EAC

Industrialisation in Kenya: What do political party manifestos say?

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This article first appeared in The East African on July 24, 2017

 

Further development of manufacturing can play a central role in driving economic transformation and job creation in Kenya. There is now a window of opportunity for Kenya (and other East African countries) to capitalise on positive underlying factors in the global economy – including rising wages in Asia, the rebalancing underway in China, and strong regional growth in Africa – and significantly expand its capabilities and global presence in export-oriented, labour-intensive manufacturing within the next 20 to 30 years.

But the recent performance of the Kenyan manufacturing sector has been weak. The share of manufacturing in Kenya’s gross domestic product (GDP) was only 9.2 percent in 2016 (well below average for a country with Kenya’s level of income) and this share has been declining in recent years. Several decades ago, Kenya had a relatively complex and substantial industrial sector by regional standards, but its East African neighbours have been catching up in recent years.

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(source: http://www.industrialization.go.ke/images/kenya_manufacturing.jpg)

Decisive and comprehensive action is required in order to reverse the decline, double manufacturing production and employment, and increase the share of manufacturing to 15 percent of GDP within the next five years. With this in mind, the Overseas Development Institute (ODI) and Kenya Association of Manufacturers (KAM) developed a 10-point policy plan to transform Kenyan manufacturing and create jobs. These 10 points, based on close co-operation amongst a range of stakeholders, aim to inform pre-election debates and can also be used by the new government to implement a more focused and effective industrialisation strategy.

There has been an analysis of the manifestos of the three main political parties to determine the extent to which they support manufacturing in Kenya and the region. The manifestos of Jubilee, the National Super Alliance (NASA) and the Third Way Alliance were launched at the end of June 2017. All three parties emphasise the industrial agenda as central to Kenya’s economic transformation in general terms, which is encouraging, with NASA emphasising innovative initiatives and especially the small and medium enterprise (SME) and informal sector, and Jubilee and the Third Way Alliance being more specific in their recommendations.

There are a range of notable similarities with the 10 policy priorities in the KAM-ODI booklet. Firstly, all three parties prioritise addressing either general or specific aspects of the enabling environment. The Third Way Alliance commits to addressing counterfeit goods, one of the KAM-ODI action points. Secondly, all three parties want to enforce a fiscal regime that is predictable and fair, a key action point among the ten policy priorities, and emphasise fair taxation in particular. Jubilee further discusses the action point on devolution. The Jubilee manifesto discusses the KAM-ODI action point on land banks and NASA and the Third Way Alliance discuss industrial parks, which need land. The Third Way Alliance pledges to work with county governments to set aside land for industrial parks, offering a practical way to implement the KAM-ODI action point on securing land for SEZs and industrial parks.

The feasibility of the creation land banks and setting aside land for industry will be linked to issues of acrimony over land title and cost of relocating populations on said pieces of land. For example, an SEZ was due to be set up in the Western part of the country but had to be scrapped as an agreement could not be reached on what land could be used due to claims of title on the piece of land. Thus all parties will have to undergo a thorough land audit in the areas the government intends to develop industrial parks and SEZs and begin with areas where there is clear land title that is not contested.

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(source: https://www.newsecuritybeat.org/wp-content/uploads/2012/07/kenya1.jpg)

In terms of energy, NASA discusses the need for an energy policy. Jubilee highlights the need for lower electricity tariffs for industrial usage and the Third Way Alliance calls for liberalisation of the energy sector and revisions to electricity billing and pricing to reduce the cost of electricity for key manufacturing sectors. Both NASA and Jubilee highlight the need for investment in electricity infrastructure. Jubilee also emphasises green energy and, in a similar vein, NASA and the Third Way Alliance focus on ramping up clean and renewable power generation.

What most of the manifestos are not clear on is how they will reduce the cost of energy in the country. For example, Kenya needs a reduction of five cents per kilowatt hour would bring the cost down to that in Tanzania. It is only the Third Way Alliance manifesto that states they will tackle the cost of energy issues by liberalising the energy sector and revising electricity billing and pricing. However, an additional problem with energy in Kenya is power outages; Kenya has more power outages than Uganda, Rwanda and Ethiopia. None of the manifestos are not clear on how this will be addressed. All three manifestos are vague on the type of reforms and investments needed to address inefficiencies and incentivise investment in power transmission and distribution.

All three parties suggest the establishment of industrial funds or development banks specific for industrialisation, such as an export-import bank (Jubilee and the Third Way Alliance) or a co-operative fund for agro-processing (NASA). But none of the parties place strong emphasis on suggestions for financial sector development. Similarly, the three parties’ manifestos do not give attention to foreign direct investment (FDI) to promote industrialisation. While these plans sound feasible, the implementation of these financing schemes will determine uptake by private sector. Ideally, the funds should offer financing perhaps at concessionary rates. The most important factor however is that the funds need to be patient such that private sector has time to use the capital effectively and generate returns over a realistic period of time. Yet the manifestos are not very clear on how financing to the sector will be structured. The Jubilee manifesto comes closest to specifics, stating that they seek to provide long-term credit funded by long-term bonds; one wonders why this strategy has not already been deployed. Further, none of the parties place strong emphasis on suggestions for financial sector development or how to promote FDI to support industrialisation.

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(source: https://res.cloudinary.com/people-matters/image/upload/w_624,h_351,c_scale,q_80/v1409637524/7126.jpg)

In terms of skills, NASA and the Third Way Alliance highlight the importance of general education, whilst Jubilee prioritises the need to nurture a globally competitive work force to power industrialisation. NASA and Jubilee stress the importance of linkages between universities and the rest of society, although Jubilee seems clearest on this and explicitly mentions the need to develop formal linkages between the private sector, academia and government. At the moment, there is a sizeable gap between what is taught to students and what the job market requires. Therefore, if curricula are not significantly revised and linked to a push to encourage students to take up of science, technology, engineering and maths (STEM) subjects, any partnerships with academia may not be fruitful in terms of creating a labour force with skills required for industrialisation. Jubilee manifesto’s pledge to promote the study of science, technology, engineering and maths but again, one wonders this has not already been done. Both the NASA and Third Way Alliance manifestos do not contain specific details on which subject areas to target for educational improvements.

NASA and Jubilee highlight the role of a fit for purpose civil service to support industrialisation. NASA stresses the need to reduce contractors’ cost of doing business with government, streamline procurement, process payments promptly and inculcate a zero tolerance approach to corruption. Jubilee wants a truly fit for purpose public service, and mentions the importance of reducing waste, dealing with procurement and rationalising the public sector wage bill. The Third Way Alliance has a narrower focus on measures to combat corruption. This element will likely prove to be the most difficult to implement as Kenya has notoriously been unable to hold those implicated in corruption scandals to account. Thus, it is dubious as to whether any of the parties have the political will required to implement this element of the manifestos.

The Third Way Alliance manifesto places strong emphasis on developing value chains in priority manufacturing sectors, including agro-processing, textiles and leather; but some of the Alliance’s proposals to support value chain development are quite protectionist in nature. The NASA and Jubilee manifestos also mention value chains, with the NASA manifesto emphasising synergies and linkages amongst enterprises. The issue of value chains is closely linked to agriculture and what has become clear over the first iteration of devolution is that agriculture seems to be neglected by both county and national governments in terms of budget allocations. According to the International Budget Partnership (IBP), national government allocated the sector as follows: 2 percent in 2015/16, 1.3 percent in 2016/2017 and 1.8 percent in 2017/18. As IBP points out, the Maputo Declaration 2003 calls for allocation of at least 10 percent of total national budget towards agriculture. The average expenditure on agriculture in Africa is 4.5 percent; Kenya’s national allocations are clearly sub-par. Thus for the value chain manifesto declarations to work, there is need to more robust allocations to agriculture at national and county level and better coordination between the two levels of government; none of the manifestos articulate how they would make this happen.

In the context of the EAC, the push for exports in the KAM-ODI booklet is important. Both NASA and Jubilee press for better market access, NASA for SMEs in particular. Improving and/or maintaining market access in the EAC is an important element of the NASA and Jubilee manifestos, aligning well with the KAM-SET call for an export push. The Jubilee manifesto focuses on expanding Kenya’s access to the US in textiles, whereas NASA emphasises market access for MSEs. In contrast, improving access to markets for Kenyan exports is not prioritised in the Third Way Alliance manifesto.

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To be clear, access to EAC for manufactured goods is riddled with problems. Total exports from Kenya the EAC registered a 4 percent decline in 2016 to KES 121.7 billion, with exports to Uganda and Rwanda falling by 9.3 percent and 2.5 percent respectively. Further, opportunities offered by the EAC’s integrated market has institutional and regulatory barriers to trade such as such as customs clearance, standards and certification, rules of origin, licences and permits, truck inspections and language barriers.  None of the manifestos address these issues. Further, the entry of China and India into the regional market has eroded Kenya’s EAC market share from 9 percent in 2009 to just 7 percent by 2013.  The World Bank claims that Kenya’s trade performance is declining quickly due to an influx of goods from China into Uganda and Tanzania, which are major export destinations for Kenya.  In the manifestos it is not clear how EAC market access issues will be addressed. The Jubilee and NASA manifestos make general statements about Kenya’s role within the EAC, but there is little detail in either manifesto in terms of specific measures or priorities to support access for Kenyan goods in the EAC market. The Third Way Alliance’s manifesto does not make any reference to Kenya’s role in a regional context.

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

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Does African unity ideology make economic sense?

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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’.

(source:http://www.channelstv.com/wp-content/uploads/2015/09/afdb.jpg)

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.

(source: http://www.panafricanalliance.com/united-states-of-africa/)

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?

(source: http://www.kepsa.or.ke/wordpress/wp-content/uploads/2015/08/Logo_of_EAC.svg1.png)

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: anzestew@gmail.com