyoga, including the districts north and northwest of Lake Victoria--and embrace five types of deep, sandy clay loams with medium-to-high productivity. * The Tanganyika surfaces (78,200 km) cover much of the area North of Lake Kyoga, West Nile, and parts of the southwest. They consist of sandy clay loam soils with low to medium productivity. * The Karamoja surfaces (16,400 km2) in the Northeast comprise sandy clay loams and black clays of low productivity. * Rift Valley soils (12,500 kn2) in the West and North are sandy clay loams with alluvial parent rock of high productivity. * Volcanic soils (5,000 kn) of high productivity are found on Mt. Elgon and in the extreme Southwest. In northern Karamoja these soils have low productivity. * Alluvial soils (27,400 kn2) found in central and northern Uganda-Lango and Acholi--as well as west of Lake Victoria, are sandy and of low productivity. * Other soil types in the North (15,000 km) are of low productivity. 3/ For a full description of Uganda's natural remources, see JD. Jameson, 'Ariculturq in Ueanda', Oxford University Press, 1970.  - 13 - Farming Systems 2.3 Using soil, rainfall, and cropping characteristics, Parsons has defined five agricultural production systems. 4/ First are the high-rainfall areas around Lake Victoria, with bananas, Robusta coffee, and food crops grown in mixed farming systems. Fallowing is minimal. 2.4 Teso systems in Eastern Uganda are a second system, characterized by annual crops grown in two distinct rainy seasons. The rains are separated by a four-month dry period. Finger millet has given way to cassava as the main food crop, and cotton was the main cash crop. Prior to the disturbances of the mid-1980s, large numbers of cattle were kept, use of draft oxpower was widespread, and intercropping, rotations, and fallow periods were common to maintain fertility and reduce soil loss. 2.5 Third are the Northern Systems also descriptive of the Northwest--in which rainfall patterns restrict cultivation to one season. Rainfall declines from south to north. In the central northern zone, communal cultivation is customary. Annuals such as cotton, maize, and finger millet are common. Further south, groundnut and sweet potato are more common, with sunflower and tobacco the main cash crops. 2.6 Fourth, the mountain systems in the West and in the East feature bananas as the main food crop, with Arabica coffee and tea as cash crops. The higher altitudes permit cultivation of temperate fruits, vegetables, and Irish potatoes, as well as some of the traditional food crops. 2.7 Fifth, in the pastoral systems in the Northeast, rainfall totals less than 800 mm per year, and pastoral livestock production is combined with sorghum and millet cropping. Land Use 2.8 A large proportion of the country's 241,000 km2 could be cultivated. After lakes, swamps and forest reserves are excluded, more than 75 percent of the country--18 million hectares--is available for cultivation, pasture, or both (fig. 11). It is not clear what share of this is unsuitable for cultivation. Much further work is needed to determine where protective measures are justified to ensure that production systems are sustainable. Even the cursory studies undertaken to date, 5/ however, indicate that large areas of land are potentially productive and under-utilized. Of the 17 million ha classified as arable on a preliminary basis by Langlands, only 4 million to 5 million ha are under cultivation. 2.9 Comparing the 1974 Langlands data on cultivable area and census information, rural population density on cultivable land has increased from 53 people per km2 in 1969 to 88 in 1991 (table 2). Eleven of the thirty-two districts analyzed had a rural population density exceeding twice the national average, in 1969 and 1991. The distribution of these densely occupied areas has not shifted. In eastern, southern and western Uganda, more than half of the districts have a rural population density of 180 persons per km2 of cultivable land. 4/ D. Parsons, Agricultural Systems, in Jameson, op. cit., p. 127. B.W. Langlands, 'Soil Productivity and Land Availability Studies', Makerere University, 1974  -14 - \hter/StIllW cI1 1^) /oreete/ Reserves C 13. 710 PaStUre/Arab I- C54 5X) Cultivated Land C20.710 Figure 11 Land Use Estimates (by United Nations Environment Program) OlIseed C7.6%) C tof onfee . 5#) Bananas C29.7 1 Roots C17. X Other Cash Crops C1.4%) Cereals C22.717) Flgure 12 Distribution of Cultivated Area, 1990  - 15 - 2.10 A rough calculation of the share of cultivable land actually cultivated in each district--based on the cultivation capacity of the rural family-shows that only 30 percent of total cultivable area is being used. Of the thirty districts reviewed, 6/ nineteen did not cultivate 50 percent or more of the available arable area. These calculations fit the gross calculations of availability of uncultivated agricultural land, based on national crop data. Although admittedly rough, these assessments do indicate that many districts appear to have substantial land of moderate-to-good potential available for crop-based production. 2.11 With the return of security and stability, and the migration of small farmers from the densely populated Southwest and Northwest into underutilized zones in the West, the cultivated area will continue to be expanded, as it has in the past (para 2.15). The Government should adopt a more active-although indirect-role in this process, in order to prevent conflicts with inhabitants of areas of immigration, and to encourage land use patterns which are sustainable in the long run. Additional study on agricultural potential is recommended, albeit on a large scale, to map out sustainable farming systems for those areas which are underutilized in order to indirectly influence the migratory flow to go into the less ecologically fragile regions. Criteria for identification of areas appropriate for agricultural expansion should include (a) agricultural potential, (b) intensity of use by current residents and claimants, (c) access to markets, (d) environmental fragility and risk of degradation,; (e) conservation criteria (to protect moist tropical forests and wildlife preserves), and (f) the existence of debilitating disease affecting people or livestock, such as trypanosomiasis. Government interventions to channel the migration flow should be indirect, and should include placing physical and social infrastructure-feeder roads, schools, hospitals-to encourage migration in the desired direction. Government can also facilitate the flow by providing supportive legislation on squatters' rights, tenant rights, and public land use and by defusing ethnic tensions between prior residents and new entrants with enhanced benefits- from rapid agricultural growth-for the entire community. . Currently Cudtlvated Area 2.12 An estimated 4.6 million ha were under cultivation in 1990, but the data are weak. The proportion of cultivated area double cropped, or intercropped, is not known. The Agriculture Census of 1966 showed none of the crops grown completely in purestand.7/ Only 60 percent of bananas was then in purestand, 50 percent of cassava, sorghum and finger millet, 40 percent of Robusta, and 75 percent of cotton. For this reason it is likely that the global estimates of area cultivated are significantly higher that the actual area utilized. 2.13 Of the total area under cultivation in 1990, (fig. 12) 36 percent is under perennial crops. Of the 1.7 million ha under perennials, about 1.4 million ha are under bananas, and 0.25 million ha is under coffee. Sugar is grown in about 20,000 ha and tea-the other significant perennial crop-covers about 20,000 ha. Except for about 70,000 ha of cotton and 4,000 ha of tobacco, annual crops are all food crops. Of the 2.9 million ha in annual food crops, 1 million ha are in cereals, 0.8 million in rootcrops, 0.7 million in pulses, and 0.4 million in oilseeds. I/ Two disricts did not have infonnation on area cultivated by family 7/ Report of the USanda Census of Agriculture, Vol. 3, 1966, in Jameson, p.cit.  - 16 - Table 2: Popuhlaton and Land Avaiabity by District Area Avg. Area Required Percent Region Rural Cultivable Cultivated for 1991 Cultivable Broad and Pop'n Land Area Density per Person POP'n Land Used Soil District 1991 (Kn' ) 2/ 1991 (ha) 3/ (Kin2) in 1991 Class Central Mpigi 796 4,406 181 0.38 3,025 69% I Mukono 717 4,061 177 0.38 2,725 67% H Luwero 408 7,986 51 0.38 1,550 19% nI Masaka 747 5,542 135 0.34 2,540 46% it Rakai 366 3,500 105 0.34 1,244 36% m Mubende 463 8,963 52 0.32 1,482 17% H EaStern Iganga 899 4,489 200 0.328 2,949 66% Im Jinja 208 619 336 0.328 682 110% 11 Kamuli 473 3,694 128 0.328 1,551 42% m Kapchorwa 112 1,064 105 0.386 432 41% X1 Kumi 225 2,454 92 0.787 1,771 72% III Mbale 645 2,022 319 0.384 2,477 122% 11 Soroti 384 8,407 46 0.787 3,022 36% 11/m Tororo 5/ 842 3,887 217 0.387 3,259 84% m Northern Apac 454 4,962 91 0.542 2,461 50% Hi Arua 598 6,578 91 0.255 1,525 23% mI Gulu 296 11,321 26 0.533 1,578 14% IV Kitgum 340 13,536 25 0.533 1,812 13% IV Kotido 181 10,352 17 N/A EII Lira 471 6,950 68 0.542 2,553 37% H Moroto 158 7,540 21 N/A IV Moyo 168 4,313 39 0.255 428 10% IV Nebbi 292 2,689 109 0.255 745 28% 1 Western Bundibugyo 116 394 294 0.2 232 59% in Bushenyi 735 3,559 207 0.25 1,838 52% 11 Hoima 5/ 395 6,633 60 0.316 1,248 19% EVil Kabale 5/ 598 2,353 254 0.286 1,710 73% U/EI Kabarole 741 7,607 97 0.25 1,853 24% 1/E11 KaseSe 343 1,478 232 0.2 686 46% X1 Masindi 275 5,369 51 0.316 869 16% H Mbarara 930 9,477 98 0.174 1,618 17% El[ Rukungiri 388 1,391 279 0.286 1,110 80% Ilml Total 14,764 167,596 88 50,973 30%