Is Industrialisation the answer to Kenya’s Economic Problems?

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This article first appeared in my weekly column with Business Daily on Apri1 19, 2015

Industrialisation is often touted as the answer to development in Kenya and Africa as a whole. Industrialisation here refers to the process in which a country transforms itself from a society based on primarily agricultural and natural resource extraction into one based on manufacturing of goods.

There is already indication that the government is grappling with the issue of industrialisation as seen in a proposal, made a few weeks ago, to end the importation of second-hand clothes and vehicles. The argument is that imports should be curtailed in order to foster industrialisation in the East African Community (EAC).

This is import-substitution industrialisation, which is essentially a trade and economic policy which advocates replacing foreign imports with domestic production premised on the notion that the region should attempt to reduce its foreign dependency through local production of industrialised products.

17148876-abstract-word-cloud-for-import-substitution-industrialization-with-related-tags-and-termsThis has been a dominant theme in development economics targeting mass poverty and increasing productivity within a given country or region. It is an inward-looking economic theory focused on bringing developing countries into the prosperity of industrialised nations.In all fairness, this position makes sense in some ways; the intention of ushering in development and self-sufficiency by moving beyond agriculture and natural resource extraction through subsidising vital industries is laudable.

As it stands, non-industrialised countries such as Kenya are dependent on industrialised ones because they have no alternative but to buy manufactured goods which lead to a vicious cycle. Further, industrialisation can be a useful link between rural and urban areas where the outputs of one feeds into the inputs of the other. Successful industrialisation also relies on efficient and functional transport and communications systems. Industrialisation can also lead to creation of better links between rural and urban areas as well as improve transport and communications.

It can also improve Kenya’s export profile, which is a trade deficit country. Indeed, Kenya recorded a trade deficit of Sh86,484 million in January 2015 alone. Industrialisation can also play an important role in creating products which meet domestic needs can be exported to earn forex.

trade_deficit_generic_mediumIn terms of function, industrialisation forces companies to compete with international competitors in terms of quality and price. At the moment EAC governments are seeking to facilitate industrialisation by banning imports of second-hand goods. The upside to this is that it allows new industries the time and space to get their formula right. Yet a ban on imports means that inefficiencies and sub-standard goods will be allowed to flourish, limiting choice and forcing consumers to buy expensive goods of potentially low quality.

Not only is this against the poor but it can also lead to industrialisation supported by protectionist government policy which can cultivate a culture of mediocrity. Industrialisation also poses additional challenges such as whether Kenya has the following: a variety of raw materials to produce finished goods, a constant supply of affordable energy, a large number of engineers, a dependable supply of both skilled and unskilled workers as well as capital goods and money for investment.

Further, the creation of by-products and waste has to be carefully managed to avoid chronic, dangerous pollution from becoming the norm. As Kenya eyes industrialisation as a catalyst for economic development, a cost-benefit analysis must be done to determine how it can be structured to spur sustainable development.

Ms Were is a development economist. anzetsew@gmail.com, twitter: @anzetse

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This is exactly what terrorist attacks are costing Kenya

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This article first appeared in my weekly column with the Business Daily on April 12, 2015

Almost two weeks ago Kenya experienced yet another horrific terrorist attack credited to militant Islamic group Al-Shabaab. The human loss experienced is immeasurable and Kenyans are still reeling in the aftermath of the massacre.

Terrorist attacks do not only cause loss of lives, they also have long-standing effects on the economy. Terrorism here refers to premeditated, politically motivated violence perpetrated against non-combatant targets by sub-national groups or clandestine agents, usually intended to influence an audience. In general, terrorism reduces consumers’ and firms’ expectations for the future and forces governments and the private sector to invest in security measures and redirect investment away from more productive economic uses.

Weekend of Violence Photo Gallery(source: http://s4.firstpost.in/wp-content/uploads/2013/09/kenya-attack.jpg)

For example, many firms in Kenya spend considerable capital on security costs which is essentially unproductive in that it does not add to their output or improve their product quality. Terror attacks in Kenya have also triggered geopolitical conflict, which is causing further economic disruption by increasing the likelihood of future attacks.

Direct costs of terrorism include the value of assets damaged or destroyed such as plant, equipment, structures and merchandise.  Economic activity is disrupted so lost wages and other forms of income are also part of the direct costs of terrorism. The direct costs of the attacks on Westgate for instance were estimated to cost Sh10 billion. In terms of indirect costs, Kenya’s ability to attract FDI has been hit by such attacks. Indeed, analysis reveals that the presence of terrorist risk corresponds to a decline in the net FDI position equal to five per cent of GDP.

This is attributed to the creation of climate of uncertainty that envelopes the country whenever attacks happen. This prevents potential investors from making new capital investment as they are unsure of the economic implications of the attacks and thus overlook Kenya for more stable economies.

EAC

(source: http://financialjuneteenth.com/wp-content/uploads/2014/12/Investment-opportunities-in-The-East-African-Community-www.financialjuneteenth.com_.jpg)

Indirect costs of terrorist attacks also affect the transportation industry because demand for air travel declines, passenger fares decline, and the inability of heightened airline security personnel to readily process travelers lead to further declines. Tourism in Kenya has obviously been a casualty with travel advisories discouraging foreign nationals from travelling to the country which is particularly bad as often warnings on non-essential travel attract remove insurance cover. Ironically, the travel advisories may fuel terrorism further. How? Well, by contributing to the collapse of the coastal tourism industry, the travel warnings may simply be increasing the joblessness, idleness, poverty, drug use and overall desperation—all well-known catalysts of terrorism.

masaai(source: http://www.onepiecetravel.com/upimg/090911/1_030225.jpg)

Other indirect costs of terrorism could include the pain and suffering of the victims and their relatives as well as the psychological trauma experienced by a stunned nation. Psychological trauma may have negative short-term impact on productivity.

Interestingly in other countries such as the US, the 9/11 attack had a stimulating effect on the economy where monetary and fiscal authorities stimuli were effected to offset the macroeconomic consequences of the attacks.Because of damage accrued, there was a surge in the private sector demand for liquidity which was met by the Federal Reserve cutting short-term interest rates and increasing short-term lending (discounts and repurchases).  Further a $40 billion emergency spending package provided a strong fiscal stimulus.

But sadly developing economies such as Kenya often cannot take such action because they do not have ready access to international capital markets and the fiscal authorities cannot redirect already strained expenditure.

 Ms Were is a development economist. Email: anzetsew@gmail.com, twitter: @anzetse

The economics of geography and why it matters

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This article first appeared in my column with the Business Daily on April 5, 2015

There is a little known branch of economics called Economic Geography that Kenya could pay attention to in order to gain new insights on factors that inform social and economic development. It is essentially the study of location, distribution and spatial organisation 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.

397px-Not_in_winter.svg(source: http://upload.wikimedia.org/wikipedia/commons/thumb/1/14/Not_in_winter.svg/397px-Not_in_winter.svg.png)

As a result, countries such as Kenya face chronic onslaughts of high levels of infectious agents because of our geographical location. 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 per cent.

A country’s geographical location also pins down its position on the globe with regard 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 the 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.

slave_trade_1650-1860_b - www.slaveryinamerica.org(source: http://www.slaverysite.com/slave_trade_1650-1860_b%20-%20www.slaveryinamerica.org.jpg)

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.

true_size_of_africa(source: http://infobeautiful2.s3.amazonaws.com/true_size_of_africa.png)

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 per cent. 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.

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 elite and fail to trickle down to the poor. There is an interface between geography and human behaviour. Political instability, the chronic mismanagement of funds by African governments 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.

Ms Were is a development economist. Email: anzetsew@gmail.com; twitter: @anzetse

Race and Development: Why Kenyans are Livid with the Chinese Restaurant

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This article first appeared in my column with the Business Daily on March 29, 2015

Last week, Kenyans were outraged when it came to light that a Chinese restaurant in Nairobi had a policy of denying black people entrance into the establishment after 5pm.

Of course fury and outcry ensued and the restaurant has since been closed for allegedly failing to comply with various rules. But frankly, why are Kenyans surprised?

Racism has always been a prevalent theme in relations between African and non-African nations. Tensions even exist among Kenyans of different races and although we can all claim to be one nation and one people, the reality is starkly different.NIGGER-KING-STORE

But this Chinese Restaurant fiasco is important as it brings to light the unspoken racism narrative embedded in economic and social development efforts in Africa by non-African actors.

Africans are routinely infantilised in development circles with the default position often being that Africans cannot quite seem to figure out how to ‘develop’ and need external (read non-African) help.

Although one would assume that the “Africa Rising” narrative would challenge notions of African inferiority by demonstrating that the continent houses intelligent and innovative individuals, a closer analysis of this narrative reveals its flaws.

Africa is only ‘rising’ because it’s catching up with the rest of the world. Although there can be nuanced, ‘Africanised’ manifestations of this rising such as M-Pesa, essentially it’s a catch up game.

The symbolic representation of authority, expertise and knowledge are still non-African in origin. Indeed, the distinction between ‘developed’ and ‘underdeveloped’ is often framed in terms of EuroAmerican yardsticks of levels of industrialisation, gross domestic product and democratisation. In the past EuroAmerica was the sole fount of wisdom but now with the economic rise of China, they too have become ‘experts’ from whom Africans can learn.

maxresdefaultNow there is no problem in learning from others. Indeed, it should be encouraged but if distinctions between those who possess expertise and those to whom it should be imparted are based only on where they come from and the colour of their skin, that’s a problem. Perhaps part of the outrage with the Chinese restaurant incident is that Kenyans expected citizens from a nation that has been subjected to racism itself to be repulsed by racism.

Indeed, perhaps a silent bond between Africa and China, especially at government levels, is that both parties ‘get’ how annoying racism can be when dealing with certain EuroAmerican delegates.

Despite what has been vociferous Sinophobic commentaries of China’s ‘neo-colonial’ and ‘imperialistic’ march into Africa by some quarters, a sense of solidarity between China and Africa persists. Perhaps Kenyans, like other Africans, felt that although China’s involvement in the continent has serious problems and drawbacks, at least racism is not the infuriating invisible elephant in the room.

Maybe Kenyans felt that China, and therefore the Chinese, are development partners that genuinely respect them. The Chinese restaurant fiasco busted this myth and feelings of solidarity. Kenyans felt deeply violated. Because this blatant act of racism occurred here, the audacity of the disrespect was incredible. But to the point made at the start, Kenyans may be outraged but they should not be surprised by what happened.

china_africa_1107 (1) Why? Because, despite the fact that we live in a multipolar world with multiple centres of power, Kenya (and indeed Africa) has largely failed to use this to our advantage.We don’t seem to be too intelligent. We still export raw materials and import manufactured goods — they just come from China now.

This incident may be the much needed wake-up call for Kenyans to realise that the perception persists that we need to work smarter and earn genuine respect. Maybe now we get it.

Ms Were is a development economist. Email: anzetsew@gmail.com. Twitter: @anzetse

 

Economic case for cushioning Kenyans with social security

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This article first appeared in my column with the Business Daily on March 22, 2015

Often discussions around social security and welfare in Africa are grounded in the narrative of human rights: the right to health, food, employment, and so on.

Kenya should seriously consider putting more public funds into social security because of the economic benefits it can catalyse.

Social security can be loosely defined as the provision of a steady stream of income to replace lost wages due to unemployment, retirement, disability, or death.

In Kenya, social security is weak and only limited to free primary education, a presidential bursary scheme, retirement funds, insurance for work-related injuries, limited cash transfer programmes and the National Hospital Insurance Fund.

Implementation of these benefits, however, is mired in bureaucracy, corruption and poor implementation. The urgency of expanding social security protection is dire given that 46.7 per cent of Kenyans have difficulty getting food.

hunger(source: http://logbaby.com/files/logo/14596.jpg)

Let’s look at poverty, the ironies therein and how social security resolves the mess. Low income people have a high propensity to consume; meaning they want to buy goods and products but lack the means to do so.

Ironically, those with the highest hunger to consume are often unable to do so.

By providing income support, social security provides a means through which the poor can meet their basic needs.

This bolsters the economy because beneficiaries spend their monthly benefits, which in turn boosts the economies of counties in which the money is spent.

Remember that often those who receive social security benefits are unable to save. Kenya’s savings rate is 13 to 14 per cent of the gross domestic product.

gdp(source: http://www.tutor2u.net/blog/images/uploads/shutterstock_81874246.jpg)

Beneficiaries spend the money on goods and services, pumping it back into the economy. Clearly, this leads to the next point, the multiplier effect of social security

Income used to buy goods and services allows companies to register more profits and hire more employees who then spend their wages on more goods and services. This creates a virtuous cycle of increased spending and income for more Kenyans.

Thirdly, social security is a massive employer. In the US alone, for example, nine million jobs are linked to the social security system. The flip side of this is that, if done carelessly, it could add to the already onerous public wage bill.

However, this needn’t be the case as a creative reorganisation of the current public office positions could surely reallocate thousands of shillings to meet the needs of the most poor within a social security mandate.

Also, is something to be said for tapping into the skills of employable individuals, engaging them in meaningful work and lowering unemployment rates.

Further, Kenya arguably has a problem with labour oversupply giving rise to high unemployment, wages are often low, interest rates are high and therefore aggregate demand is muted. Social security provides an injection of capital that boosts aggregate demand.

sovereign-wealth-fund0Finally, social security strengthens savings and lowers dependency rates. This dependency dampens the ability of Kenyans to save and invest. Once relieved of the high levels of dependency, those earning an income can plan the use of their capital in a more productive manner.

Ms Were is a development economist. Email: anzetsew@gmail.com Twitter: @anzetse

Economic benefits of decentralisation won’t be immediate

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This article first appeared in my weekly column with the Business Daily on March 15,2015

What will be the impact of the introduction of political, administrative and fiscal decentralisation in Kenya? More importantly, what are the pros and cons of decentralisation with regard to economic development?

How Male Psychology affects Economic Performance

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