employment

China taking over manufacturing in Africa?

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This article first appeared in my weekly column with the Business Daily on September 10, 2017

Earlier this year, McKinsey and Company, released a report on Sino-African relations that assessed the activities of Chinese businesses in Africa as well as Sino-African economic partnerships. There are about 10,000 Chinese-owned firms operating in Africa today and about 90 percent of these are privately owned debunking the myth that Chinese business activity in Africa is dominated by State Owned Enterprises and overly influenced by state craft. Of particular interest is understanding how the Chinese presence is informing industrial development, a chronically underdeveloped sector on the continent.

31 percent of Chinese firms in Africa are in manufacturing and they already handle about 12 percent of industrial production in Africa with annual revenues of about USD 60 billion; revenues in manufacturing outstrip that of any other sector listed. Chinese factories are focused on Africa’s domestic markets, 93 percent of revenues come from local or regional sales in Africa.

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(source: https://cdn.static-economist.com/sites/default/files/images/print-edition/20140208_MAP001_0.jpg)

One third of Chinese firms report profit margins of over 20 percent in 2015. In manufacturing this is attributed to ample pricing headroom in Africa; prevailing market prices for manufactured products are so high that Chinese firm earn comfortable profits and their profit levels are higher than those of African firms. Interestingly although manufacturing is capital investment and commitment heavy, 31 percent of firms made investment decisions within a week. 67 percent of firms investments are self-financed and Chinese companies are optimistic about the future of the African market with most firms indicating plans for expansion.

Chinese firms are also generating local employment as 89 percent of employees are African; this figure is 95 percent in the manufacturing sector. 61 percent of firms upskill African employees through professional training and/or apprenticeships, an indication that Africa is poor at educating Africans with skills relevant for employment. In terms of management, 44 percent of managers are African, this figure is 54 percent in the manufacturing sector. Chinese firms contribute to African markets mainly by introducing new products, services, technologies and methods.

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The report is clearly optimistic of Chinese firm activity in Africa, for example more content is focused on detailing the benefits than to delineating the costs; one wonders why. And the costs are significant, there are concerns of Chinese firms engaging in dumping where they sell products in export markets at prices below those in domestic markets. This may be leading to ‘unfair’ capture of export markets from African firms. Breaches of labour regulations are more common among Chinese firms than in other foreign-owned firms. These include inhumane working conditions, work without contracts, exceeding legal limits on work hours and threatening to fire workers who refuse to work in unsafe conditions.

Clearly Chinese firms will continue to make inroads into Africa and the continent will accrue many benefits from this but will also have to vigilantly manage the costs. With regards to industrialisation, it will be interesting to see how African industrial policy will be structured to encourage a stronger indigenous presence in the sector given the ability, innovation, efficiency and commitment of Chinese manufacturing firms, firms which also benefit from African trade deals as they are domicile here. Chinese firms make it clear that there is a lucrative domestic market that indigenous firms have failed to fully tap and thus African firms have a lot to learn from Chinese firms. If trends continue, a situation may emerge where African industrialisation is owned and dominated by Chinese firms. While this is welcome in terms of contributions to Africa’s development, can it then be termed ‘African’ industrialisation?

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

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TV Interview: Panel feature on Labour Day

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On May 1, 2017, I was part of a panel on NTV talking about labour and employment issues in Kenya

The State of Enterprise in Kenya

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This article first appeared in my weekly column with the Business Daily on October 30, 2016

Last week the Kenya National Bureau of Statistics (KNBS) released the National Micro, Small and Medium Establishment (MSME) Survey. KNBS defines micro-enterprises and having less than 10 employees; small enterprises having 10 to 49 employees and medium sized enterprises as having 50 and 99 employees. In terms of licensed versus unlicensed business, the survey found that there are 1.56 million licensed MSMEs and 5.85 million unlicensed businesses. With regards to employment, number of persons employed by MSMEs is approximately 14.9 million with the unlicensed enterprises contributing 57.8 per cent. Overall, micro sized enterprises accounted for 81.1 per cent of employment reported in the MSMEs. The value of the MSME’s output is estimated at KES 3,371.7 billion against a national output of KES 9,971.4 representing a contribution of 33.8 per cent in 2015. In terms of distribution of MSMEs by sex of business owners, the survey found out that 47.9 per cent of the licensed establishments were owned by males and 31.4 per cent were owned by females. Further, 60.7 per cent of unlicensed establishments were solely owned by females. In terms of type of activity, repair of motor vehicles and motor cycles accounted for more than half of the total persons working in MSMEs.

Unsurprisingly 80.6 per cent of establishments reported family/own funds as the main source of start-up capital while 4.2 per cent of business owners got loans from family and/or friends to start their business. What was interesting however is how income generated was used. Micro establishments reported spending 44.4 percent of income on household and family needs. Medium and small establishments spent significantly high part of their net income on investment at 63.4 and 69.5, per cent, respectively. 93.8 percent of the unlicensed businesses reported a monthly turnover of less than KES 50,000 and none had a turnover above KES 1,000,000. Licensed establishment with a monthly turnover between KES 50,000 to KES 200,000 constituted 31.3 per cent. More than half of the licensed medium establishments recorded a turnover of more than KES 1,000,000.

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While useful there are several gaps in the survey. The first and most obvious is a failure of analysis with a focus on the informal sector. The survey used the terms licensed versus unlicensed, with no clear focus on whether the unlicensed segment is considered informal. All the survey has in terms of registration data is that 78.9 per cent of the businesses were not in the registers maintained by the counties. However, the KNBS also makes the point that a county license (also referred to Single Business Permit) is a requisite for all enterprises. Licensing is not a sufficient indicator form informality, as there may be licensed enterprises that still operate informally with regards to tax compliance, adherence to minimum wage, and submission of statutory payments.

However, what was useful in terms of extrapolating informality, is that the survey noted that all unlicensed businesses in the MSME sector are micro- establishments. It would not be a stretch to assume that unlicensed businesses are informal, but as mentioned, licensed business can also operate informally. The important point here perhaps is that informal firms tend to be micro in size.

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(source: http://www.goldmansachs.com/citizenship/10000women/meet-the-women-profiles/kenya-women/mary-kenya/slide-show/mary-slide1.jpg)

The second concern with the survey is the paltry data on tax compliance. The survey makes the point that licensed MSMEs pay a monthly average of KES 33.8 billion in taxes compared to KES 294.0 million paid by unlicensed businesses. Again other features of formality are not clearly delineated thus one can only extrapolate that a significant portion of income earned by unlicensed establishments is not taxed.

Finally, the issue of productivity was not addressed in the survey. There is no indication as to whether licensed enterprises are more productive than unlicensed ones, or which of the micro, small or medium enterprises are the most productive.

In short this MSME survey is a step in the right direction however it is a shame that KNBS did not use this opportunity to truly delineate between formal and informal economic activity. This can be seen in the fact that the Economic Survey released by KNBS this year indicated 82 percent of employed Kenyans are engaged in the informal sector. Yet in this survey unlicensed enterprises account for only 57.8 percent of those employed. In the future, it would be useful for KNBS to focus on formality versus informality more so than licensed versus unlicensed.

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

 

 

 

How important are services to economic growth?

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This article first appeared in my weekly column with the Business Daily on March 21, 2016

A report by the Overseas Development Institute (ODI) analyses four services sectors in Kenya to determine the role of services in economic growth. The four sectors analysed are the financial sector, IT services, transport services and tourism services.  The report argues that services are becoming increasingly important, even for non-industrialised countries such as Kenya, as they have a direct contribution to GDP, exports and employment.

Indeed according to the report, services account for 50.7% of the share of GDP; a fact with which the World Bank agrees. Kenya has already become a major exporter of services in areas such as transport services, financial services and, less significantly, ICT. In terms of exports, the export of services from Kenya nearly tripled from $1.9 billion in 2005 to $4.9 billion in 2012; far more than the exports of goods. The ODI report goes on to state that ICT and financial services in particular makes companies in other sectors more productive, help develop value chains and safeguard jobs, while tourism creates numerous jobs within suppliers. Further, services have an important role to play in the ‘servicification’ of manufacturing. Indeed the World Bank survey made the point that in Kenya, services  constitute at least 62% of the cost of manufactured goods illustrating the extent to which manufacturing relies on services.

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(source: http://www.simplexityconstruction.co.nz/assets/Uploads/SERVICES.jpg)

The position ODI takes goes contrary to dogma in economic theory which argues that the most effective path to development is linear with a progression from agriculture to manufacturing and finally into services. Yet here is Kenya, a non-industrialised economy, with services as the engine of economic growth.

Given this scenario, the questions to ask include: what are the implications of a services-led economy in the context of a non-industrialised county? Is a service-driven economy sustainable in the long term? Does a preponderance of services have a negative effect on the development of agriculture and manufacturing?

Well, the report acknowledges that there are weaknesses in the service-driven model, especially in non- industrialised countries. The dominance on services means that it pulls labour in from the other sectors such as manufacturing. This could result in the exacerbation of deindustrialisation as manufactured jobs are replaced by low-productivity services jobs.  This is a key concern for Kenya which has a significant informal economy, most of which is not very productive and in which services are a notable constituent. Is Kenya facing a scenario where labour is being pulled into services from other sectors, not into high productivity services which are typically in the context of formal employment, but rather into low productivity informal employment in services?

Further there are questions as to whether the dominance of services in Kenya will lead to skills shortages in agriculture and manufacturing. The report rightly makes the point that there is a risk emerging where the development of skills for the service sector will preponderate, perhaps to the detriment of skills development in other sectors. More and more young Kenyans will opt to train to become bankers and HR specialists because it will be easier to find jobs in those areas of speciality than it would be if they had trained as engineers and scientists. What does this bode for the future of the country?

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The final risk of service-driven growth is that, as ODI point out, too much export-oriented services have opportunity costs. It could lead to Dutch disease effects where the shilling appreciates thereby damaging the manufacturing industry as locally produced goods become expensive and uncompetitive due to a strong shilling.

In terms of the way forward, Kenya should continue to reap the benefits of service-driven growth but go through a deliberate process of rebalancing where highly productive agriculture and manufacturing play a stronger role. Further, there is a need to ensure that as long as services preponderate, it is associated with noteable job creation and secondary effects that benefit the economy as whole.

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

How Africa can benefit from China’s slowdown and reorientation

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This article first appeared in my weekly column with the Business Daily on March 6, 2016.

An analyst with the Brookings Institution made an important point during a podcast recently; China will shed 85 million jobs at the bottom end of the manufacturing sector between now and 2030. So naturally the question becomes: where will they go? The analyst made the point that at the moment most of the jobs are being absorbed by China’s neighbours. But a more important question for Africa is: how can the continent poise itself to be a key absorber of those jobs?

Before answering that question, key details of the shedding of jobs in manufacturing by China need to be more intimately understood. There are two key drivers that are pushing jobs out of manufacturing in China; the first is the general slowdown of China. China has been slowing and growth in 2015 was the slowest in 25 years. Part of the consequences of this slowdown is the shutdown of numerous factories in textile, machine tool and chemicals industries. The boom China enjoyed for decades has created factory overcapacity. Combined with slowing demand in global markets China’s manufacturing sector is struggling. The second factor that is informing the migration of jobs from China is that the Chinese economy is going through a fundamental reorientation where services and household consumption fuel economic growth rather than the investment and industry. China is shifting from being the ‘world’s factory’ with an aggressive export orientation strategy to one led by consumption and services.

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The scale of this reorientation is made clear when one considers that China’s growth in the past 15 years or so has been driven by exports and exports account for about 20% to 30% of China’s economic growth. The Chinese government has long sought to encourage this reorientation and indeed, in 2015 the service industries absorbed some job losses from manufacturing. Perhaps another factor informing the reorientation is the reality that China will soon face labour shortages and coupled with rising wages, export driven growth will be difficult.

This scenario should be good news for Africa, a continent that has yet to effectively industrialise. Indeed, many African countries are going through premature deindustrialisation driven by several factors the most salient of which is the lack of robust industrial policy by African governments. As it stands, it seems likely that what will inform African economic growth will shift from agriculture straight into the services sector and bypass industry altogether. At the moment the African economy is not leveraging industry to drive growth. This is a concern for the continent as industry is an important and large employer not only for the manufacture of goods consumed locally, but global markets as well. Through encouraging manufacturing and industry the continent can make a dent in the poverty problem as millions are absorbed in waged employment.

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So there is no better time than now for Africa to finally get serious about industrialisation and absorb some of the 85 million jobs in low end manufacturing migrating out of China. What is required for this to happen? Four elements; the first is aggressive, well thought out and strategic industrial policy formulation and implementation by African governments.

The other three, as the Brooking analyst stated, are competition, clustering and management. Africa has to deliberately encourage the creation of a competitive manufacturing sector to create strong businesses that can survive domestic and global economic shocks. Clustering is also important because analysts have observed that businesses are more productive when they are located next to businesses that engage in similar activity. This has been encouraged, to a certain extent, through the creation of Special Economic Zones etc., but more research has to be done to determine the specific type of clustering that can facilitate robust African industrialisation. The final factor is effective management; poorly managed companies do not stand of chance of surviving in a global economic context that is difficult. So the time is now for Africa to lay the ground work for industrialisation so that when the global economy eventually recovers, the continent will be well poised to reap the dividends of industrialisation.

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

 

Why Kenya needs to reorient its economy

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This article first appeared in my column with the Business Daily on January 24, 2016


Kenya is an import economy and the country’s journey as an import economy has made key flaws of this economic orientation evident. One clear problem is having a chronic and substantial Current Account Deficit, secondly government has to be hawk eyed about KES depreciation to keep import bills manageable, thirdly the country is unable to generate forex to pay foreign-denominated debt and finally Kenya’s import economy exacerbates the country’s unemployment problem. How? Well as an import economy we are essentially exporting jobs by hiring people from other countries to make goods for us to purchase.

Thus there is reason for a serious conversation to be had on how to reorient the economy to be one driven by exports, and not the export of raw commodities, but manufactured goods. If Kenya becomes a net exporter of raw commodities be they agricultural commodities or fuels and metals, the country will simply fall into the resource trap in which so many African countries find themselves where they cannot and do not determine the value of the commodities they export and thus fall victim to fluctuating commodity prices. Export orientation rooted in industry and manufacturing is a means of avoiding this trap and will allow the country to have greater control of the pricing of exported goods.

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Further, export orientation is advantageous because momentum will shift from having a CAD to a Current Account Surplus, and this would be good news for several reasons. Not only would government be comfortable with the devaluation of the KES (where the momentum is at the moment), exports generate forex that government can not only use to build up reserves but also more easily pay off foreign denominated debt without having to go through the expensive headache of selling KES.

Secondly, export orientation has, time and again, proven to be an effective means of pulling millions out of poverty. As a net exporter, a more serious dent can be made in Kenya’s unemployment problem as the country will be in a position where it is Kenyans being hired by companies locally to make goods for people in other countries. In the most simple terms, being a net goods exporter generally means you are a net job importer. This set-up is obviously a plus in not only putting Kenya’s labour market to good use, export orientation rooted in waged employment builds disposable income developing the local consumer market where more people have more money with which they can purchase more goods and services thereby fueling economic growth. Further, export orientation can be a useful risk mitigation technique as companies that export will have an easier time riding out fluctuations in the Kenyan economy and are more likely to stay in business.

(source: http://www.niras.com/~/media/images/niras-com/jobs/job-vacancies/job-vacancies-550×210.ashx)

Finally, as an export economy serving numerous external consumer markets, not only will it allow more companies to hire more people, targeting a massive external market is a much more effective strategy for generating sales and profits beyond the limited domestic market. As a result, Kenyan owners of businesses of all sizes can be in charge of profitable businesses that build their wealth and that of the country. This will also be good news for government because a larger number of profitable companies will translate into higher tax collection and revenue generation. Thus government will become more self-reliant in financing key development projects.

Clearly export orientation has its challenges; exporting comes with regulatory, commercial and financial challenges businesses would not have otherwise faced if they just focused on growing revenues in their domestic market. Further, as was seen in the 2008-09 financial crises, if external consumer markets are hit by financial troubles, it will affect exporters. However these are risks that can be mitigated. For example, government can provide more effective direction on the requirements of exports into various markets and with the private sector, help businesses to access the export finance they need to grow. Further, Kenyan companies can begin by focussing on export markets within Africa where the trend is consumer market growth.

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

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.

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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.

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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