This article first appeared in my weekly column in the Business Daily on September 20, 2015
The World Bank makes the point that the structural economic transformation in Africa is not following the path that other developing countries have followed as they expanded and sophisticated their economies. To put this statement into context, different sectors of the economy contribute to GDP growth and these are typically characterised as three core sectors: agriculture, industry and services. Typically the path to economic development is one where there is a shift from the traditional sector of agriculture into industry and manufacturing. From there the economy tends to evolve further into services. However, this is not the pattern of growth that Africa is undergoing; Africa seems to be diversifying away from agriculture, not into industry but directly to services. Indeed in Africa, services contributed 62 percent to the cumulative growth in GDP, while manufacturing contributed 25 percent and agriculture 13 percent. Manufacturing is not really taking off on the continent and Africa is leapfrogging industry straight into services. Services here refers to a broad body of activity such as health, education, information and communication, hospitality, public administration, wholesale and retail trade, finance and insurance, and real estate among others.
Kenya falls right in line with this trend; indeed recent statistics indicates that agriculture contributed 29.3 percent to GDP, industry stood at 17.4 percent and services an overwhelming 53.3 percent. So while the share of GDP is contracting for agriculture, industry is remaining fairly stagnant and there is rapid growth in services.
But why is this important? Why should Kenya and indeed Africa be trying to industrialise? Shouldn’t Kenya be happy that we are leapfrogging industry into services? Can this not be perceived as an advantage? The answer to that is a qualified no and here’s why; firstly historically manufacturing been the driver of economic growth and has allowed countries, particularly developing countries, to catch up with advanced economies. From1950 to 2005, the pattern of industrialization has closely reflected changes in global patterns of development.
Secondly, industry is an important job creator and it creates jobs job opportunities for variously skilled levels of labour. Indeed, in services, the sub-sectors important to GDP tend to have low wage employment intensity (employment per KES million) and in Kenya, employment within the services sector has been declining since 2000. Given levels of unemployment in Kenya, it would be prudent to boost a sector that can meaningfully contribute to this problem. Further, manufacturing is traditionally the main sector responsible for the diffusion of innovation and productivity change. The development of industry allows countries to employ technology in building productivity and learning.
Finally, there are risks of services leading the path to economic growth because Kenya does not have the necessary components that form the foundation on which services can function effectively and efficiently. Simple factors such as poor electricity supply, low levels of infrastructure penetration and expensive travel costs negatively inform the extent to which services can lead economic growth. Bear in mind that it is more likely that some of these deficits would have been addressed had the country been diversifying into industry. Additionally the price of services tends to increase more rapidly than that of manufacturing goods; thus a preponderance of services growth may lead to a plethora of activities that cost Kenyans more than if growth had been led by industry. Add to this the fact that in Kenya, labour tends to move away from agriculture but into low skill services with relatively low productivity growth mainly in informal retail trade; this has been dubbed premature deindustrialisation.
This discussion should not make one conclude that services (or agriculture) does not play an important role in economic development, clearly it does. The emphasis should rather be on how to build industry in a manner that allows it to play its true potential role in economic development and do so in a manner that fosters links between agriculture and manufacturing and between services and manufacturing.
The reality is that at present, without growth in industry and manufacturing, Kenya and indeed Africa will face limited growth prospects and will remain vulnerable to external shocks, adverse changes in terms of trade, and remain the eternal producer of raw fuels and metals to which little value is added and which are volatile raw export commodities. With such grim prospects, there should be a greater impetus to boost industry performance in Kenya and indeed the continent.
Anzetse Were is a development economist; email: firstname.lastname@example.org