High cost of ‘kadogo’ economy drives many deeper into poverty

A new study by the World Bank questions the economic usefulness of the “kadogo economy”, saying it only serves to perpetuate poverty among low-income earners.

The concept of the “kadogo economy” gained prominence in the late 1990s when, due to growing poverty among most Kenyans, manufacturers and retailers started selling goods in small packages retailing for as little as Sh5 in order not to lose the market of the poor.

The study, carried out between December 2010 and June 2011, shows that low income earners end up paying more than the middle and upper income class for a similar unit of goods thus reducing their chances of breaking out of the poverty cycle. Low income earners are classified as those living on less than $1.50 (Sh135) a day.

“Compared with the middle and upper income earners, who are able to buy in larger quantities, the poor are paying a premium for buying in smaller units,” said Mr Joseph Kimotho, a consultant who conducted the study.

For instance, it shows that consumers in slums cannot afford to buy the 2kg packet of sugar that retailed in June 2011 for about Sh200 ($2.5) in most shops.

However, they can afford to buy goods in lots of 5 grammes at Sh5 ($0.06).

This translates to a 217 per cent increase for five grammes of cooking fat, 178 per cent for five grammes of sugar and 76 per cent for five grammes of maize flour.

“Though the smaller quantities are more affordable to consumers in the slums, they are paying considerably more,” Mr Kimotho said.

The findings could provide a critical insight to the parliamentary select committee on the cost of living.

Inflation has been rising steadily for the last 13 months and was 19.72 per cent in November, wreaking havoc on budgets.

While it is next to impossible to do away with the “kadogo economy,” given the critical role it plays, Mr Kimotho says policy makers could devise ways of organising kiosk owners to purchase goods collectively to benefit from quantity discounts and have the wholesalers transport them to their shops.

The study indicates that there is little difference between the wholesale and retail prices of goods such as fresh produce supplied directly by farmers.

Some items like bananas, potatoes, wheat and onions, are most expensive in kiosks than in supermarkets.

According to the study, the reason for the difference is because self-service stores are supplied directly by producers whereas kiosks owners go through an intermediary.

Price standardisation could also work.

The price of milk, for instance, is generally standard across the different types of retail outlets.

In September, President Kibaki assented to the Price Control Act that empowers the Finance minister to declare certain goods essential commodities and fix their maximum prices from time to time.

Consult manufacturers

However, the Act is a watered down version of the original Bill authored by Mathira MP Ephraim Maina that sought to fix the prices of essentials like maize, unga, wheat, wheat flour, rice, cooking fat or oil, sugar, paraffin, diesel and petrol without consulting manufacturers.

Now when fixing prices, the minister has to consult with the manufacturers.

The parliamentary committee investigating price increases has since advised against price controls saying they could lead to hoarding and shortages.

Some critics have argued that Kenya would be violating free market agreements under the World Trade Organisation if price controls were rigorously enforced.