Month: April 2018

Implications of the Economic Survey 2018

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This article first appeared in my weekly column with the Business Daily on April 30, 2018

Last week the Kenya National Bureau of Statistics (KNBS) released the Economic Survey 2018 providing data on the economy for 2017. There are several data sets that should be noted and inform economic strategy going forward.

Firstly, the economy is estimated to have expanded by 4.9 percent in 2017 compared to 5.9 percent in 2016; that is a reduction of 1 percent year on year. This is unsurprising and in fact good news because previous analysis indicates that the Kenyan economy tends to slow down in an election year by about 1.2-1.4 percent. Thus, a reduction by 1 percent, particularly in a drought and election year, indicates the fundamental engines of the economy are robust. Growth was powered by accommodation and food services; ICT; education; wholesale and retail trade; and Public Administration.

Kenya’s top export earners last year included tea and, horticulture products. FILE PHOTO | NMG (source: https://www.businessdailyafrica.com/analysis/ideas/Implications-of-the-Economic-Survey/4259414-4535818-3tjw81/index.html)

Secondly, GDP per capita increased from KES 158,575.5 in 2016 to KES 166,314.4 2017. Inflation aside, the increase in per capita is good news and indicates that on the whole, economic growth is rising faster than the population thereby leading to net growth in income. However, poverty remains prevalent thereby implying the inequality remains a core problem in the country. The survey shared insights for the 2015/16 Household Survey which indicated that overall poverty stood at 36.1 per cent (16.4 million people), food poverty at 32.0 percent (14.5 million people), and hard core poverty at 8.6 percent (3.9 million people); in all cases poverty is higher in rural than urban areas. This indicates that the rural-urban wealth divide is real and will likely continue to catalyse rural-urban migration as Kenyans move to towns and cities in search of higher incomes.

Thirdly, the informal sector continues to employ most Kenyans and accounted for 83.4 per cent of total employment; this is down from about 89 percent last year. Informal employment tends to be of lower quality than formal employment in terms of wages, job security, and working conditions. Thus, the bulk of Kenyans continue to work in a sector is precarious and may very well negatively inform the quality of their lives.

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(source: https://www.standardmedia.co.ke/business/article/2001263519/foreign-investment-forecast-to-slow-down)

Finally, data on exports paints an interesting picture in that top export earners were tea, horticulture, articles of apparel and clothing accessories, coffee, and titanium ores and concentrates. Thus, Kenya’s exports continue to be dominated by agricultural products and products with limited value addition particularly given that manufacturing sector growth was very weak last year and grew at 0.2 percent.  Further, Africa remained the leading destination of Kenya’s exports, accounting for 37.7 percent of total exports in 2017, with East African Community (EAC) accounting for more than half of total exports to Africa. What this means is that Kenya’s exports mainly go to countries with low GDP per capita that informs spending power and aggregate demand. It is important that the country restructures exports such that they are more sophisticated and target countries with higher incomes so that exports become a stronger engine for job creation and income growth.

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

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Factors to Consider in Affordable Housing Scheme

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This article first appeared in my weekly column with the Business Daily on April 22, 2018

The government recently announced that it seeks to develop 500,000 units of affordable housing as part of the Big Four agenda. Government also announced that it seeks to extend affordable mortgages for as low as 7 percent, facilitated by the Kenya Mortgage Refinancing Company (KMRC). Reports indicate that KMRC has secured financing from the World Bank and the African Development Bank which have allocated KES 16.1 billion and KES 15 billion respectively.

Several factors ought to be considered if the affordable housing intent is to translate into home ownership for low-income earners (this piece draws from an article by Dr Mbui Wagacha in the Business Daily on April 4, 2018).

An informal settlement in Nairobi. FILE PHOTO | NMG

(source: https://www.businessdailyafrica.com/analysis/ideas/What-State-must-get-right-in-affordable-housing-scheme/4259414-4493452-vkwsl5/index.html)

Firstly, the criteria of who qualifies for affordable housing and related loans needs to be crystal clear. It is important that government present granular details of and rationale for the specific criteria that need to be met to be eligible for the scheme. Ideally, the target should be low-income households currently living in informal settlements. Once the criteria is established, government should develop a database of all individuals who qualify for the scheme. A system can then be set up where once housing is available, individuals are randomly chosen from the database and granted the houses and linked loan facilities. This can be coordinated through an Affordable Housing Authority.

Secondly, government needs to invest in both sides of the housing market. The demand side is being addressed through the creation of KMRC and subsidised mortgages. Finding the right financial partners to deploy the mortgages will be crucial and here, Savings and Credit Cooperative Organisation(SACCOs) ought to be brought in strategically. SACCOs and cooperative networks currently already provide 90 percent of mortgages in the Kenyan housing market, invariably at more affordable rates than commercial banks. Government should actively pull in and incentivise SACCOs to deploy the subsidised loans, and in doing so, leverage the latter’s knowledge of lending to the housing market affordably and thereby penetrate lower income markets. Linked to this, there ought to be a strategy to finance the construction of affordable homes. This can also be deployed through SACCOS, so that the interest charged on construction loans remains at manageable levels and does not push up home purchase prices. Further, domestic firms ought to be actively engaged to bid for construction tenders, and requisite support to ensure project by domestic firms is prioritised.

Image result for construction kenya

(source: http://nca.go.ke/new/src/investigation-of-construction-failures-in-kenya-for-enhancement-of-development-control/)

Thirdly, an affordability strategy ought to be developed to comprehensively address the issue of land prices. Land currently constitutes the lion’s share of home prices especially in urban and peri-urban areas, which is where most of the affordable housing ought to be constructed. Government can provide the land at no cost as part of the scheme such that the prices of homes only feature the cost of construction; this will drastically bring down prices.

Finally, conditions of resale of affordable houses have to be specific and stringent. If individuals in the scheme seek to sell their house, they can only sell back to the housing scheme itself; no third party ought to be allowed to buy the affordable homes. If these measures are not taken, unscrupulous investors will target the affordable homes, offer individuals great deals and mop up all the houses through re-sale, thereby defeating the intent of the scheme in the first place.

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

Banning Used Clothing a Bad Idea

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This article first appeared in my weekly column with the Business Daily on April 15, 2018

Ripples of concern spread over Africa when Rwanda was punished by the USA for their ban on the import of used clothing from the USA. In response, the USA announced a 60-day suspension of Rwanda’s AGOA duty free privileges on clothing and footwear.

The Rwandan government is of the view that a prohibition of second hand clothes band is crucial for the Rwandan economy. The argument is simple and argues that a ban all imports of second-hand clothing is necessary to strengthen their textile industry. With textile and apparel a key component of their industrialisation strategy, the ban on used clothes seeks to tap into domestic demand for clothing to strengthen the domestic textile industry.

Mitumba (used clothes) sellers in Nairobi help customers to pick items at a market in Nairobi. FILE PHOTO | NMG

(source: https://www.businessdailyafrica.com/analysis/ideas/Why-banning-mitumba-is-a-bad-idea/4259414-4395006-3smd5w/index.html)

The view here is that beyond the loss of livelihood issue, the ban on used clothing is a bad idea, not so much because of the ire it will draw from the USA, but because it’s bad economics. Firstly, used clothing allows Africans to buy a wide range of clothes and shoes affordably. At the moment, the price point at which local manufacturers sell their clothes and shoes are too high, particularly for low income Africans who have very limited funds. With a poverty rate of 35.6 percent, the reality is that many Kenyans have to pinch their pockets to clothe themselves. The used clothing market allows millions of Kenyans to buy clothes for as little as KES 30; these price points do not exist in the clothing produced by the domestic textile industry. Thus, in banning used clothing, government would essentially be imposing a fine on the poor, forcing them to put even more of their limited income to basic items such as clothing.

Secondly, local clothes and shoes manufacturers do not have the capacity to meet the demand for clothing and shoes in the domestic market. Thus, a ban on used clothes presents the very real risk of excess demand pushing the price of new clothing even higher.

Image result for second hand clothes kenya

(source: http://voicesofafrica.co.za/second-hand-clothing-donations-creating-dilemma-kenya/)

Thirdly, a ban on used clothing in a context where used clothes are the most cost effective and preferred channel for clothing will create a black market. This shadow market will operate outside legal parameters and will penalise consumers in terms of price point because the risk of peddling contraband will have to be priced into the clothing on sale. Thus, there is the risk that a ban on used clothing will create a shadow market from which many will be forced to buy their clothing, because it will likely still be the cheaper option, but a price point higher than that which existed when the sale of used clothing was legal. Thus again, the poor will be unnecessarily fined due to government policy.

What would make sense is to start a gradual ban on new clothing imports and encourage local manufacturers to make clothes for that domestic new clothing market segment first. This should be coupled with government support to local manufacturers so that local companies can make a wide variety of clothing and shoes available at reasonable prices. A ban on used clothing would only make sense when local manufactures are able to produce clothing and shoes at a price point similar to that in the used clothing market.

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

Untapped Market Intelligence in the Informal Economy

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This article first appeared in my weekly column with the Business Daily on April 8, 2018

The role of the informal economy, or Micro and Small Enterprise (MSEs) in driving Kenya’s, indeed Africa’s, economy is increasingly being recognised. The 2016 MSME Survey by the Kenya National Bureau of Statistics revealed that the sector contributed about 34 percent to GDP. Furthermore, about 90 percent of employed Kenyans sit in the informal sector. It is therefore a puzzle as to why this sector is not recognised as an expert reservoir of knowledge on purchasing habits as well as consumer and market intelligence in the country.

The reality is that most Kenyans buy and sell goods and services in the informal economy. A report on retail in Africa by Deloitte in 2015 indicated that about 90 percent of retail purchases in Africa are conducted in the informal economy. This must be partly informed by the fact that the sector knows how to continue to meet consumer demands and purchase preferences.  Informal businesses are good at deciphering and interpreting trends then creating goods and services that meet the demand for that trend affordably. This indicates an intelligence not only in anticipating consumer needs, but an innovation capacity that allows the sector to translate consumer desires in products available for sale. An example of this is how furniture makers have foreign catalogues, magazines and pictures of furniture that they can replicate at a fraction of the cost for the domestic market.

Image result for informal market kenya

(source: http://nitibhan.com/tag/informal-retail/)

There is often the misconception that the informal sector is only for low income Kenyans; nothing could be further from the truth. Middle class Kenyans rely on the informal sector for everything from food, to fashion, furniture and fun. Going to a local for a drink and meal is common, buying basic food items from the local kiosk is an everyday occurrence and going to markets to buy second hand clothing is commonplace. The informal sector is aware of the fact that consumer demand is informed by global trends and preferences. The ubiquitous nature of smart phones means that young people can see hot trends abroad and demand the same in the domestic markets. Thus, informal businesses have to be able to quickly respond to trends and make hot items available locally. Again, this demonstrates a level of market knowledge in the sector that is often ignored and dismissed by most.

It can be argued that if you want scalable market intelligence to inform product development and marketing strategies, the informal economy is the best place to go. Informal retail vendors have a consistent history of responding to trends, anticipating consumer purchasing habits and converting formal and expensive retail items into something you can take home for yourself. Sadly, most companies do not connect how their own purchases and spending habits are captured in a sector that is neglected statistically and in terms of market research. Indeed, some companies even seem unaware of how they rely on the informal sector to push their own products and penetrate markets.

Image result for informal market kenya

(source: https://www.zedbooks.net/blog/posts/women-informal-economy-urban-africa/)

In short, informal businesses understand trends, customer preferences and purchase habits. They innovate to meet retail needs and ensure that consumer demands for goods and services are met affordably and consistently. They are likely the largest untapped reservoir of market intelligence in Africa.

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

 

 

Automation and How Africa Can Survive It

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This article first appeared in my weekly column with the Business Daily on April 1, 2018

The Overseas Development Institute (ODI) recently released a paper on Digitalisation and the Future of Manufacturing in Africa. The Fourth Industrial Revolution, with increasing use of advanced technologies such as 3D printing and robotics, is expected to have a major impact on the manufacturing process globally. The paper seeks to answer this question: Are robots taking our jobs? What ODI’s research found is that it depends on the stage of automation in the country as well as the strategy the country employs going forward.

The analysis reveals that African countries have a window of opportunity to link manufacturing with job creation even as the uptake of automation becomes more aggressive. There is an inflection point where the cost of automation will become cheaper than the cost of labour in manufacturing. In the USA, the inflection point is fast approaching and robots may become cheaper than US labour by 2023; that’s in 5 years. The risk of automation taking jobs is even higher in other countries. Studies indicate that the impact of automation on employment can be considerable and that 57% of jobs in the OECD, 69% in India and 77% in China are at risk of being automated.

Image result for automation

(source: http://myventurepad.com/automation-world-everything-need-know-industrial-automation/)

Coming back to Kenya, the risk of jobs being automated is less acute because the inflection point at which automation becomes cheaper than labour comes in 2034; that is a window of opportunity that is roughly 10 years longer than in the US. Ethiopia faces the inflection point between 2038 and 2042. What this means is that Africa has about a 15-25 year window where labour will remain cheaper than automation, thus sustaining the incentive to shift manufacturing to the continent due to cheap labour. Human labour rather than robots will continue be the cheaper option for factory floors in Africa for a while to come.

However, there is another inflection point that is equally as important; the point at which robots in other countries become cheaper than African labour. The paper predicts that US robot costs will become cheaper than Kenyan wages (in the furniture sector) by 2033. Thus, by 2033, using robots in manufacturing in the US will be cheaper than using Kenyan labour to make the same product. This is bad news because as the cost of capital falls for producers in developed economies, they may find it increasingly efficient to re-shore production from offshored plants back to their own ‘smart’ factories. This will mean Africa will no longer be able to use the ‘cheap labour’ narrative to attract manufacturing to the continent.

Image result for automation

(source: https://techcrunch.com/2016/04/21/the-automation-revolution-and-the-rise-of-the-creative-economy/)

This research points to the reality that African countries must adapt to a digital future. While there is still window of opportunity where human labour continues to be cheaper than automation, this window should be used for two purposes. The first is to leverage automation for the creation of new employment opportunities such as ‘digital’ jobs. Secondly, Africa must begin the process of developing sectors that less vulnerable to automation and skill Africans to work in those sectors.

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

 

 

Podcast: Why Africa needs to pay a lot more attention to politics in China

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I talked with Eric Olander and Cobus Van Staden of the China Africa Project Podcast and discussed why Africans need to pay more attention to what happens at events like the “Two Sessions” gatherings given China’s large and growing importance in African trade and development. This drew on an earlier column I wrote on Africa and China.