export orientation

Use imports to develop domestic manufacturing

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This article first appeared in my weekly column with the Business Daily on August 6, 2017

Kenya is an import economy; we import just about everything from garlic and oranges to construction materials and heavy industrial machinery. The general view, which I largely accept, is that an import economy constrains economic growth and development due to several reasons. The first is that, an import economy dampens the ability of local manufacturing to meet the needs of the local market; instead foreign nations meet the country’s needs. As a result, imports lock out local manufacturers from benefitting from domestic demand. Secondly an import economy essentially creates a situation where domestic demand generates jobs and income for foreign countries. As a result, local job creation is muted because the market has been captured by foreign entities.

That said, since Kenya is an import economy it is important to find means through which the situation can be leveraged for economic growth as there are some benefits to the status quo. The first is that an import economy creates market capture that can be exploited by domestic industry. In being an import economy, it is clear which products Kenyans buy and the related market size for each product type can be easily estimated. This provides a basis on which government can launch effective import-substitution strategies as there is a sure bet market to which local industry can sell if their goods are of similar use, quality and value.

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(source: http://www.canada-usblog.com/files/2016/01/Import.jpg)

Secondly, innovation is garnered through imports. As an import economy, the country gets a clear sense of the new ideas as well as the standards and features that sell in domestic, regional and international markets. When a Kenyan buys a snack made in Italy, it provides local snack manufacturers an opportunity to see the quality of snacks that garner an international market. Thus imports provide a source of innovation and standards that can be emulated by local manufacturers.

Thirdly, because an import economy is flooded with products from around the world, it provides an opportunity to create export-oriented manufacturing where local manufacturers learn about what products sell regionally or internationally. Thus imports provide the foundation for creating a manufacturing sector that is export-oriented. Through learning about standards and innovation in the point elucidated above, local manufactures have a clear idea of what sells on the international market. Thus, through the analysis of imports, government can determine priority industries in the country and track imports in those industries to get a clear idea of what type and quality of product can be the foundation for the  country’s on own export push for manufactured products.

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(source: https://www.incimages.com/uploaded_files/image/970×450/manufacturing_pano_18867.jpg)

Thus imports can be leveraged for both import-substitution AND export- orientation strategies; the two are not mutually exclusive. However, the negative effect of imports can only be mitigated if there is deliberate effort both from government and manufacturers to exploit the gains that imports provide. In doing so, Kenya can transition from being a country reliant on imports to one where local manufacturers regain domestic market share and also build export capacity and sales.

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

How to develop light manufacturing in Kenya

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This article first appeared in my weekly column with the Business Daily on June 11, 2017

Last week I attended a meeting organised by the Overseas Development Institute (ODI), the Africa Centre for Economic Transformation (ACET) and the Government of Ethiopia aimed at analysing and sharing lessons on the development of light manufacturing in Africa.

The development of light manufacturing is an important part of Kenya’s plan for industrialisation as articulated in the Kenya Industrial Transformation Programme (KITP) developed by the Ministry of Industry. The Special Advisor to the Prime Minister of Ethiopia, Arkebe Oqubay, made some interesting points about key features of light manufacturing of which countries should be cognisant as they implement industrialisation plans.

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(source: http://www.fanabc.com/english/media/k2/items/cache/d9fc17f32b375e9eeed63a6c2d3200a4_XL.jpg?t=1410776827)

The first is no secret; light manufacturing is labour intensive. This feature makes light manufacturing attractive for African countries as an entry point into industrialisation as it has the ability to absorb large pools of labour. While this is attractive, it seems to me that it can create considerable pressure to rapidly skill up a relatively low skilled labour pool. Human and technical resources have to directed to a young and inexperienced labour pool in order to develop a sector with high labour productivity and high profit-making potential. Clearly it can be done, but has to be well thought out with clear links to education policy.

The second point made was that countries cannot implement a light manufacturing strategy without addressing issues in agriculture. Whether it is textiles and apparel, leather and leather products, or food and beverages (F&B) manufacturing, agricultural inputs are crucial. In this sense Kenya faces a conundrum because certain segments of the agricultural sector such as tea, horticulture and floriculture are highly productive, but the rest of the sector wallows in poor productivity and considerable inefficiencies. It is no secret that textile and apparel firms in the EPZs in Kenya import their fabric from abroad, a factor that dampens the ability of this value chain to be an even bigger employer and income earner for Kenyans. The leather value chain in the country is also sub-par and the production capacity for domestic agricultural input into F&B manufacturing is lacklustre. What is clear is that Kenya cannot make serious forays into light manufacturing until the issues in the agricultural sector and value chains are fundamentally addressed.

The final point Oqubay made was that the sector should be export-oriented if scale is to be achieved in a manner that restructures the economy. Insights from ODI on this issue point to the importance of conducive trade rules and trade facilitation measures that lower trade costs both in terms of accessing inputs and export markets. If manufacturers cannot get the inputs they require and reach target export markets, the sector cannot effectively scale.

Other factors important in industrial policy, as pointed out by ODI, is collaboration and coordination between public and private sector in a manner that creates consensus on the strategic direction of the sector and country at large. When coupled with effective investment facilitation, SEZ creation/industry cluster development, and infrastructure development, it creates an environment where light industry can take off.

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(source: https://mpoverello.files.wordpress.com/2014/07/bagamoyosez_zps9cd0561d.png)

Kenya can build on the successes being registered in infrastructure development and expedite the creation of SEZs, learning from countries like Ethiopia. However, the country needs a sharper focus on improving agricultural productivity, a more coherent skills development strategy, vastly improve investment facilitation and more effectively encourage public-private dialogue on the development of light manufacturing in the country.

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