Month: October 2016

The State of Enterprise in Kenya

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This article first appeared in my weekly column with the Business Daily on October 30, 2016

Last week the Kenya National Bureau of Statistics (KNBS) released the National Micro, Small and Medium Establishment (MSME) Survey. KNBS defines micro-enterprises and having less than 10 employees; small enterprises having 10 to 49 employees and medium sized enterprises as having 50 and 99 employees. In terms of licensed versus unlicensed business, the survey found that there are 1.56 million licensed MSMEs and 5.85 million unlicensed businesses. With regards to employment, number of persons employed by MSMEs is approximately 14.9 million with the unlicensed enterprises contributing 57.8 per cent. Overall, micro sized enterprises accounted for 81.1 per cent of employment reported in the MSMEs. The value of the MSME’s output is estimated at KES 3,371.7 billion against a national output of KES 9,971.4 representing a contribution of 33.8 per cent in 2015. In terms of distribution of MSMEs by sex of business owners, the survey found out that 47.9 per cent of the licensed establishments were owned by males and 31.4 per cent were owned by females. Further, 60.7 per cent of unlicensed establishments were solely owned by females. In terms of type of activity, repair of motor vehicles and motor cycles accounted for more than half of the total persons working in MSMEs.

Unsurprisingly 80.6 per cent of establishments reported family/own funds as the main source of start-up capital while 4.2 per cent of business owners got loans from family and/or friends to start their business. What was interesting however is how income generated was used. Micro establishments reported spending 44.4 percent of income on household and family needs. Medium and small establishments spent significantly high part of their net income on investment at 63.4 and 69.5, per cent, respectively. 93.8 percent of the unlicensed businesses reported a monthly turnover of less than KES 50,000 and none had a turnover above KES 1,000,000. Licensed establishment with a monthly turnover between KES 50,000 to KES 200,000 constituted 31.3 per cent. More than half of the licensed medium establishments recorded a turnover of more than KES 1,000,000.

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(source: http://s3-1.kiva.org/img/w800/260346.jpg)

While useful there are several gaps in the survey. The first and most obvious is a failure of analysis with a focus on the informal sector. The survey used the terms licensed versus unlicensed, with no clear focus on whether the unlicensed segment is considered informal. All the survey has in terms of registration data is that 78.9 per cent of the businesses were not in the registers maintained by the counties. However, the KNBS also makes the point that a county license (also referred to Single Business Permit) is a requisite for all enterprises. Licensing is not a sufficient indicator form informality, as there may be licensed enterprises that still operate informally with regards to tax compliance, adherence to minimum wage, and submission of statutory payments.

However, what was useful in terms of extrapolating informality, is that the survey noted that all unlicensed businesses in the MSME sector are micro- establishments. It would not be a stretch to assume that unlicensed businesses are informal, but as mentioned, licensed business can also operate informally. The important point here perhaps is that informal firms tend to be micro in size.

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(source: http://www.goldmansachs.com/citizenship/10000women/meet-the-women-profiles/kenya-women/mary-kenya/slide-show/mary-slide1.jpg)

The second concern with the survey is the paltry data on tax compliance. The survey makes the point that licensed MSMEs pay a monthly average of KES 33.8 billion in taxes compared to KES 294.0 million paid by unlicensed businesses. Again other features of formality are not clearly delineated thus one can only extrapolate that a significant portion of income earned by unlicensed establishments is not taxed.

Finally, the issue of productivity was not addressed in the survey. There is no indication as to whether licensed enterprises are more productive than unlicensed ones, or which of the micro, small or medium enterprises are the most productive.

In short this MSME survey is a step in the right direction however it is a shame that KNBS did not use this opportunity to truly delineate between formal and informal economic activity. This can be seen in the fact that the Economic Survey released by KNBS this year indicated 82 percent of employed Kenyans are engaged in the informal sector. Yet in this survey unlicensed enterprises account for only 57.8 percent of those employed. In the future, it would be useful for KNBS to focus on formality versus informality more so than licensed versus unlicensed.

Anzetse Were is a development economist; anzetsew@gmail.com

 

 

 

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How government should address revenue shortcomings

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This article first appeared in my weekly column with the Business Daily on October 23, 2016


Last week I participated in a panel discussion at the KRA Tax Summit on tax policy and economic development. Current fiscal policy is defined by a widening gap between expenditure and revenue generation putting a spotlight on the country’s tax regime and how to expand tax collection. While there are steps that can be taken to generate more revenue more effectively, several issues have to be acknowledged first.

Firstly, Kenya’s low GDP per capita means that incomes for millions are so small that tax cannot be effectively extracted from them. Linked to the poverty issue is dependency where those who are financially able often voluntarily support friends and relatives who are not because Kenya does not have a robust welfare system through which taxes are redistributed to those who need support. Thus the reality is that those who are taxed actually have low lived disposable income which presents a moral dilemma because in other countries taxes paid provide welfare services. In Kenya not only do millions pay tax, they are also the welfare system for millions of others. These high levels of dependency can be argued to be a form of tax that Kenyans pay for living in a country with no welfare system.

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(source: http://www.compassion.com/Images/KE_Urban_community_slide.jpg)

Secondly, the focus on the need to expand revenue generation needs to be coupled with pressure to reduce public expenditure. The fiscal deficit is not narrowing and is above the preferred government ceiling of 5 percent. It is crucial that government recurrent expenditure and excess spending is curbed so that less debt financing is required in annual budgets.

Additionally, one cannot make plans to expand the tax base in Kenya without addressing concerns around the management of public finances.  There is little incentive for Kenyans to be tax compliant because of the reality that many feel that the management of public funds is wanting.

Finally, many feel they do not receive services from government commensurate to taxes paid. So until Kenyans feels public finances are being managed responsibly and there is a clearer link between taxes paid and services rendered, tax compliance will not be a priority for many.

That said there are steps that can be taken to generate more revenue and indeed it is important that more revenue is generated to narrow fiscal deficits. A key strategy that has to be developed is structural and should target the informal economy. The aim is not to tax informal businesses but rather support their growth and development. At the moment the informal economy is defined by many micro-firms making micro-profits. I do not think the KRA has the muscle required to extract taxes from so many businesses; the effort would probably not justify the amounts extracted from the informal economy.

Thus government should develop a strategy focussed at making informal businesses more productive and profitable. Key elements of this support would be to provide the sector with proper transport, energy and water infrastructure, technical and business management training, and financing. Once informal firms are more profitable a conversation then can start about formalisation and pulling them into the tax net.

Image result for informal business kenya (source https://qzprod.files.wordpress.com/2016/03/a-kenyan-self-employed-business-man-agustine-karani-arranges-shoes-at-his-shop-in-nairobi.jpg)

Indeed what I have found is that when informal firms grow in size and profits there is a tipping point that is reached that creates motive to formalise. The motive to formalise is usually rooted in the need to access larger investment and contracts, and grow profits more aggressively. Thus it is possible that if government supports the growth and development of informal firms, many will reach that tipping point, self-formalise and become tax compliant.

Government should not view informal businesses as mischievous tax evaders, rather they should view these businesses as future tax payers. Target the informal economy with support and the sector will not only be an important employer, it will become a key source of revenue the government is so eagerly seeking.

Anzetse Were is a development economist; anzetsew@gmail.com

What Kenya and South Africa can learn from each other

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This article first appeared in my column in the Business Daily on October 16, 2016

Last week South Africa’s President Zuma made a state visit to Kenya highlighting the relations between the two countries. Beyond the agreements that have been reached, there are key lessons each country can learn from the other in terms of fostering robust and sustainable economic growth.

One key lesson for Kenya from South Africa is education; South Africa’s literacy rate is about 98 percent, Kenya’s is about 82 percent. But the real disparities reside in tertiary education. Currently only 4 percent of Kenya’s student population make it to tertiary education; in South Africa this figure is 20 percent. In terms of leading universities on the continent, South African institutions regularly top the list. In the Times Higher Education Ranking of the top ten universities in Africa, half are South African; and none are below number six. Only one Kenyan university (University of Nairobi) features in the top ten, and at number eight.

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(source: https://upload.wikimedia.org/wikipedia/commons/thumb/e/eb/UCT_Leslie_Social_Science_lecture_theatre_class.JPG/500px-UCT_Leslie_Social_Science_lecture_theatre_class.JPG)

Beyond ranking, a key concern of the Kenyan education is curriculum relevance. A report released by the World Bank this year stated that tertiary education in Kenya is characterised by a persistent mismatch of skills between what is taught and the requirements in the labour market. This is not to say that South Africa is perfect but at least there is an active, public interrogation of curriculum with active participation from government.  Kenya could certainly learn from South Africa here.

A second lesson for Kenya from South Africa is manufacturing and industry. South Africa is the continent’s most industrialized economy. Manufacturing contributes about 15.2 percent to South Africa’s; while in Kenya this figure has been stuck at 10 percent. This is not to say South Africa’s manufacturing sector is perfect, but Kenya could learn about increasing diversity in manufacturing. Manufacturing in South Africa is diverse constituting of numerous industries such as agro-processing, automotive, chemicals, ICT and electronics, metals and, textiles, clothing and footwear. Kenya’s manufacturing sector is dominated by food and beverages which constitute up to 70 percent of the sector according to some estimates. Again, Kenya can look to South Africa and learn how to diversify the complexity and build the role of manufacturing in the economy.

Now let’s look at what South Africa can learn from Kenya. East Africa is a bright spot in Africa largely because region is not commodity reliant. As the biggest economy in East Africa, Kenya’s resilience against the commodities slump is an important lesson for South Africa. A senior researcher at the South African Institution of International Affairs argues that the importance of commodities to South Africa’s economy cannot be overstated as they generate approximately 60 percent of South Africa’s foreign exchange earnings through exports. Indeed, the analyst makes the point that the commodities slump poses serious economic problems for South Africa, not only because of the extensive connectedness between mining and the rest of the economy, but the financial services sector was built on mining.

A look at South Africa’s export profile reveals that the top exports of South Africa are gold, diamonds, platinum, and iron ore.  The commodities slump has fundamentally negatively affected the economy particularly in managing the current account deficit.  South Africa’s economy shrunk by 1.2 percent in the first quarter of 2016; juxtapose this Kenya’s robust growth Q1 growth of 5.6 percent. South Africa could learn from Kenya better buffering its economy from commodities slumps.

The second lesson for South Africa from Kenya is black entrepreneurship. Given the complex history of South Africa and the legacy of apartheid, the face of South African private sector does not reflect the racial composition of its population. In fact there is a story that some in South Africa say that if whites knew how much money they would make by ending apartheid they would have voted against it a long time ago. And while programmes such as Black Economic Empowerment sought to rectify economic racial inequality, all it seems to have delivered is a few blacks contributing to white owned companies and hopping from company to another collecting dividends. South Africa has an important lesson to learn from Kenya in building black entrepreneurship. Indeed, some estimates state that the South African economy could grow by five percent in the future if the government and private sector invest R12 billion into 300,000 black-owned small businesses.

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(source: https://anzetsewere.files.wordpress.com/2016/10/89a66-small-business-in-kenya-invest-africa-businesses.jpg)

Kenya understands the power of black entrepreneurship and as an article in the Mail and Guardian states, perhaps the most meaningful economic change for millions of South Africans can come from a focus on developing small enterprises.

Anzetse Were is a development economist; anzetsew@gmail.com

 

 

The Economics of Africa’s Geography

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This article first appeared in my weekly column with the Business Daily on October 9, 2016

There is a little known branch of economics called Economic Geography which Kenya could pay attention to in order to garner new insights on factors that inform social and economic development. Economic Geography is essentially the study of location, distribution and spatial organization of economic activities across a region, and the implications to development. The pertinence of the field of study lies in how the development of Kenya and Africa, or the lack thereof, can essentially be seen as a function of geography. Some within this field argue that the underdevelopment of the continent is a case of ‘bad latitude’ and that income disparities within and between regions can be explained by erratic climates, poor soil,  low agricultural productivity and infectious disease which then mutually reinforce each other in a ‘vicious cycle of destitution’.

Jeffery Sachs makes the point that one of the reasons Africa has such a high burden of disease is because we do not have a winter; and winter essentially makes it impossible for most infectious agents such as parasites, viruses and bacteria, to survive. As a result, countries such as Kenya face chronic onslaughts of high levels of infectious agents because of our geographical location.

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(source: http://www.worldatlas.com/webimage/countrys/africasatview.jpg)

If Africa were located in European climes, some argue, it would be Africa and not Europe that would have economically dominated modern history. One study even goes as far as saying that if Zimbabwe were located in central Europe, the resulting improvement in its market access would increase its GDP per capita by almost 80 percent.

A country’s geographical location also pins down its position on the globe with regards to other countries and centres of power. This determines the importance of a country in international relations that in turn affects economic development. Some argue that one of factors that fed the Trans-Atlantic slave trade is the proximity of the eastern coast of the USA and the western coast of Africa. If these regions had been further away perhaps a different area would have suffered the horrors of slavery. In Kenya a similar argument holds; the choice of Nairobi as the nexus of power by the British may have informed why regions in and around Nairobi are more economically developed than those in the outer regions such as North Eastern. Perhaps had the climate in North Eastern been more to the liking of the British, Kenya’s socioeconomic landscape would be vastly different.

Another point made by economic geography is that the sheer size of the African continent negatively affects its economic development. Africa is massive; indeed one can comfortably house China, Japan, India, the USA, Eastern Europe, Italy, the UK, France, Portugal, Germany and Italy in Africa with room to spare. The implication of this on the cost of building infrastructure and ensuring access to all points of the continent is obvious. Indeed a study argues that halving distance between Zimbabwe and all its trading partners would boost its GDP per capita by 27 percent. In short there is the argument that if Africa were the size of Europe, it would be much easier and cheaper to build infrastructure and interlink the entire continent; a factor that would catalyse economic growth and engender closer socio-political ties.

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Africa’s geography has also been the foundation of its economic strengths; vast reserves of minerals and metals have been the backbone of the African economy. Sadly, these reserves have deteriorated into Africa’s ‘resource curse’ where rents from minerals in African often tend to accrue to elites and fail to trickle down to the poor. Therefore, there is an interface between geography and human behaviour. Political instability, the chronic mismanagement of funds by some African governments coupled with Africa’s position in the international division of labour also explain the continent’s limited growth and development, not just its geography.

Nonetheless economic geography provides a perspective of analysis, of which Kenya could make great use.

Anzetse Were is a development economist. Email: anzetsew@gmail.com;

The link between unemployment and poor education

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This article first appeared in my weekly column with the Business Daily on October 2, 2016

It is no secret that Kenya has a serious unemployment problem. Kenya’s official unemployment rate stood at 9.2 percent in 2014 and a report released by the World Bank this year put Kenya’s youth (aged 15-24) unemployment rate at 17.3 percent compared to 6 percent for both Uganda and Tanzania. Unemployment rate refers to the share of the labour force that is without work but available for and seeking employment. Therefore those who are under-employed or (poorly) self-employed are not captured in this figure. If both these categories were included, the number would be much higher. Some put the unemployment rate at 40 percent.

Education is linked to unemployment in Kenya. At the moment, the education system is failing Kenyan youth miserably. In terms of primary and secondary education, FSD points out that although Kenya implemented universal primary education additional costs of uniforms and books prevent many from attending school. And even when families who are able to pay for primary school costs they often cannot afford the fees to pay for secondary school. Secondary schooling is expensive and rarely accessible in underserved areas.

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(source: https://readtiger.com/img/wkp/en/Kenya_class.jpg)

The Brookings Institution points out that 62 percent of Kenyan youth aged 15-34 years have below secondary level education, 34 percent have secondary education, and only 1 percent have university education. As a study by the Jomo Kenyatta University of Agriculture and Technology (JKUAT) points out, skills are a crucial path out of poverty; indeed education makes it more likely for Kenyans to not just to be employed, but to hold jobs that are more secure and provide good working conditions and decent pay.

As it stands, Kenyan youth are barely making it to secondary school and thus are relegated to never having an opportunity to have a job that is stable and well remunerated due to the high qualification requirements of formal employment. Further, often poorly educated Kenyans are too poorly equipped to competently manage small businesses leading to low levels of productivity and profitability that characterise the informal economy. In short, the lack of access to education relegates millions of Kenyans to a cycle of poverty as they do not qualify for ‘good’ formal jobs and often do not have the skills sets to be effectively self-employed.

Sadly even of those who do attain tertiary education, most are ill-equipped to be absorbed into employment due to the disconnect between what is taught at universities and what the labour market actually requires. The JKUAT study makes the point that the commercialisation of tertiary education in Kenya has led to overcrowding in the institutions due to the increase in enrolment and this ‘massification’ policy by universities is characterised by degree programmes that do not address the job market. University administrations compromise the quality of education by accepting students without improving facilities to absorb them and seem focused on financial gain when expanding education programmes. As a result, millions of Kenyans are poorly trained and become frustrated graduates who cannot find employment.

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(source: http://mkenyaujerumani.de/wp-content/uploads/2014/03/Kenyans-graduating-graduation-Kenya-students-University.jpg)

Another report released by the World Bank this year stated that tertiary education in Kenya is characterised by a persistent mismatch of skills between what is taught and the requirements in the labour market. Kenya’s post-secondary qualifications are not adequately skilling young people, and thus many graduates are unable to find jobs due to their poor skills sets, despite the achievement of tertiary qualifications. Indeed, according to the World Bank’s Enterprise Survey for Kenya, about 30 percent of firms surveyed stated an inadequately skilled workforce as the most important constraint inhibiting growth.

Clearly the education system in Kenya is creating a mass of young people who do not have the skills required for employment or self-employment. In this failure Kenya is not only exacerbating the unemployment problem, the country is failing to leverage the demographic dividend of a young and active labour force. It is crucial that this failure in the education system is addressed if Kenya is to achieve Vision 2030.

Anzetse Were is a development economist; anzestew@gmail.com