Month: March 2016
This article first appeared in my weekly column with the Business Daily on March 21, 2016
A report by the Overseas Development Institute (ODI) analyses four services sectors in Kenya to determine the role of services in economic growth. The four sectors analysed are the financial sector, IT services, transport services and tourism services. The report argues that services are becoming increasingly important, even for non-industrialised countries such as Kenya, as they have a direct contribution to GDP, exports and employment.
Indeed according to the report, services account for 50.7% of the share of GDP; a fact with which the World Bank agrees. Kenya has already become a major exporter of services in areas such as transport services, financial services and, less significantly, ICT. In terms of exports, the export of services from Kenya nearly tripled from $1.9 billion in 2005 to $4.9 billion in 2012; far more than the exports of goods. The ODI report goes on to state that ICT and financial services in particular makes companies in other sectors more productive, help develop value chains and safeguard jobs, while tourism creates numerous jobs within suppliers. Further, services have an important role to play in the ‘servicification’ of manufacturing. Indeed the World Bank survey made the point that in Kenya, services constitute at least 62% of the cost of manufactured goods illustrating the extent to which manufacturing relies on services.
The position ODI takes goes contrary to dogma in economic theory which argues that the most effective path to development is linear with a progression from agriculture to manufacturing and finally into services. Yet here is Kenya, a non-industrialised economy, with services as the engine of economic growth.
Given this scenario, the questions to ask include: what are the implications of a services-led economy in the context of a non-industrialised county? Is a service-driven economy sustainable in the long term? Does a preponderance of services have a negative effect on the development of agriculture and manufacturing?
Well, the report acknowledges that there are weaknesses in the service-driven model, especially in non- industrialised countries. The dominance on services means that it pulls labour in from the other sectors such as manufacturing. This could result in the exacerbation of deindustrialisation as manufactured jobs are replaced by low-productivity services jobs. This is a key concern for Kenya which has a significant informal economy, most of which is not very productive and in which services are a notable constituent. Is Kenya facing a scenario where labour is being pulled into services from other sectors, not into high productivity services which are typically in the context of formal employment, but rather into low productivity informal employment in services?
Further there are questions as to whether the dominance of services in Kenya will lead to skills shortages in agriculture and manufacturing. The report rightly makes the point that there is a risk emerging where the development of skills for the service sector will preponderate, perhaps to the detriment of skills development in other sectors. More and more young Kenyans will opt to train to become bankers and HR specialists because it will be easier to find jobs in those areas of speciality than it would be if they had trained as engineers and scientists. What does this bode for the future of the country?
The final risk of service-driven growth is that, as ODI point out, too much export-oriented services have opportunity costs. It could lead to Dutch disease effects where the shilling appreciates thereby damaging the manufacturing industry as locally produced goods become expensive and uncompetitive due to a strong shilling.
In terms of the way forward, Kenya should continue to reap the benefits of service-driven growth but go through a deliberate process of rebalancing where highly productive agriculture and manufacturing play a stronger role. Further, there is a need to ensure that as long as services preponderate, it is associated with noteable job creation and secondary effects that benefit the economy as whole.
Anzetse Were is a development economist; firstname.lastname@example.org
This article first appeared in my column with the Business Daily on March 13, 2016
On Tuesday last week the World Bank launched the Kenya Country Economic Memorandum with the theme ‘From Growth to Jobs & Prosperity’. Apurva Sanghi Lead Economist and Program Leader at the Bank made three core points during his presentation.
The first is that economic growth in Kenya is volatile, non-inclusive and marked by stagnation in agriculture and industry. In terms of volatility Kenya’s growth has been volatile since independence and domestic shocks such as political instability (especially during election years) affect GDP growth more than external ones.
The second point was that growth is not inclusive and the country continues to register high poverty levels, the estimates of which sit between 36-42% in 2016. Further, job creation has been marginal and slow, clearly only able to absorb a fraction of the working age population that enter the labour market each year. Further, of the jobs created, the vast majority have been informal jobs.
Another important point made by Sanghi was that economic growth in Kenya has been led by services which has been resilient with clear stagnation in agriculture and manufacturing. Services exports are catching up with goods exports and this is partly because the sector is less dependent on raw materials and not truly affected by changes in commodity prices. In terms of agriculture, the main factors informing the stagnation include over-involvement of government in maize and sugar markets which keep prices high. In terms of manufacturing, it has marginal contribution to GDP, and Kenya has dropped 8 places in the rank of economic complexity of goods produced by the sector; in fact Kenya’s top exports are among the least complex. Sanghi also mentioned that achieving the Vision 2030 GDP growth rate target of 7% has thus far been elusive with the country reaching 7% only four times since independence. In order for Kenya to grow more robustly and with less volatility, both savings and productivity have to increase, the performance of both manufacturing and agriculture need to improve, and public investment management by government has to improve.
How feasible is this? Well with regard to savings numerous factors negatively inform Kenyan saving habits among which is the reality that there is no real social security net in Kenya. Yes government has a cash transfer system for the very vulnerable and poor but the lived reality for most Kenyans is that they cannot usually rely on government when they fall ill or lose a job. As a result, middle income pockets of Kenyans are under immense pressure for it is the middle and upper class that finance costs such as school fees, hospital bills and funerals for friends and relatives. Coupled with high dependency ratios linked to high levels of unemployment and underemployment, Kenya’s middle class has limited lived disposable income which of course makes saving very difficult. I have thus long held the view that the hype about the spending power of the African middle class is Panglossian.
In terms of productivity, the report itself makes the point that levels of productivity vary greatly between sectors and within sectors. Further, most Kenyans are employed in the informal sector which is characterised by low productivity due to a myriad of factors such as poor management skills, poor education levels and the lack of access to finance, technology and innovations. Therefore, the question on which government ought to be focussed is how to increase productivity, particularly in the informal sector. This is not necessarily synonymous with pushing for the formalisation of the informal sector but rather, supporting Kenyans trapped in the primarily low income informal sector by skilling up the population in informal labour, developing apprenticeship programs and loosening finance into the sector.
Finally, public investment must improve with a preponderance of development rather than recurrent expenditure. Public investment strategies must be devoid of corruption in order to ensure government spending is strategic and effective.
Anzetse Were is a development economist; email@example.com
This article first appeared in my weekly column with the Business Daily on March 6, 2016.
An analyst with the Brookings Institution made an important point during a podcast recently; China will shed 85 million jobs at the bottom end of the manufacturing sector between now and 2030. So naturally the question becomes: where will they go? The analyst made the point that at the moment most of the jobs are being absorbed by China’s neighbours. But a more important question for Africa is: how can the continent poise itself to be a key absorber of those jobs?
Before answering that question, key details of the shedding of jobs in manufacturing by China need to be more intimately understood. There are two key drivers that are pushing jobs out of manufacturing in China; the first is the general slowdown of China. China has been slowing and growth in 2015 was the slowest in 25 years. Part of the consequences of this slowdown is the shutdown of numerous factories in textile, machine tool and chemicals industries. The boom China enjoyed for decades has created factory overcapacity. Combined with slowing demand in global markets China’s manufacturing sector is struggling. The second factor that is informing the migration of jobs from China is that the Chinese economy is going through a fundamental reorientation where services and household consumption fuel economic growth rather than the investment and industry. China is shifting from being the ‘world’s factory’ with an aggressive export orientation strategy to one led by consumption and services.
The scale of this reorientation is made clear when one considers that China’s growth in the past 15 years or so has been driven by exports and exports account for about 20% to 30% of China’s economic growth. The Chinese government has long sought to encourage this reorientation and indeed, in 2015 the service industries absorbed some job losses from manufacturing. Perhaps another factor informing the reorientation is the reality that China will soon face labour shortages and coupled with rising wages, export driven growth will be difficult.
This scenario should be good news for Africa, a continent that has yet to effectively industrialise. Indeed, many African countries are going through premature deindustrialisation driven by several factors the most salient of which is the lack of robust industrial policy by African governments. As it stands, it seems likely that what will inform African economic growth will shift from agriculture straight into the services sector and bypass industry altogether. At the moment the African economy is not leveraging industry to drive growth. This is a concern for the continent as industry is an important and large employer not only for the manufacture of goods consumed locally, but global markets as well. Through encouraging manufacturing and industry the continent can make a dent in the poverty problem as millions are absorbed in waged employment.
So there is no better time than now for Africa to finally get serious about industrialisation and absorb some of the 85 million jobs in low end manufacturing migrating out of China. What is required for this to happen? Four elements; the first is aggressive, well thought out and strategic industrial policy formulation and implementation by African governments.
The other three, as the Brooking analyst stated, are competition, clustering and management. Africa has to deliberately encourage the creation of a competitive manufacturing sector to create strong businesses that can survive domestic and global economic shocks. Clustering is also important because analysts have observed that businesses are more productive when they are located next to businesses that engage in similar activity. This has been encouraged, to a certain extent, through the creation of Special Economic Zones etc., but more research has to be done to determine the specific type of clustering that can facilitate robust African industrialisation. The final factor is effective management; poorly managed companies do not stand of chance of surviving in a global economic context that is difficult. So the time is now for Africa to lay the ground work for industrialisation so that when the global economy eventually recovers, the continent will be well poised to reap the dividends of industrialisation.
Anzetse Were is a development economist; firstname.lastname@example.org