Financing

How Kenya can industrialise in 5 years

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This article first appeared in my weekly column with the Business Daily on June 18, 2017

Manufacturing can play a crucial role in Kenya’s inclusive growth by absorbing large numbers of workers, creating jobs indirectly through forward and backward linkages to agriculture, raising exports and transforming the economy through technological innovation.

It is with this in mind that the Overseas Development Institute and the Kenya Association of Manufacturers coordinated a multi-stakeholder process to determine how the manufacturing sector can create 300,000 jobs and increase the share of manufacturing in GDP to 15 percent in 5 years.

A plan titled ‘10 policy priorities for transforming manufacturing and creating jobs’, has been developed focused on key actions that can be taken to build the manufacturing sector and achieve the aforementioned goals. The plan is rooted in the Kenya Industrial Transformation Programme and the Vision 2030 Manufacturing Agenda targeted at priority sectors of both formal and informal manufacturers (jua kali) as both sectors need support if Kenya is to industrialise equitably.

Image result for manufacturing Kenya

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

The first issue to address is the business environment in Kenya. While Kenya has moved up 21 places, in its position World Bank’s Ease of Doing Business Rank, considerable constraints exist particularly in dealing with construction permits, paying taxes and registering property. Thus further action is needed to improve the business environment. Additionally, for manufacturing to flourish the country needs a fiscal regime that is more articulated to support the sector. Fiscal policy at both national and county level needs to be more deliberately leveraged to support industrialisation through, for example, developing fiscal incentives that drive investment into manufacturing.

The third action point concerns making land more accessible and affordable. Research by Hass Consult reveals that the price of land in and around Nairobi has increased by a factor of 6.11 to 8.05 since 2007. Aggressive increases in land price dampen investor appetite for investment in manufacturing which tends to be land intense. Thus there is a need to prevent inflationary speculation on land prices, and develop government land banks earmarked for industry.

Energy costs continue to be punitive in the country and make Kenya’s manufacturing sector less competitive than even its East African neighbours. Government efforts need to not only target increasing energy generation but also lower energy prices and increase the quality and consistency of energy to the industrial sector. This should be coupled with a key gap constraining the sector- access to finance. Manufacturing companies, particularly SMEs and informal industry, are undercapitalised and face multiple obstacles to obtaining access to finance. Bespoke financing mechanisms aimed at the sector, such as through an Industrial Development Fund, need to be fast-tracked.

Image result for manufacturing Kenya

(source: https://newsghana.com.gh/wp-content/uploads/2015/01/wpid-manufacturing150115.jpg)

Kenya cannot leverage manufacturing for economic development without creating a more aggressive export push into regional and international markets. Kenya’s exports to the EAC are declining and opportunities such as AGOA can be tapped into more effectively. Additionally, Kenya needs to reorient education policy and skills development towards STEM subjects so that the skills in the labour pool drive the growth of manufacturing.

Finally, overall coordination in the sector is crucial. An agency in government should be created that coordinates all government entities relevant to industrialisation such as agriculture, education and the National Treasury. The private sector also needs to better coordinate particularly along value chains to drive sub-sector growth in a more robust and targeted manner. Finally, there is a need for better coordination between public and private sector through fostering trust and reciprocity to drive industrialisation forward.

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

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What China’s One Belt, One Road initiative means for Africa

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This article first appeared in my weekly column with the Business Daily on May 21, 2017

Last week China announced a plan to build a vast global infrastructure network linking Africa, Asia, Europe and the Middle East into ‘One Belt, One Road’. China plans to spend up to USD 3 trillion on infrastructure in an effort that seems to be centred more on linking 60 countries in the world with China, not necessarily each other. This One Belt initiative is perhaps part of China’s determination to position itself as the world’s leader in the context of Trump’s insular USA. This initiative has two-fold implications for Africa: the opportunities and potential problems that it creates.

One belt, one road

(source: https://qz.com/983581/chinas-new-silk-road-one-belt-one-road-project-has-one-major-pitfall-for-african-countries/)

In terms of opportunity, obviously African needs continued financial support in infrastructure development. The Africa Development Bank (AfDB) estimates that Africa’s infrastructure deficit amounts to USD 93 billion annually until 2021. In this sense any effort to support the development of Africa’s infrastructure is welcome.

Secondly, this is an opportunity for Africa to negotiate the specifics of the type of infrastructure the continent requires and create a win-win situation where Africa leverages Chinese financing to not only address priority infrastructure gaps, but also better interlink the continent.

However there are multiple challenges the first of which is that Europe, India and Japan seem edgy about this initiative and have distanced themselves from it. According to India’s Economic Times, India and Japan are together embarking upon multiple infrastructure projects across Africa and Asia in what could be viewed as pushback against China’s One Belt initiative. The countries have launched their own infrastructure development projects linking Asia-Pacific to Africa to balance China’s influence in the region.

Europe is also edgy because the initiative has not been collaborative and comes across as an edict from China; countries in the initiative were not consulted. Europe is also uneasy with the lack of details and transparency of the initiative seeing it as a new strategy to further enable China to sell Chinese products to the world.

Secondly, analysts have pointed out that from an Africa perspective, the One Belt seems to continue the colonial legacy of building infrastructure to get resources out of the continent, not interlink the continent. Will the initiative entrench Africa’s position as a mere raw material supplier to China and facilitate the natural resource exploitation of the continent?

Image result for Africa infrastructure

(source: africanbusinessmagazine.com/wordpress/wp-content/uploads/2017/01/Africa-infrastructure-1k.jpg)

Additionally, there are concerns with how the financing will be structured and deployed. Will financing be debt or grants? It can be argued that China needs to increase its free aid toward Africa in order to build its image as a global leader. Further, who will build the infrastructure? Africa has grown weary of China linking its financing to the contracting of Chinese companies. Will this infrastructure drive employ Africans and use African companies? If not, then it can argued that Africa will merely be borrowing money from China to pay itself back.

Linked to the point above, is the fact that Africa is already deeply indebted to China. In Kenya, China owns half of the country’s external debt. Kenya will pay about KES 60 billion to the China Ex-Im Bank alone over the next three years.  Kenya and Africa do not need more debt from China, and if this initiative is primarily debt-financed (in a non-concessionary manner), it will cause considerable concern in African capitals.

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

How entrepreneurship can drive structural economic change

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This article first appeared in my weekly column with the Business Daily on January 17, 2016.

Entrepreneurship is increasingly being perceived as Africa’s silver bullet to ending poverty. All you need to do is start a business, the commentary promises, and with hard work, you’ll be rich. Such simplistic thinking is intellectually lazy because in order for entrepreneurship to make serious dents in Africa’s poverty, there has to be strategic direction and oversight. Directed and deliberate action to promote entrepreneurship can drive structural economic transformation, particularly industrialisation. Industrialisation is important for several reasons such as creating jobs, building disposable income and moving towards an export-oriented focus through which forex can be accrued so that millions are dragged out of poverty. So what components need to be in place to make this work?

 (source: https://anzetsewere.files.wordpress.com/2016/01/711ab-industrial.jpg)

The first is direction from government; and here there is good news for Kenya. Late last year government developed the Industrial Transformation Programme which charts out a strategy to build manufacturing and industry in sub-sectors such as agro and fish processing, textiles and apparel and leather. It seems as though this programme will be coordinated with the Kenya Industrialisation Policy (2010) which acknowledges the need to build supporting features for industrialisation such as transport infrastructure, energy, ICT and, water and sewerage. Bear in mind that there are critics of Industrial Policy and many African governments have been advised and in some cases convinced not to pursue aggressive industrialisation policies in the name of deregulation rooted in ‘small government’. African leaders have been given numerous examples of where Industrial Policy failed such as those pursued by some Latin American countries in the 1990s and even in Africa. But the truth is that in some countries such policies have worked in areas such as East Asia and even in the very regions whose governments are anti- Industrial Policy when it comes to Africa.

Africa should stay focused and push for robust Industrial policy because as the Foreign Policy magazine aptly states, failures in Industrial Policy say more about how to do industrial policy- not whether it should be done. As a result, Foreign Policy continues, the Kenyan government and others serious about industrialisation may well have renegotiate, and re-design previous international trade commitments, and refuse to sign new ones that put them at a disadvantage. The creation and pursuit of Industrial Policy, particularly in the context of regional economic blocs can provide a foundation on which enterprises can be developed or supported to start in a manner that drives industrialisation forward.

The second element required to allow entrepreneurship to drive industrial change is strategic financing. The Industrial Transformation Programme already has provision for an Industrial Development Fund but further steps ought to be taken. Government can do what is possible with regards to financing industry-focused enterprises but the private financial sector has to play a role as well whether these are Banks, Equity Funds, Venture Capital Funds, Angel Investors or Impact Investors. Specific, targeted and coordinated financing ought to be made available to credible industry-focused businesses. Through such coordinated, sector-specific lending buttressed by proactive Industrial Policy, a gradual transformation can occur in terms of the composition of businesses that make up Kenya’s, and indeed Africa’s, economy.

(source: http://amoreec.com.sg/wp-content/uploads/2014/11/Money-Sign.png)

The final element and perhaps the most important, is robust and uncompromising anti-corruption oversight; without this the aforementioned will simply not work. If corruption sullies the strategy detailed here, businesses will be selected for financing in the spirit of cronyism and building favour banks rather than in the spirit of culling out weak enterprises such that the best rise to the top. Corruption will also make analysis impossible and analysts will be unable to determine elements of the strategy that are working and those that ought be modified or dropped altogether.

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