Industrialisation

The importance of industry in economic development and regeneration

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This article first appeared in the Business Daily on July 16, 2017

 

A few weeks ago East Africa Breweries Limited (EABL) announced it would set up a KES 15 billion brewery plant in Kisumu which is anticipated to help create at least 110,000 direct and indirect jobs. This investment in this factory is crucial for the country and region for several reasons.

Firstly, EABL’s investment is an investment into industry and manufacturing. A 10 point plan to catalyse industrialisation in Kenya was developed by the Overseas Development Institute (ODI) and the Kenya Association of Manufacturers (KAM) which points to the significance of industrialisation to any economy in the world. Many economic development success stories owe a great deal to the role of the manufacturing sector. Manufacturing can play a crucial role in Kenya’s inclusive growth by absorbing large numbers of workers, including by creating many jobs indirectly through forward and backward linkages to agriculture, raising exports and transforming the economy through technological innovation. This investment is important as a significant private sector player that has been in the region for a truly long time, views investment into industry and manufacturing as a viable and solid investment option. This is good news for Kenya.

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(source: oktoberfest.co.ke/wp-content/uploads/2013/08/eabl.jpg)

Secondly, this investment into manufacturing is important as it is occurring in the context of a sector that has been financially neglected. As the ODI and KAM piece points out, although aggregate finance for manufacturing has benefited from an increased stock of bank lending to manufacturing, from USD 0.8 billion in 2006 to USD billion in 2015, the share of manufacturing in total lending declined from 15 to 11 percent over the same period. Thus EABL’s investment should indicate to local and global investors that the manufacturing sector is financially attractive when the right investment decision is made.

Thirdly, investment in the food and beverages (F&B) sector is a significant job creator. USA’s food and beverage companies are the biggest source of the country’s manufacturing jobs. The advent of a manufacturing facility out of Nairobi will create viable, good quality jobs for the millions of Kenyans in the region who are unemployed, under-employed or employed in the informal sector. The quality of jobs, particularly the direct jobs created by this investment, will allow numerous households in the region and country to benefit from the stability that comes from a stable and well-informed investor.

Fourthly, EABL’s investment has clear linkages to agriculture. As Kisero points out, it was David Mwiraria when he was Finance minister, who first to come up with the idea of introducing tax remission for beer made from sorghum, millet and cassava. The remission is only valid if the company develops and invest in a comprehensive value chain for these food crops. Thus EABL, knows that it is obligated to invest in agriculture that will feed into its investment. This presents a huge opportunity, particularly for small holder farmers, to diversify into more profitable crops; an option that did not previously exist. Thus the effect of EABL’s investment may well reap dividends for the local community in agriculture.

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(source: https://www.farmafrica.org/images/where-we-work/ethiopia/Barley-wide.jpg)

Fifthly, as an investment in 2017, EABL will likely invest in a state of the art facility that will encourage a reorientation of skills required to service the factory. In Trinidad, a survey on their F&B industry revealed that technology has led to an increase in automation in the manufacturing process. This engendered a shift for skills in manufacturing process away from manual labour to skilled machine operators. EABL’s investment will play a role in pointing to the skills deficit and skills requirements for F&B manufacturing in the Kenya. As a result, the local and national labour market could make good use of this opportunity to re-skill or up-skill for the development of a labour pool skilled for an industrialised Kenya in the 21st century. To be clear, this will not be easy as education policy and educational training is still largely outdated, oriented towards social sciences and not linked to industry needs. EABL’s investment presents an opportunity, along with other new investors in manufacturing, to get a true grip of the types of skills required to drive F&B manufacturing forward in the country.

And finally, this is the first new investment in the Nyanza region for a significant period of time. Western and Nyanza have long complained of being neglected in terms of significant investments. And although efforts have been made to revitalise Mumias Sugar Factory and Pan Paper, the economic logic of these investments have been questioned, and rightly so. EABL’s investment is being made with a clear vision of return, and this will extend beyond financial returns. While the bottom line is likely a focus for the EABL team, the investment will generate forward and backwards linkages into the local and national economy in a manner that grows income for the local communities. Thus, it would be an interesting exercise to analyse not only the financial, but also social returns created by this investment.

Bear in mind that Kenya has the Kenya Industrial Transformation Programme (KITP) developed by government to catalyse industry in the country. The EABL investment should be one of many aimed at pulling Kenya into an industrial age of prosperity and engender economic growth in a manner that informs economic development and regeneration.

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

 

 

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.

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(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.

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(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

Manufacturing in Africa is growing faster than assumed

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This article first appeared in my weekly column with the Business Daily on May 1, 2016


Last week the Overseas Development Institute (ODI) published an interesting paper on export-based manufacturing potential in Sub-Saharan Africa (SSA). The report states that contrary to the common view, production, employment, trade and foreign direct investment in the manufacturing sectors has actually increased over the past decade in SSA. Between 2005 and 2014, manufacturing production more than doubled from $73 billion to $157 billion, growing 3.5% annually in real terms; some are higher with Uganda’s manufacturing growing by 5% over 2010-2014, Zambia’s by 6% over 2008-2012; and Tanzania’s by more than 7% in the last decade. Further, SSA countries are increasingly exporting manufactures to each other (20% of total trade in 2005, 34% in 2014), and a great deal of FDI into manufacturing is among and between African countries.

The report states that there are exceptional manufacturing opportunities in garments and textiles, agro-processing and horticulture, automobiles and consumer goods. However, the share of manufacturing in total employment fell from 10% in 1991 to 8.5% in 2013. This is important to note because although manufacturing is growing, the employment creation ability of the sector seems more muted than it used to be. Perhaps factors such as the growing role of technology in manufacturing is important and may reflect the gradual technological deepening in African manufacturing exports over the past decade.

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(source: http://www.fashionatingworld.com/images/Textile-industry-Africa.jpg)

The report is very sober in noting the reality that Africa’s (all Africa, not just SSA) share in total world manufacturing exports remains less than 1%, and this has fallen marginally since 2010. Yet the good news is that between 2005 and 2014 exports from Africa as a whole (not just SSA) grew at an average annual rate of 10% or higher in the product groups analysed.

In terms of insights on Kenya, Kenya’s share of manufacturing exports is higher than that of Ethiopia and Rwanda. Further, the intra-African trade share in Kenya was high at 67.5 percent in 2013. But, as the report notes, this figure ought to be considered in the reality that the coastal countries with large ports, such as Kenya, facilitate import and export trade in the region pushing trade numbers up. Top manufacture products from Kenya include apparel, clothing and accessories; perfume, cosmetics and cleansers; iron and steel, and inorganic chemicals. However, compared to the peers in the report, Kenya has a lower share of domestic value-added (DVA)  content of gross exports as a share of total exported value added with DVA standing at a lower than average 62 percent. The most promising sectors in manufacturing in Kenya detailed in the report, in terms of revealed comparative advantage, include automatic typewriters and word-processing machines, self-adhesive paper and paperboard, hair-nets, safety pins of iron or steel, carbonates, flat-rolled products of iron or non-alloy steel, and leather.

As ODI’s Dirk Willem te Velde states, industrial development is crucial for human development and leads to wealth creation, economy-wide productivity change, greater incomes, significant job creation and resilience throughout the economy. As a development economist, there are two keen points of interest for me in terms of informally assessing the development potential of manufacturing. First, is the extent to which manufacturing can absorb low skilled labour given that Kenya’s population’s average years of schooling is 6.5 years. The second issue is the employment creation potential of manufacturing. For too long Africa has been seen to support the jobless growth phenomena where the economy is growing but formal job creation is lacklustre.

(source: http://www.greenconduct.com/wp-content/uploads/2013/07/jobless.jpg)

The report provides some insight on these issues by looking at Tanzania. The highest low-skilled employment potential in Tanzania is in agricultural products; this good news given the importance of agriculture to countries such as Kenya and Tanzania. In terms of employment potential, for Tanzania, agriculture comes out on top again. Agricultural products such as high-value vegetables and fruits, processed grains, processed meat, wood products and leather have high employment potential. Thus, the good news is that it is possible for agriculture, a dominant player in African economies, to be best placed to absorb low skilled labour and have high employment potential. This should provide impetus for Kenya to do a similar type of analysis and closely examine the important role agro-processing can have in reaping development dividends for the country. But bear in mind that the issues of high wages is an overall constraint for the sector. Labour costs in SSA are generally higher (when measured relative to GDP per capita) than in low-and middle-income comparator countries in Asia and Latin America.

Anzetse Were is a development economist; email: 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

 

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?

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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.

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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

Is Industrialisation the answer to Kenya’s Economic Problems?

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This article first appeared in my weekly column with Business Daily on Apri1 19, 2015

Industrialisation is often touted as the answer to development in Kenya and Africa as a whole. Industrialisation here refers to the process in which a country transforms itself from a society based on primarily agricultural and natural resource extraction into one based on manufacturing of goods.

There is already indication that the government is grappling with the issue of industrialisation as seen in a proposal, made a few weeks ago, to end the importation of second-hand clothes and vehicles. The argument is that imports should be curtailed in order to foster industrialisation in the East African Community (EAC).

This is import-substitution industrialisation, which is essentially a trade and economic policy which advocates replacing foreign imports with domestic production premised on the notion that the region should attempt to reduce its foreign dependency through local production of industrialised products.

17148876-abstract-word-cloud-for-import-substitution-industrialization-with-related-tags-and-termsThis has been a dominant theme in development economics targeting mass poverty and increasing productivity within a given country or region. It is an inward-looking economic theory focused on bringing developing countries into the prosperity of industrialised nations.In all fairness, this position makes sense in some ways; the intention of ushering in development and self-sufficiency by moving beyond agriculture and natural resource extraction through subsidising vital industries is laudable.

As it stands, non-industrialised countries such as Kenya are dependent on industrialised ones because they have no alternative but to buy manufactured goods which lead to a vicious cycle. Further, industrialisation can be a useful link between rural and urban areas where the outputs of one feeds into the inputs of the other. Successful industrialisation also relies on efficient and functional transport and communications systems. Industrialisation can also lead to creation of better links between rural and urban areas as well as improve transport and communications.

It can also improve Kenya’s export profile, which is a trade deficit country. Indeed, Kenya recorded a trade deficit of Sh86,484 million in January 2015 alone. Industrialisation can also play an important role in creating products which meet domestic needs can be exported to earn forex.

trade_deficit_generic_mediumIn terms of function, industrialisation forces companies to compete with international competitors in terms of quality and price. At the moment EAC governments are seeking to facilitate industrialisation by banning imports of second-hand goods. The upside to this is that it allows new industries the time and space to get their formula right. Yet a ban on imports means that inefficiencies and sub-standard goods will be allowed to flourish, limiting choice and forcing consumers to buy expensive goods of potentially low quality.

Not only is this against the poor but it can also lead to industrialisation supported by protectionist government policy which can cultivate a culture of mediocrity. Industrialisation also poses additional challenges such as whether Kenya has the following: a variety of raw materials to produce finished goods, a constant supply of affordable energy, a large number of engineers, a dependable supply of both skilled and unskilled workers as well as capital goods and money for investment.

Further, the creation of by-products and waste has to be carefully managed to avoid chronic, dangerous pollution from becoming the norm. As Kenya eyes industrialisation as a catalyst for economic development, a cost-benefit analysis must be done to determine how it can be structured to spur sustainable development.

Ms Were is a development economist. anzetsew@gmail.com, twitter: @anzetse