education

How fiscal policy can attract the right type of investment for Africa

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This article first appeared in my column with the Business Daily on March 30, 2017

Someone once told me that there are three types of foreign investors in Africa. The first are those who invest in the country in order exploit raw natural resources and direct them to their projects outside the country. The second are those who invest in countries in order to flood the country’s markets with their products. The third are investors who invest in the country for the long-term in a manner that creates employment, builds incomes, contributes to GDP growth and of course, generates profits. Africa seems to have little problem in attracting the first two investor type, but often struggles to secure the third type. The question for Kenya is, which type of investor is the country attracting? And what can be done to attract the third type of investor?

These questions are important in the context of fiscal policy, of which a key event will take place today when the National Budget 2017/18 will be read. Fiscal policy ought to and can play an important role in attracting the right type of investor to Kenya.

Over the past ten years, the government has been on an investment drive to build the country’s infrastructure. In principle, efficient public investment in infrastructure can raise the economy’s productive capacity by connecting goods and people to markets. The national budgets over the past few years have thus has allocated significant amounts to energy and transport infrastructure such as LAPSSET, the Standard Gauge Railway (SGR), Rural Electrification and the Last Mile Project. With the SGR due to be completed this year, it will become clear what dividends the country will reap from such heavy fiscal commitment to infrastructure. That said, infrastructure investment is a prerequisite to attract the third investor type as the ease and cost of transporting goods are an important business cost and variable.

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(source: http://footprint2africa.com/wp-content/uploads/2016/11/construction.jpg)

The second fiscal strategy that can bring long term investors as well as bolster food security and manufacturing is tax incentives to create productive agricultural value chains. Fiscal policy can more effectively engender a shift from subsistence to commercially productive farming by identifying commercially viable agriculture value chains and linking small holder farmers to manufacturers. Through incentives such as tax remissions along key food and beverage manufacturing value chains, fiscal policy can incentivise higher productivity in farming and contribute to making manufacturing more dynamic than is currently the case. The key however, is consistency in fiscal policy with no abrupt changes in tax remissions or other incentives so as to engender long term investment in food value chains.

Thirdly, the right investor type can be attracted to the country through investment in Kenya’s human capital. As the IMF points out, more equitable access to education and health care contributes to human capital accumulation, a key factor for growth and an improvement in the quality of life. Fiscal policy has two roles here; the first is creating incentive structures for private sector investment into the country’s private and public education and health networks and the second being the country’s own fiscal commitment to health and education sectors. National budget allocations to education stand at about 23 percent, while commitments to health are at about 6 percent of the national budget. Health allocations are paltry and while the education allocations look impressive, a great deal of the funds are directed to free primary education. In order to develop a healthy, highly skilled and productive labour pool, government ought to consider reorienting the almost obsessive fiscal commitment to infrastructure towards more robust allocations to health and post-secondary education. This should be complemented by the creation of incentive strategies that attract investment into national priority nodes for the sectors.Image result for health kenya

(source: https://investinkenya.co.ke/components/uploads/0942a7f713ab6801a17e2cfb325fc99c.jpg)

The fourth means through which fiscal policy can attract the right investors is by managing tax rates at national and county levels.  At the moment, private sector is facing numerous tax burdens due to the lack of harmonisation of tax rates between national and county governments. Fees and charges at county level are unpredictable, non-standardised and onerous; business face multiple payments for advertising and transporting goods across county borders. While these are not technically taxes, they are a form of tax exerted on private sector with no clear link to the service that should be expected for such payments. At national level, the main concern for private sector beyond VAT refunds, is that a small segment of business and individuals are onerously taxed due to the narrow tax base in the country. Thus national government ought to develop a long-term strategy for broadening the tax base.

A key component of broadening the tax base is addressing informality in the economy where millions of informal businesses do not pay taxes. The aim here is not to tax informal businesses, as most are micro-enterprises barely making profits, but rather creating an ecosystem that encourages the development of informal business. Again, fiscal action can be taken by government to direct financing focused at developing micro, small and medium enterprise through more the strategic deployment of the Youth, Uwezo and Women’s Funds. The financing architecture of these three funds has to be fundamentally rethought to focus on building technical skills and business management capacity, and improving productivity and profitability in the informal sector.

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Additionally, the government ought to develop a strategy for Kenya’s cottage industry which is the Jua Kali (informal industry) sector linked to solid fiscal commitments. Through fiscal action, the government should create an investment environment that attracts traditional investors as well as non-mainstream financing such as angel investors, impact investors and venture capitalists to invest in Jua Kali. In this manner, action will not only invest in the informal sector, it will create incentives for investment into a sector in which over 80 percent of employed Kenyans earn a living, in a manner that complements fiscal policy.

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

Neglecting the youth hampers the development of Africa

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This article first appeared in my weekly column with the Business Daily on March 5, 2017

A few weeks ago, a local television station aired the story of a young man who is an orphan, had been admitted to some of the most prestigious learning institutions in the country but was now living the life of a pauper. Dishevelled and unkempt, he looked like he was living the life of a homeless man; yet when he spoke, his clarity of mind and intelligence were unquestionable. This week a video of African children in the Congo working in mines went viral. The two children in question were eight and eleven year old boys, working in awful and dangerous conditions, barely making income and living a life of destitution and hopelessness. Why are these stories important? They are important as they reveal the extent to Africa is mismanaging the potential and promise of young people on the continent.

The average age of an African is 19.5 years, yet the average age of an African leader is 65. Is there any wonder then, as to why Africa’s leaders seems to be chronically unable to catalyse a young labour force and apply it to the development of young people themselves, that of their countries and the continent at large? In fact, sometimes it seems youth are seen as a demographic liability, not asset.

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(source: http://africa-facts.org/wp-content/uploads/2015/01/african-kids.jpg)

In Kenya the rate of youth unemployment is dire; 80 percent of those unemployed are under the age of 35. There are several factors that contribute to this figure the first of which is poor education. The Brookings Institution points out that 62 percent of Kenyan youth aged 15-34 years have below secondary level education, 34 percent have secondary education, and only 1 percent have university education. Skills are a crucial path out of poverty; indeed education makes it more likely for Kenyans to not just to be employed, but to hold formal jobs that are more secure and provide good working conditions and decent pay. So the fact that the country is doing such a poor job in educating the youth translates to the relegation of those young people to the periphery of the promise of the country.

Secondly, even among those who are educated, most are ill-equipped to be absorbed into employment. A study by JKUAT made the point that the commercialisation of tertiary education in Kenya has led to overcrowding in the institutions due to the increase in enrolment. This ‘massification’ policy by universities is characterised by degree programmes that do not address the job market. As a result, millions of Kenyans are poorly trained and become frustrated graduates who cannot find employment. Another report released by the World Bank stated that tertiary education in Kenya is characterised by a persistent mismatch of skills between what is taught and the requirements in the labour market. Thus, even education itself does not guarantee employment in this country.

Thirdly, due to the aforementioned dynamics, most young people are left to fend for themselves, invariably in the informal economy. The informal economy employs 80 percent of Kenyans and yet this sector of the economy is grossly neglected. Sadly in many ways, the neglect of the informal economy is the neglect of the youth as it is only in this sector that most youth with limited resources are able to start ‘hustling’ and earn a living. The cost of formalisation from tax payments to compliance to minimum wage, means that the informal sector is the only choice, as it has the lowest barriers of entry for economic enterprise.

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(source: https://www.iied.org/files/styles/main-image/public/fishsellers_0.jpg?itok=UIA7ZDur)

The good news is that it is not too late to act, but the nature of action must be very different to ongoing activities. At the moment, most youth interventions either operate in silos with the limited creation of long lasting structures and partnerships; are funded unsustainably where programs end when donors pull out; or provide interventions that do not address the needs of the youth effectively (think Youth Fund). Youth need a combination of on-going employment opportunity; credit lines for enterprises through the deployment of blended financial vehicles (grants AND loans); skills upgrading (life, business, management, financial and technical skills) and mentorship. Only in doing this will the country, and indeed continent, leverage the demographic dividend that is the young people of Africa.

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

 

How corruption in exams distorts national economy

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This article first appeared in my weekly column with the Business Daily on January 8, 2017

Cabinet Secretary for Education, Matiang’i, stunned the country when he released the results of the Kenya Certificate of Secondary Education (KCSE) late last year. Only 141 As were earned compared to over 2500 in 2015. The pattern was similar in all other grade classes, with far fewer students earning the top grades when compared to previous years. Some schools that were top performers barely managed to garner top grades this year. While this has surely aggravated some schools, students, teachers and even parents, the importance of how Matiang’i supervised and structured the entire KCSE exam process should not be underestimated.

(source: http://buzzkenya.com/wp-content/uploads/2016/04/KCPE-And-KCSE-Registration-Deadline-extended-1.png)

Firstly, it seems clear the rot of dishonesty and cheating had overtaken the education system with ominous results; corruption had become a way of life in Kenya’s education system. When schools, teachers, students and parents all collude to cheat their way into earning top marks, the very core of the future of the country is compromised as cheating becomes an accepted way of life. Students witness adults devising schemes to cheat as normal. How then can a country expect to create a generation of honest, hardworking Kenyans when the young see such profound deviousness embodied by their elders? If anything, the dubious manner in which previous exams were conducted cemented the culture and essential acceptance of cheating and corruption in the minds of future generations.

Secondly, the culture of cheating was crippling the country; students were no longer interested in learning. An analyst made the point that the culture of cheating had eroded the importance of learning in the minds of millions of students. Many students saw no need to pay attention in class as they were assured of being leaked the final exam papers just before the exams. Consequently some saw no need to focus and absorb what they were being taught as they were assured of As regardless of whether they understood the content or not. This attitude then would follow students into further education, where again schemes were created to earn the top marks without having learnt the content required for the course. This has had serious consequences: firstly, transcripts presented to potential employers mispresented the students’ competencies and strengths. As a result, employers had no tool with which they could select the best and position them in relevant positions. Secondly, cheating meant many students entered the workforce as essentially incompetent as they had not truly learned the full body of knowledge expected of them. As a result, employers quickly realised that top marks account for nothing and thus had to spend millions more training job entrants in basic skills. This is a waste of millions of shillings that could have been better spent had honesty been the norm. Additionally, those who cheat their way through school bring with them a culture of eating where they have not planted, of reaping where they did not sow and of viewing corruption as a legitimate tool to use in professional life.

(source: http://www.businessdailyafrica.com/image/view/-/1080426/medRes/225595/-/maxw/600/-/14hkeoy/-/students.jpg)

Thirdly, cheating has a detrimental effects on economic development. If the country has a distorted means of assessing student performance, how can the country assess where the country stands in terms of the literacy and educational competence of the youth? How can the country determine subject and geographical areas that need special attention and strategy? Cheating in the education sectors makes it impossible for the country to develop relevant strategy to improve the education sector and better position the sector to be a catalyst for the development of the country.

Matiang’i and his team should be applauded for having the grit to take on the culture of corruption that had riddled the country’s education system. The next step should now be a thorough assessment of curricula to ensure that education at all levels equips the youth with relevant skills to earn a fruitful living and push the country’s development forward.

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

What is really going on with the Kenyan Economy? TV Interviews

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On November 13, 2016 I spoke on a panel on KTN on the disparity between Kenya’s GDP growth statistics and the lived economic reality of Kenyans.

On November 9, 2016 I was part of a two person panel on K24 discussing the state of the Kenyan economy.

Factors affecting the Kenyan economy

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This article first appeared in my weekly column in the Business Daily on November 20, 2016

I have been getting several questions pertaining to what is ‘really’ happening in the Kenyan economy. Many Kenyans see incongruence between economic growth statistics and their own lived experience. According to the World Bank the economy is expected to grow by 5.9 percent in 2016; the Kenya National Bureau of Statistics reported that Kenya’s economy expanded by 6.2 percent in Q2 2016.  However, several companies have closed down operations in the country and thousands of jobs have been lost this year alone. There are numerous variables that may be informing why Kenyans do not seem to be feeling the positive effects of economic growth.

The first is that GDP growth and Ease of Doing Business data do not capture the reality of the growth and Ease of Doing Business in the informal economy where over 80 percent of employed Kenyans earn a living. Therefore, one cannot extrapolate positive overall statistics as reflective of performance of the informal economy. To what extent does Ease of Doing Business research reflect improvements in the business environment for informal businesses? Parameters such as increased ease with regards to tax compliance and business registration inform Ease of Doing Business performance, yet these are parameters with which informal businesses largely do not intersect. Thus, perhaps the incongruence stems from the fact that the economy from which millions earn a living is largely ignored by official data gathering and analytical efforts.

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(source: http://www.standardmedia.co.ke/business)

With regards to companies closing and job loss, several factors at play; I will focus on manufacturing and the banking sector. Manufacturing in this country is under threat because the cost of doing business for manufacturers in Kenya remains high particularly with regards to electricity, transport, cross-county taxes and, frankly, corruption. Additionally, the country has allowed the entry of cheap goods, particularly from Asia, to flood the market; goods that benefit from protection and subsidies in their home economies which is not reflected here. The combination of these factors is making Kenya an increasingly uncompetitive location for manufacturing which is diametrically opposed to the Government’s industrialisation agenda. With regards to the banking sector, job shedding seems to be informed by automation and the interest rate cap. Mobile and e-banking means that many customers do not need direct human contact to effect the transactions they require. The interest rate cap has removed a key risk management tool that banks used to manage information asymmetry with regards to credit worthiness. As a result, banks seem to have limited space to make numerous loans as the risk buffer is no longer present. Fewer loans means fewer staff are needed to monitor loan compliance.

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(source: http://www.theeastafrican.co.ke/image/view/-/1428984/medRes/371054/-/maxw/600/-/lpr3kh/-/manu.jpg)

Kenyans are also concerned that economic growth is not associated with job creation; the country seems to be stuck in the ‘jobless growth’ rut. Again, this is informed by several factors. Firstly, Kenya’s economic growth is services driven, and services produces far less jobs than manufacturing for example. The main services sub-sectors that are labour intense are health, education and hospitality; sub sectors such as telecoms and financial services need far less labour. It is no secret that tourism in the country has been hit leading to job losses; and even when there is marginal recovery, a limited number of jobs are created and those are seasonal. Until the manufacturing sector is given the attention it requires such that economy is driven by export-led manufacturing, the ‘jobless growth’ challenge will continue. Finally, the education system in the country is doing a gross disservice to the youth by making millions of young people essentially unemployable. 62 percent of Kenyan youth aged 15-34 years have below secondary level education. Further, Kenya is characterised by a persistent mismatch of skills between what is taught and the skill requirements of the labour market. Thus most youth are poorly educated and those who are well educated are not trained in skills the labour market seeks.

Finally, financial mismanagement at both national and county levels is compromising growth. It seems that government funds that are meant to be economically productive and generate economic activity do not reach intended projects. As long as this continues to occur, jobs and growth that could have been created by government investment and financing will not materialise.

All these factors inform the disconnect between rosy economic statistics and the reality Kenyans feel on the ground; and these will persist if there is no change in financial management and economic development strategy going forward.

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

What Kenya and South Africa can learn from each other

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

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

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

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

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

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

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

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

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

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

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

 

 

The link between unemployment and poor education

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

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

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

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

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

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

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

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

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

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

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