This article first appeared in my weekly column with the Business Daily on September 27, 2015
Kenya has been in the throes of a teacher’s strike rooted in the fact that government has failed to pay teachers a 50% pay raise despite being ordered to do so by the courts. Government’s argument is that they don’t have money. What does government mean when they say they don’t have money? And is that the only economic factor to consider? I am of the view that teachers should be paid, so what’s the problem and can these issues be resolved?
Well let’s look at concerns economists may have that government will face in implementing a pay hike for teachers.
Firstly, raising teachers’ wages will raise recurrent expenditure. This column has already analysed government spending patterns; recurrent spending is already too large and has to be brought down. Analysis by the International Budget Partnership indicates that in 2013/14 government spent 78% of the budget on recurrent expenditure. For 2014/15, recurrent expenditure will eat into 63% of the budget. This year, the recurrent vs. development estimate split stands at 52% to 48%. Implementing a wage increase for millions of teachers will push the recurrent budget up. This is a concern.
Secondly is the budget deficit; the 2015/16 budget deficit was due to be 8.7 per cent of GDP. Implementing the teacher’s pay rise may raise this to 10-11 percent of GDP according to some analysts. Why is this a problem? Well the larger the budget deficit the more pressure there is on government to borrow to meet this gap. The government is already in significant debt; KES 2.5 trn. Frankly, there is already concern on how government is going to service this debt, particularly the part that is foreign-denominated in the context of a weak shilling. It is unlikely government will borrow more to pay the teachers.
The final issue is liquidity. The value of the Kenyan shilling has been tanking and although it seems to be stabilising, it is doing so at a much weaker point than it has ever been for years. This has negative implications for servicing foreign- denominated debt as well as meeting the country’s import bills. What does the teacher’s strike have to do with all this? Well remember, the government is trying to stabilise and eventually strengthen the KES and there are several factors that affect the value of the shilling. One such factor is how much money is moving through the economy. The CBK monitors and tries to control how much KES is flowing through the economy. Because of the decline of the shilling, CBK has been trying to reduce the amount of shillings in circulation to control KES depreciation. In fact, the CBK has sought to drain excess liquidity from the market by offering Sh6 billion in repurchase agreements and get that money out of active circulation. The concern is that if teachers are paid, it will inject significant amounts of shillings into the economy and this may put additional downward pressure on the value of the KES. As said before, this will have negative effects on the government’s ability to meet import bills and service foreign-denominated debt. So this may be another factor informing government’s reluctance to pay the teachers.
These are some of the factors behind why Kenyans are being told by government that if teachers are to be paid, taxes will be hiked. But the truth of the matter is that there is a legal and, in my view, moral obligation to implement the wage increase. Government should look at the gravity of the country’s economic position and use this strike to remedy the problems. How?
Well on recurrent expenditure, government simply must reduce this in any case. There is clearly concern in the minds of many Kenyans on the amount elected officials earn in this country. So government can implement austerity measures starting with cutting the salaries of elected officials. Linked to this is fiscal deficit issue; government has to cut spending, period. The problem Kenyans seem to have is that elected officials are willing to raise their wages but when it comes to teachers, Kenyans are told that government is broke. This anomaly can be remedied by cutting the wages of those officials and direct that money to teachers.
Then there is the issue of corruption at both central and county government levels. Kenyans know public funds are being misused by public officials and feel that if corruption were curbed, there would be money to pay the teachers. Thus until Kenyans see the government punishing corrupt public officials and getting a handle on corruption, there is likely to be intolerance with the notion that there’s ‘no money’ to pay the teachers.
The liquidity issue is the only area in which I also have concerns but frankly government should be developing strategies to, for example increase forex earned by the country, so that there is less pressure to reduce KES circulation to control shilling depreciation.
Importantly, the challenges government will have in implementing the wage increase should not be taken to be reasons as to why government should not pay, rather the factors are indications of structural problems in the economy that government ought to be addressing in any case. The teachers’ strike simply provides fresh impetus for the challenges to be faced and addressed.
Anzetse Were is a development economist; email: email@example.com
This article first appeared in my weekly column in the Business Daily on September 20, 2015
The World Bank makes the point that the structural economic transformation in Africa is not following the path that other developing countries have followed as they expanded and sophisticated their economies. To put this statement into context, different sectors of the economy contribute to GDP growth and these are typically characterised as three core sectors: agriculture, industry and services. Typically the path to economic development is one where there is a shift from the traditional sector of agriculture into industry and manufacturing. From there the economy tends to evolve further into services. However, this is not the pattern of growth that Africa is undergoing; Africa seems to be diversifying away from agriculture, not into industry but directly to services. Indeed in Africa, services contributed 62 percent to the cumulative growth in GDP, while manufacturing contributed 25 percent and agriculture 13 percent. Manufacturing is not really taking off on the continent and Africa is leapfrogging industry straight into services. Services here refers to a broad body of activity such as health, education, information and communication, hospitality, public administration, wholesale and retail trade, finance and insurance, and real estate among others.
Kenya falls right in line with this trend; indeed recent statistics indicates that agriculture contributed 29.3 percent to GDP, industry stood at 17.4 percent and services an overwhelming 53.3 percent. So while the share of GDP is contracting for agriculture, industry is remaining fairly stagnant and there is rapid growth in services.
But why is this important? Why should Kenya and indeed Africa be trying to industrialise? Shouldn’t Kenya be happy that we are leapfrogging industry into services? Can this not be perceived as an advantage? The answer to that is a qualified no and here’s why; firstly historically manufacturing been the driver of economic growth and has allowed countries, particularly developing countries, to catch up with advanced economies. From1950 to 2005, the pattern of industrialization has closely reflected changes in global patterns of development.
Secondly, industry is an important job creator and it creates jobs job opportunities for variously skilled levels of labour. Indeed, in services, the sub-sectors important to GDP tend to have low wage employment intensity (employment per KES million) and in Kenya, employment within the services sector has been declining since 2000. Given levels of unemployment in Kenya, it would be prudent to boost a sector that can meaningfully contribute to this problem. Further, manufacturing is traditionally the main sector responsible for the diffusion of innovation and productivity change. The development of industry allows countries to employ technology in building productivity and learning.
Finally, there are risks of services leading the path to economic growth because Kenya does not have the necessary components that form the foundation on which services can function effectively and efficiently. Simple factors such as poor electricity supply, low levels of infrastructure penetration and expensive travel costs negatively inform the extent to which services can lead economic growth. Bear in mind that it is more likely that some of these deficits would have been addressed had the country been diversifying into industry. Additionally the price of services tends to increase more rapidly than that of manufacturing goods; thus a preponderance of services growth may lead to a plethora of activities that cost Kenyans more than if growth had been led by industry. Add to this the fact that in Kenya, labour tends to move away from agriculture but into low skill services with relatively low productivity growth mainly in informal retail trade; this has been dubbed premature deindustrialisation.
This discussion should not make one conclude that services (or agriculture) does not play an important role in economic development, clearly it does. The emphasis should rather be on how to build industry in a manner that allows it to play its true potential role in economic development and do so in a manner that fosters links between agriculture and manufacturing and between services and manufacturing.
The reality is that at present, without growth in industry and manufacturing, Kenya and indeed Africa will face limited growth prospects and will remain vulnerable to external shocks, adverse changes in terms of trade, and remain the eternal producer of raw fuels and metals to which little value is added and which are volatile raw export commodities. With such grim prospects, there should be a greater impetus to boost industry performance in Kenya and indeed the continent.
Anzetse Were is a development economist; email: firstname.lastname@example.org
This article first appeared in my weekly column with the Business Daily on September 13, 2015
It is no secret that the Kenya shilling has been tanking, nearing 106 to the US dollar last week. Bear in mind that this is not the lowest the shilling has ever reached; KES reach USD 107 in October 2011. However, conditions now are different and have informed the anxiety about the depreciation of the shilling. Not only does Kenya’s Current Account Deficit remain substantial, the country is racking up foreign denominated debt. As of March 2015, Kenya’s public debt stood at KES 2.5 trn, about KES1.3 trillion (52%) from domestic sources, with the remainder of KES1.2 trillion in foreign borrowing (48%). Yet total public debt is expected to go up to 2.9trn by end year. How much of this will be foreign denominated? This question becomes important when analysing the KES value issue as it adds to the problem of a scarcity of dollars.
The factors that are causing KES depreciation are numerous and include high liquidity in the market after the government released payments to state-linked entities and ministries, a strengthening of the US dollar, Kenya’s high current account deficit which has led to a scarcity of dollars, high imports, and poor tourism inflows the last of which is an important forex earner. Finally, foreign investors have been exiting the Nairobi Securities Exchange taking dollars along with them. So what can and what has the CBK been doing to address these pressures on the shilling?
Well firstly is the direct sale of foreign exchange. However, such a strategy is constrained by two factors. Firstly, Kenya is an import economy, thus by definition, forex is scarce. Yes, the government currently has Foreign Exchange reserves of about $6.4 billion as well as a precautionary facility from the IMF, but these options are limited. Not only must dollars be drained from the economy to make trade payments, lower exports and the poor performance of tourism add a further burden on the CBK’s ability to throw dollars at the depreciation problem. Further, high dollar denominated debt means that the government has to start saving dollars in order to make the repayments that are maturing on this type of debt.
Secondly, the CBK can address the depreciation problem by fiddling with interest rates; and it has. CBK raised the Central Bank Rate (CBR) to 10.0 percent in June 2015 from 8.50 percent, which had been stable since May 2013. CBK then again raised CBR from 10% to 11.5% in July 2015. But there are several problems with raising interest rates to influence the performance of the shilling. Firstly, it often has the effect of slowing economic growth due to reduced investments and consumption. The conundrum here is that the performance of the Kenyan economy will be negatively affected by a hike on interest rates; yet the Treasury’s rosy growth projection of up to seven per cent this year was based on interest rates remaining stable at around the May 2013 levels. Remember that the Kenyan economy is already performing at the subpar level of 4.9% GDP growth in first quarter. Yet interest rates hikes make the prospects of the rates of future GDP growth even grimmer. However high GDP growth performance was based on lower interest rates, the very same lower interest rates government had hoped to rely on to generate the type of economic growth to generate funds that can be used to accumulate revenue as well as build up forex reserves. Thus the irony is that the interest rate increases CBK is using to try and control KES depreciation may constrain GDP growth and thus the government’s ability to accumulate the funds needed to give it wiggle room in controlling interest rates in the future. Difficult conundrum indeed.
Finally, the CBK can reduce the amount of shillings in circulation to control KES depreciation. Indeed, the CBK has sought to drain excess liquidity from the market by offering Sh6 billion in repurchase agreements. But again the CBK is constrained, mainly by political considerations. It is well known that Kenya has a very high recurrent public expenditure bill and thus the government is in a situation where more KES are regularly being released into the market than had been the case for previous administrations, pushing KES liquidity in the market up at regular intervals. But there is no way, as of now, that that public expenditure bill will be reduced; such steps would be too politically acrimonious. Add to this the fact that Kenyan teachers just secured a pay increase. That hike, if calculated up to 2017, will be Sh99.8 billion incurred on teachers’ pay alone. It is also likely that payments to police and other civil servants will rise; thus the public recurrent expenditure is on the rise. Sadly, government’s options in creating the funds to make such payments possible will, again, affect government’s ability to control the depreciation of the KES. How can government pay an ever increasing public expenditure? One by raising taxes which reduce investment and consumption and reduce GDP growth, or additional borrowing by government in domestic markets which crowds out private sector, or foreign borrowing which adds to the problem of additional foreign denominated debt. Thus here, again, CBK’s impact in lowering KES circulation via draining excess liquidity is limited given all these political considerations. Indeed in addressing all these wage demands, government again will be put in the difficult position of very high liquidity in local markets, coupled with taking actions that may dampen GDP growth while also potentially accruing more foreign denominated debt. Again, a difficult conundrum indeed.
Given all these factors, it is clear that the CBK is in a very tight position with regard to the monetary policy options at its disposal to control the depreciation of the shilling. It will be interesting to see the action CBK takes in coming months in addressing what is truly a difficult problem.
Anzetse Were is a development economist; email: email@example.com
This article first appeared in my weekly column with the Business Daily on September 6, 2015
Last week Kenya hosted the Eastern Africa Region Pan African Congress and later this week will host the NEPAD APRM Summit which is rooted in the notion continental unity and cooperation. This is therefore a good time to take stock on how economically viable Pan Africanism, loosely defined as the ideology of African unity, is for the country and continent.
It should be noted that current conversations on Pan Africanism are very different than they were even 20 years ago which occurred in a context of poor economic performance and chronic dependence on international aid. Today, African governments seek to make the shift from aid to trade and from dependence to self-reliance. Indeed, the incoming president of the African Development Bank, Adesina (PhD) in his inaugural speech last week stated that, ‘We must integrate Africa– grow together, develop together. Our collective destiny is tied to breaking down the barriers separating us’.
The positive elements of economic Pan Africanism are clear. Through economic integration Africa can do three important things: coordinate the economic development of the continent efficiently, negotiate more effectively on global trade and economic platforms, and leverage economies of scale.
When Africa is considered as a unit, comparative advantage and efficiency can preponderate in investment decisions and economic development. an economically united Africa has stronger global bargaining power and as a continent, Africa is a more attractive investment destination with a market of over one billion open for business to both foreign and domestic entities. Further, economic Pan Africanism can encourage regional convergence in key indicators such as the rate of inflation, budget deficit and public debt, as well as external current account balance.
However, is economic Pan Africanism truly viable? It is true Africa has taken important steps towards economic integration and most sub-Saharan African countries are members of one or more regional arrangements. These include, the Economic Community of West African States (ECOWAS), the Economic Community of Central African States (ECCAS), the East African Community (EAC), the Southern African Development Community (SADC), and the Common Market for East and Southern Africa (COMESA). The aim is to eventually create a Continental Free Trade Area (CFTA) by 2017. Yet, even when one puts aside the difficulties faced in ensuring that such regional blocs actually function (such as the intricacies of the rules of origin), there are two core problems that impede further integration.
Firstly, competition exists within regional blocs. This is partly informed by the heterogeneity of economies where weaker economies exist alongside stronger neighbours. For example, Kenya is the strongest player in the EAC and thus dominates the union. This can give rise to a feeling that Kenya does not really ‘need’ other countries in the EAC to build its economy. Indeed there can exist the notion that Kenya is opening up to neighbouring markets with lower purchasing power and thus while other EAC members benefit from Kenya’s markets with ‘deep’ pockets, Kenyan companies do not equally benefit as neighbouring countries have ‘shallower’ pockets. Further, in the EAC Kenya wants to hold its position as the dominant player in the region. Isn’t the current sugar and milk row between Kenya and Uganda an indication of the limits of the ‘spirit of Pan Africanism’ even within regional blocs?
The second factor that prevents regional integration is that competition exists between different regional blocs. This issue is exacerbated by the reality of overlapping and multiple regional bloc memberships. In terms of the reluctance with regards to integrating regional blocs it is no secret that South Africa and Nigeria dominate Africa economically. Therefore, it can be difficult for countries in the EAC for example, to feel compelled to open their smaller economies to SADC or ECOWAS which house these dominant economies. A unification of regional blocs may mean that trade imbalances between regions are exacerbated leading to wider economic gaps with larger economies and economic blocs dictating the pace of economic growth.
Indeed, there are general issues that hinder continental economic integration continentally such as national government concerns of public revenue loss due to tariff reduction, a lack of assurance that market integration will align with national economic interests and the concern of an unequal distribution of continental integration benefits. Further, there is difficulty in reconciling a trade-off between short-term losses and the long-term benefits from trade integration, which is particularly important in the context of the short-term five-year election cycles in which African governments operate.
Thus it seems clear, that while the spirit of Pan Africanism is strong, there are real obstacles that impede the economic integration of the continent. The (good) news is that there does seem to exist a commitment to regionalisation and continental economic integration. It will be interesting to see how some of the challenges elucidated above will be addressed in this dance towards economic unity.
Anzetse Were is a development economist; email: firstname.lastname@example.org
This article first appeared in my column with the Business Daily on August 30, 2015
There are a couple things happening in China right now that Africa should be looking at very keenly. We won’t talk about Black Monday here because what happens on the Chinese stock exchange does not necessarily directly speak to the impact China’s economy has on Africa. Let’s talk about what really matters for Kenya and the continent.
Firstly, the structure of the Chinese economy is changing; China has been undergoing a shift from heavy industry to services. In fact The Economist states China’s, ‘services sector supplanted manufacturing a couple of years ago as the biggest part of China’s economy, and that trend has only accelerated this year’. This has massive implications for Africa which has benefitted immensely from the commodity hunger from China, particularly for commodities from the extractives sector. How will Africa be affected? Well, while some countries such as Nigeria seem to be weaning their economy from an over-reliance on oil, other African countries such as South Sudan, Chad, Equatorial Guinea, DRC, Gabon and Angola still rely heavily on oil exports even for national budget formulation. Thus, Africa can expect continuing downward momentum from China in terms of a demand for such commodities and thus reduced revenues.
The wane in commodity demand from China is set to have a series of effects on African economies. For example, sovereign bond issues from oil-exporting African countries which still rely heavily on such exports for public revenue generation should be approached with caution not only because of waning demand but obviously also due to lowering oil prices. Investors should look at the overall export profile of a country before making a decision to invest. Further, countries such as Kenya and much of East Africa, which are set to become oil producers in the near future can expect oil ventures to be significantly less profitable than was the case a few years ago. Not only does demand from countries such as China seem to be waning, there is a decline in oil prices and a definite shift in much of EuroAmerica towards renewables. Such factors mean that the previous assumption that ‘oil= healthy revenue’ popular in the minds of many African governments is being challenged in an unprecedented manner. One need only look to Ghana to see the pitfalls that abound when a country overestimates projected revenue from oil sales.
Secondly is the devaluation of the yuan; the recent devaluation should be perceived as a mixed bag for Africa. On one hand, for an import country like Kenya, the devaluation of the yuan is frankly a sigh of relief in what has been a very bleak import outlook in the context of the depreciating Kenya Shilling. A look at Kenya’s import profile reveals that, by far, Kenya’s largest share of imports come from Asia with China leading the way particularly in capital and consumer goods. Thus the yuan devaluation is one bright spot in what has seemed like an unending rise in import bills. The flip side of this equation however is that a weaker yuan may make African countries deepen an already deep reliance on Chinese imports making them more sensitive to volatility in the Chinese economy. However, the devaluation of the yuan is already being seen to put depreciating pressure on the Kenya Shilling which would make imports from other parts of the world more costly for the country. This is a reality Kenya simply cannot afford as it would exacerbate current account deficit pressure.
Finally, there is another shift occurring in the Chinese economy from being a predominantly export economy to one more reliant on domestic consumption. Wages have risen as millions of Chinese have reaped dividends from economic growth in which millions of Chinese were pulled out of poverty. Thus overall, Chinese have more disposable income to purchase finished goods. This shift from export reliance to local consumption seems to be part of an on-going overhaul that has perhaps been informed by the decline in exports from China after the Global Financial Crisis of 2008-09. It would be no surprise to surmise that China wants to buffer itself from the vulnerability of external demand. This, however, leaves Africa with a series of questions: Which country will now become the dominant absorber of African commodities? Can Africa manufacture goods of sufficient quality to appeal to the Chinese market? Where will commodity-reliant countries source alternative revenue now that this shift in China is happening? Further, who will be the next ‘world factory’? Africa?
Thus, there is good reason for Africa to keep an eye on China, if for nothing else, to see how Africa can make the most use of on-going shift in China’s economy.
Anzetse Were is a development economist; email: anzetsew@gmailcom
This article first appeared in my weekly column with the Business Daily on August 23, 2015-
The headlines have been full of the sugar row unfolding across Kenya. Why is Kenya importing sugar from Uganda? Should the sugar industry be protected? What about the livelihood of sugar farmers? Sadly this issue has been politicised and muddied what the focus of the conversation ought to be. So let’s deal with a few issues.
Firstly, should Kenya be importing sugar from Uganda? Well, Uganda produces about 465,000 tonnes of sugar consumes 320,000 tonnes, leaving it with a 145,000-tonne surplus. Kenya produces 650,000 tonnes of sugar against a demand of 860,000 tonnes, leaving a 210,000-tonne deficit. So even if Kenya imported all of the excess sugar from Uganda, we would still have a deficit. Some sugar farmers are of the view that no imports should be allowed, but clearly that is not practical.
On the issue of the pricing of sugar from Uganda, according to the Departmental Committee on Agriculture, Livestock And Co-Operatives (DCALC) the average cost of producing a ton of sugar in Kenya is USD 870, compared to USD 350 in Malawi; USD 400 in Zambia and USD 300 in Brazil. The Kenya Sugar Board puts sugar production costs in Uganda at USD 180 a tonne. So yes it is true that Ugandan sugar is cheaper than Kenya’s but so is sugar from anywhere else it seems. But one has to ask, if this is a negative reality. The truth of the matter is that 45% of Kenyans live at or below the poverty line. Why should the poor pay more money for sugar because Kenya’s sugar industry is uncompetitive? Why should the sugar industry expect the poor to pay for its inefficiencies?
That said, government seems set on protecting the sugar industry. Duty on imported sugar was more than doubled to protect local production from cheaper imports. Sugar importers are charged Sh44.75 per kilogramme, up from Sh19.40. Of course some economists are of the view that this should not be happening because in raising duty, the government is enabling the continued survival of a sector that is inefficient, unproductive and uncompetitive; but protection of the industry continues.
The other side of the coin however is the reality is that there are thousands of farmers and millions of households who rely on sugar for income. Indeed, according to the DCALC the sugar industry in Kenya directly and/or indirectly supports six million Kenyans and has a major impact on the economies of Western Kenya and Nyanza regions and, to a lesser extent, Rift Valley. So the reality is that any factor that is perceived to be a threat to these households will cause acrimony.
However the industry is beset with issues; according to the IEA, these include poor cane husbandry practices lead to low yields and the use of poor seed variety which results in low sucrose content and late maturity. Other factors include expensive inputs and agricultural equipment, lack of credit facilities for small growers (which dominate the sector; of the 300,000 cane farmers only 4,500 are large scale), the lack of irrigation facilities and poor infrastructure. Further modern technology is often not used although it would decrease the cost of production.
But this brings in the broader question of whether the sugar belt in Kenya should be dominated by sugar farming. Are there other crops that can be farmed there that help address Kenya’s food security issues as well as yield more profit for farmers? This should be a core part of the conversation because sugar has not appeared to have made a noticeable impact on improving the lives of residents of the sugar belt.
Additionally, and this is the part Kenyans seem to enjoy addressing the most, there is the issue of sugar smuggling. The Kenya Sugar Board clearly has weak surveillance capacity and thus cannot effectively handle the issue of sugar smuggling along Kenya’s porous borders particularly in Eastern and North Eastern. Cases abound of business people repackaging imported sugar and selling it as locally manufactured sugar. This allows them to enjoy massive profit margins while glutting the sugar market and thus placing downward pressure on the price cane farmers earn for their crop. So a key element of this conversation is finding out who is doing the smuggling and how they can be stopped. Accusations and counter-accusations are of no use here.
But also bear in mind that there are irregularities within the sugar industry as well; between 2006-2012 a sugar company is said to have exported unknown quantity of sugar to the Democratic Republic of Congo, Ethiopia, Rwanda, Southern Sudan, Uganda Italy and the UK. Why did this happen when Kenya suffers from a sugar deficit?
This article has not exhausted all the angles that need to be considered in the sugar row but clearly there are numerous issues that ought to be addressed. And frankly, most of them are internal to Kenya. So Kenyans should not target their hostility at Ugandan sugar but rather use this issue to take time for self-reflection and look at the role Kenya itself plays in creating the problem in the first place.
Anzetse Were is a development economist; email: email@example.com, twitter: @anzetse
This article first appeared in my weekly column the Business Daily on August 17, 2015
Kenya, like many other African countries, has a dualism issue in the structure of its economy that informs the patterns of the economic development of the country. Although there are several forms of dualism active in the Kenyan (and African) economy, the article will focus on formal vs. informal dualism.
The formal sector of the economy comprises of activities that are captured in GDP statistics, tend to comply with legal and regulatory requirements (i.e. tax compliance, implementation of labour laws etc), offer jobs that are financially secure and tends to be the wealthier section of the economy. However, the informal sector exists as well.
Informal sector activities are typically not captured in official GDP figures, are often not officially registered, are not formally regulated, do not necessarily meet legal operational requirements and are typically not tax compliant. According to the IEA, in Kenya, the informal sector is estimated at 34.3% and accounts for 77% of employment. Over 60% of those working in the informal sector are youth aged between 18-35 years, 50% of which are women. In the East Africa region, the sector is the source of 85% to 90% of all non-farming employment opportunities. According to NORRAG, the informal sector is no longer confined, in terms of practice or as an image, to the road-side mechanic or dress maker, the sector now includes other areas such as ICT and related service enterprises. In fact the informal sector is now present in a wide range of business operations where skills are demanded and where opportunities for productive employment generation are found.
There are multiple implications of this formal vs. informal dualism; firstly the lack of clarity on the precise size of the informal sector translates to a lack of certainty with regards to the size of the Kenyan economy. Do GDP figures capture the informal sector? Although the informal sector is said to contribute about 18% of the GDP, is this a comprehensive figure? Is it understated or overstated? Is the economy is actually bigger or smaller than assumed? To what extent is the informal economy ‘guesstimated’ into official GDP figures? The ambiguity of the size of the informal sector means that Kenya does not really know how big the economy is; this then informs the accuracy of statistics such as the debt-to-GDP ratio that provide useful information on the extent to which the country is leveraged.
This formal vs. informal dualism also inform factors such as the ability of the country to move comprehensively in one direction. Policies and laws pertinent to the economy are mainly implemented and monitored with regards to the formal economy, leaving the informal behind. Other issues include social protection; workers in the informal economy are generally not covered by adequate social protection. This makes informal workers a vulnerable and sizable proportion of the Kenyan population.
Quality assurance is an additional issue. The formal economy tends to comply with established standards and quality norms; this is not necessarily the case in the informal sector. Some may meet industry standards while others do not; this has implications for consumer protection rights. Another issue is productivity; most informal sector players cannot afford analysis that informs them of the productivity of their enterprise. Thus inefficiencies are likely to continue in the informal sector, dragging down the sector’s efficiency.
Skills transfer is an additional issue of importance. While the government may change curricula in Universities and TVETs, this does not truly affect the informal economy as 60% and 73% of informal sector employees (with less than 20 employees) acquire their skills through apprenticeships. So the formal sector is likely to benefit for updates in curriculum while the informal sector does not. There are already implications to this dualism because, for example, apprentices in informal auto mechanics sub-sector have dropped sharply because many of the “older master mechanics” do not have skills to handle the “newer versions of injection engines”, they only know carburettor engines.
While there may be efforts being made to formalise the informal sector the reality is that there is limited incentive for the informal sector to do so. Formalisation is often an expensive process with registration fees, lawyer’s fees, social insurance payments for employees and, the big one, tax. Why should informal business owners formalise if the exercise will be expensive with limited benefits accrued?
In terms of a way forward, the informal sector in Kenya should develop Informal Sector Associations, as seen in West Africa, which are tuned into skills updating and allow for an easier track of emerging training needs. Such associations also allow for self-regulation, make it easier for interventions to be implemented and facilitate easier and a more accurate monitoring and analysis of the sector.
Anzetse Were is a development economist; email: firstname.lastname@example.org