This article first appeared in my weekly column with the Business Daily on April 24, 2016
I was recently asked two questions about Kenya’s economy by a leading economic think tank active in Africa. I thought it would be useful to share the questions I was asked in order to give others a sense of the puzzles the Kenyan (and African) economy present to global research institutions. The two questions were: 1) Why is manufacturing productivity so low in Kenya? 2) Why is informality not decreasing with economic growth (in Africa)?
These are great questions and reflect some of the issues I grapple with as a Kenyan development economist. My response to the issue of manufacturing productivity in Kenya was as follows; firstly there is no single story about productivity in manufacturing in Kenya. The recently launched World Bank Country Economic Memorandum(CEM) makes the point that levels of productivity vary greatly between sectors and within sectors, so there is no single story that has emerged yet. However, I do agree there are productivity issues in manufacturing in Kenya broadly speaking and these are driven by three core factors.
The first is the fact that inputs such as electricity and transport are high; but an often overlooked expensive input is the high wages in Kenya. The CEM made the point that Kenya has the highest wages among peers such as Bangladesh, Cambodia, Ghana, Burkina Faso, Tanzania, Pakistan and even India. Thus if one were to do a wage to productivity analysis in Kenya, how well would we do compared to peers? Secondly is the question of poor management. Some are of the view that management is fairly good in Kenya but I differ with this view. In the past I have been part of a team coordinating surveys on management issue in companies in Kenya. What we basically found was that while Kenyans are technically competent, we lack soft skills such as good communication skills or managing staff in a manner that makes them productive, motivated and committed to the organisation. In short, there are thousands of Kenya who show up to work but have zero motivation to give the organisation their very best; and management cannot or does not know how to change this. Finally, many Kenyans in manufacturing are employed in the informal manufacturing sector which is characterised by low productivity due to poor management skills, poor education levels and the lack of access to finance, technology and innovations. All these factors negatively inform productivity in manufacturing.
The second question was: Why is informality not decreasing with economic growth (in Africa)?
Again there are again, three core factors informing this feature. The first of which is that there are real barriers to entry into formality. First is the expense of entry; realities such as business registration and licensing are expensive and laborious processes. Secondly, formality is also linked to expensive compliance requirements such as paying (high) Kenyan wages, complying to inspections, and of course, taxation. Running a formal business is expensive and on the tax issue, informal businesses are yet to be convinced that they will benefit from formalising and entering the tax net. What benefits do they accrue in return for paying taxes? A clear case has yet to be made to them.
Finally, for many Kenyans starting a small informal business is often a last resort. We all know the story of the graduate who has tried to get a job for years and has failed. As a result such a graduate opens their own small business in order to make some income, however little, to maintain themselves as they keep looking for a job. Such a person may not have the desire (or resources) to start a formal business as the business is not their true passion or career focus area. Why would such a person formalise their business?
Anzetse Were is a development economist; firstname.lastname@example.org