industry

Industrialisation in Kenya: What do political party manifestos say?

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This article first appeared in The East African on July 24, 2017

 

Further development of manufacturing can play a central role in driving economic transformation and job creation in Kenya. There is now a window of opportunity for Kenya (and other East African countries) to capitalise on positive underlying factors in the global economy – including rising wages in Asia, the rebalancing underway in China, and strong regional growth in Africa – and significantly expand its capabilities and global presence in export-oriented, labour-intensive manufacturing within the next 20 to 30 years.

But the recent performance of the Kenyan manufacturing sector has been weak. The share of manufacturing in Kenya’s gross domestic product (GDP) was only 9.2 percent in 2016 (well below average for a country with Kenya’s level of income) and this share has been declining in recent years. Several decades ago, Kenya had a relatively complex and substantial industrial sector by regional standards, but its East African neighbours have been catching up in recent years.

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

Decisive and comprehensive action is required in order to reverse the decline, double manufacturing production and employment, and increase the share of manufacturing to 15 percent of GDP within the next five years. With this in mind, the Overseas Development Institute (ODI) and Kenya Association of Manufacturers (KAM) developed a 10-point policy plan to transform Kenyan manufacturing and create jobs. These 10 points, based on close co-operation amongst a range of stakeholders, aim to inform pre-election debates and can also be used by the new government to implement a more focused and effective industrialisation strategy.

There has been an analysis of the manifestos of the three main political parties to determine the extent to which they support manufacturing in Kenya and the region. The manifestos of Jubilee, the National Super Alliance (NASA) and the Third Way Alliance were launched at the end of June 2017. All three parties emphasise the industrial agenda as central to Kenya’s economic transformation in general terms, which is encouraging, with NASA emphasising innovative initiatives and especially the small and medium enterprise (SME) and informal sector, and Jubilee and the Third Way Alliance being more specific in their recommendations.

There are a range of notable similarities with the 10 policy priorities in the KAM-ODI booklet. Firstly, all three parties prioritise addressing either general or specific aspects of the enabling environment. The Third Way Alliance commits to addressing counterfeit goods, one of the KAM-ODI action points. Secondly, all three parties want to enforce a fiscal regime that is predictable and fair, a key action point among the ten policy priorities, and emphasise fair taxation in particular. Jubilee further discusses the action point on devolution. The Jubilee manifesto discusses the KAM-ODI action point on land banks and NASA and the Third Way Alliance discuss industrial parks, which need land. The Third Way Alliance pledges to work with county governments to set aside land for industrial parks, offering a practical way to implement the KAM-ODI action point on securing land for SEZs and industrial parks.

The feasibility of the creation land banks and setting aside land for industry will be linked to issues of acrimony over land title and cost of relocating populations on said pieces of land. For example, an SEZ was due to be set up in the Western part of the country but had to be scrapped as an agreement could not be reached on what land could be used due to claims of title on the piece of land. Thus all parties will have to undergo a thorough land audit in the areas the government intends to develop industrial parks and SEZs and begin with areas where there is clear land title that is not contested.

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In terms of energy, NASA discusses the need for an energy policy. Jubilee highlights the need for lower electricity tariffs for industrial usage and the Third Way Alliance calls for liberalisation of the energy sector and revisions to electricity billing and pricing to reduce the cost of electricity for key manufacturing sectors. Both NASA and Jubilee highlight the need for investment in electricity infrastructure. Jubilee also emphasises green energy and, in a similar vein, NASA and the Third Way Alliance focus on ramping up clean and renewable power generation.

What most of the manifestos are not clear on is how they will reduce the cost of energy in the country. For example, Kenya needs a reduction of five cents per kilowatt hour would bring the cost down to that in Tanzania. It is only the Third Way Alliance manifesto that states they will tackle the cost of energy issues by liberalising the energy sector and revising electricity billing and pricing. However, an additional problem with energy in Kenya is power outages; Kenya has more power outages than Uganda, Rwanda and Ethiopia. None of the manifestos are not clear on how this will be addressed. All three manifestos are vague on the type of reforms and investments needed to address inefficiencies and incentivise investment in power transmission and distribution.

All three parties suggest the establishment of industrial funds or development banks specific for industrialisation, such as an export-import bank (Jubilee and the Third Way Alliance) or a co-operative fund for agro-processing (NASA). But none of the parties place strong emphasis on suggestions for financial sector development. Similarly, the three parties’ manifestos do not give attention to foreign direct investment (FDI) to promote industrialisation. While these plans sound feasible, the implementation of these financing schemes will determine uptake by private sector. Ideally, the funds should offer financing perhaps at concessionary rates. The most important factor however is that the funds need to be patient such that private sector has time to use the capital effectively and generate returns over a realistic period of time. Yet the manifestos are not very clear on how financing to the sector will be structured. The Jubilee manifesto comes closest to specifics, stating that they seek to provide long-term credit funded by long-term bonds; one wonders why this strategy has not already been deployed. Further, none of the parties place strong emphasis on suggestions for financial sector development or how to promote FDI to support industrialisation.

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In terms of skills, NASA and the Third Way Alliance highlight the importance of general education, whilst Jubilee prioritises the need to nurture a globally competitive work force to power industrialisation. NASA and Jubilee stress the importance of linkages between universities and the rest of society, although Jubilee seems clearest on this and explicitly mentions the need to develop formal linkages between the private sector, academia and government. At the moment, there is a sizeable gap between what is taught to students and what the job market requires. Therefore, if curricula are not significantly revised and linked to a push to encourage students to take up of science, technology, engineering and maths (STEM) subjects, any partnerships with academia may not be fruitful in terms of creating a labour force with skills required for industrialisation. Jubilee manifesto’s pledge to promote the study of science, technology, engineering and maths but again, one wonders this has not already been done. Both the NASA and Third Way Alliance manifestos do not contain specific details on which subject areas to target for educational improvements.

NASA and Jubilee highlight the role of a fit for purpose civil service to support industrialisation. NASA stresses the need to reduce contractors’ cost of doing business with government, streamline procurement, process payments promptly and inculcate a zero tolerance approach to corruption. Jubilee wants a truly fit for purpose public service, and mentions the importance of reducing waste, dealing with procurement and rationalising the public sector wage bill. The Third Way Alliance has a narrower focus on measures to combat corruption. This element will likely prove to be the most difficult to implement as Kenya has notoriously been unable to hold those implicated in corruption scandals to account. Thus, it is dubious as to whether any of the parties have the political will required to implement this element of the manifestos.

The Third Way Alliance manifesto places strong emphasis on developing value chains in priority manufacturing sectors, including agro-processing, textiles and leather; but some of the Alliance’s proposals to support value chain development are quite protectionist in nature. The NASA and Jubilee manifestos also mention value chains, with the NASA manifesto emphasising synergies and linkages amongst enterprises. The issue of value chains is closely linked to agriculture and what has become clear over the first iteration of devolution is that agriculture seems to be neglected by both county and national governments in terms of budget allocations. According to the International Budget Partnership (IBP), national government allocated the sector as follows: 2 percent in 2015/16, 1.3 percent in 2016/2017 and 1.8 percent in 2017/18. As IBP points out, the Maputo Declaration 2003 calls for allocation of at least 10 percent of total national budget towards agriculture. The average expenditure on agriculture in Africa is 4.5 percent; Kenya’s national allocations are clearly sub-par. Thus for the value chain manifesto declarations to work, there is need to more robust allocations to agriculture at national and county level and better coordination between the two levels of government; none of the manifestos articulate how they would make this happen.

In the context of the EAC, the push for exports in the KAM-ODI booklet is important. Both NASA and Jubilee press for better market access, NASA for SMEs in particular. Improving and/or maintaining market access in the EAC is an important element of the NASA and Jubilee manifestos, aligning well with the KAM-SET call for an export push. The Jubilee manifesto focuses on expanding Kenya’s access to the US in textiles, whereas NASA emphasises market access for MSEs. In contrast, improving access to markets for Kenyan exports is not prioritised in the Third Way Alliance manifesto.

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To be clear, access to EAC for manufactured goods is riddled with problems. Total exports from Kenya the EAC registered a 4 percent decline in 2016 to KES 121.7 billion, with exports to Uganda and Rwanda falling by 9.3 percent and 2.5 percent respectively. Further, opportunities offered by the EAC’s integrated market has institutional and regulatory barriers to trade such as such as customs clearance, standards and certification, rules of origin, licences and permits, truck inspections and language barriers.  None of the manifestos address these issues. Further, the entry of China and India into the regional market has eroded Kenya’s EAC market share from 9 percent in 2009 to just 7 percent by 2013.  The World Bank claims that Kenya’s trade performance is declining quickly due to an influx of goods from China into Uganda and Tanzania, which are major export destinations for Kenya.  In the manifestos it is not clear how EAC market access issues will be addressed. The Jubilee and NASA manifestos make general statements about Kenya’s role within the EAC, but there is little detail in either manifesto in terms of specific measures or priorities to support access for Kenyan goods in the EAC market. The Third Way Alliance’s manifesto does not make any reference to Kenya’s role in a regional context.

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

Time for Africa to change strategic partnership with Asia

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This article first appeared in my weekly column with Business Daily on June 26, 2016


Earlier this month the President of South Korea visited Kenya and numerous intentions of bilateral cooperation were articulated including a deal to establish a science and technology centre and other agreements centred on trade, investment promotion, education, sport and culture. It was a shame that industry and manufacturing did not feature very prominently during the visit as Kenya and other African countries can clearly learn from South Korea and other Asian countries on this sector.

Sadly if you look at Kenya’s trading patterns with Asian countries, it’s the continuation of an old story; Kenya exports mainly raw agricultural commodities and imports finished and manufactured goods. Our biggest trading partners are from Asia, specifically India, China and Japan.  It seems as though although Africa is waking up to the need to industrialise, practical partnerships both between governments and between businesses do not exist to catalyse industrialisation on the continent. In short, Africa should shift from calling in Asia to build roads, rails bridges and instead start to focus on partnerships to boost industry and manufacturing.

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With China alone due to shed about 85 million jobs at the bottom end of the manufacturing sector between now and 2030, Africa has to shift from the development assistance and infrastructure focused partnerships with Asia and shift to building low end manufacturing on the continent. Yes it is true that the infrastructure base in the continent is poor, but so is the manufacturing and industry base. While infrastructure development is front and centre for Africa right now, manufacturing has not received such prominence. There ought to be a dual focus on infrastructure and industry while working on other aspects of Africa’s landscape particularly with regards to education, land reform and technology absorption and development.

Bear in mind that getting guidance and mentorship from industrialised countries is how much of Asia rose to become the manufacturing giant it is in the world today. For example industrialisation in Japan was a result of many factors but a key factor was the support it got from the USA. Japan’s industrialisation took off in during the Cold War. With the massive communist dragon called China so nearby, the USA made a deliberate effort to build ties with Japan to buffer China’s influence as well ensure capitalism took root in Japan next to a bastion of communism. As a result, some analysts argue that the USA even hollowed out some of its own manufacturing capacity and made deliberate efforts to build Japan’s industrial and manufacturing base and also opened its markets to manufactured Japanese products.  Indeed by 1953, US military procurement from Japan peaked at a level equivalent to 7% of Japan’s GNP.

Although the global context in which Africa seeks to industrialise is very different the core point remains the same; Africa must learn from others and seek to reach out to countries that have successfully industrialised to build this sector on the continent in a very practical manner.  African governments ought to more deliberately bring the issue of industry and manufacturing on the table during any negotiations with Asian countries. We all know that as wages rise in China, Chinese exports will become more expensive and this provides opportunities for manufacturing in Africa. Africa should position itself to do the manufacturing Asia no longer wants to do as their economies sophisticate.

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The path Africa can take can include starting with building low end manufacturing that is not too complex and can absorb what is still largely an under-educated labour force by starting with textiles and other light manufacturing. This can then be displaced by the growth of engineering and chemical industries. I am of the view that the textile assembly that goes on in the Export Processing Zone in Kenya does not count as manufacturing since most of the components of the apparel are imported and are not building Kenya’s textile factories and industry. Thus the point is simple; Africa should call in Asia to help build industry not just infrastructure.

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

The missing middle of Kenya’s economy

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This article first appeared in my weekly column in the Business Daily on September 20, 2015

 The World Bank makes the point that the structural economic transformation in Africa is not following the path that other developing countries have followed as they expanded and sophisticated their economies. To put this statement into context, different sectors of the economy contribute to GDP growth and these are typically characterised as three core sectors: agriculture, industry and services. Typically the path to economic development is one where there is a shift from the traditional sector of agriculture into industry and manufacturing. From there the economy tends to evolve further into services. However, this is not the pattern of growth that Africa is undergoing; Africa seems to be diversifying away from agriculture, not into industry but directly to services. Indeed in Africa, services contributed 62 percent to the cumulative growth in GDP, while manufacturing contributed 25 percent and agriculture 13 percent. Manufacturing is not really taking off on the continent and Africa is leapfrogging industry straight into services. Services here refers to a broad body of activity such as health, education, information and communication, hospitality, public administration, wholesale and retail trade, finance and insurance, and real estate among others.

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(source: http://sostg.com.au/wp-content/uploads/2013/03/iStock_000014887823Medium.jpg)

Kenya falls right in line with this trend; indeed recent statistics indicates that agriculture contributed 29.3 percent to GDP, industry stood at 17.4 percent and services an overwhelming 53.3 percent. So while the share of GDP is contracting for agriculture, industry is remaining fairly stagnant and there is rapid growth in services.

But why is this important? Why should Kenya and indeed Africa be trying to industrialise? Shouldn’t Kenya be happy that we are leapfrogging industry into services? Can this not be perceived as an advantage? The answer to that is a qualified no and here’s why; firstly historically manufacturing been the driver of economic growth and has allowed countries, particularly developing countries, to catch up with advanced economies. From1950 to 2005, the pattern of industrialization has closely reflected changes in global patterns of development.

Secondly, industry is an important job creator and it creates jobs job opportunities for variously skilled levels of labour. Indeed, in services, the sub-sectors important to GDP tend to have low wage employment intensity (employment per KES million) and in Kenya, employment within the services sector has been declining since 2000. Given levels of unemployment in Kenya, it would be prudent to boost a sector that can meaningfully contribute to this problem. Further, manufacturing is traditionally the main sector responsible for the diffusion of innovation and productivity change. The development of industry allows countries to employ technology in building productivity and learning.

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Finally, there are risks of services leading the path to economic growth because Kenya does not have the necessary components that form the foundation on which services can function effectively and efficiently. Simple factors such as poor electricity supply, low levels of infrastructure penetration and expensive travel costs negatively inform the extent to which services can lead economic growth. Bear in mind that it is more likely that some of these deficits would have been addressed had the country been diversifying into industry. Additionally the price of services tends to increase more rapidly than that of manufacturing goods; thus a preponderance of services growth may lead to a plethora of activities that cost Kenyans more than if growth had been led by industry. Add to this the fact that in Kenya, labour tends to move away from agriculture but into low skill services with relatively low productivity growth mainly in informal retail trade; this has been dubbed premature deindustrialisation.

This discussion should not make one conclude that services (or agriculture) does not play an important role in economic development, clearly it does. The emphasis should rather be on how to build industry in a manner that allows it to play its true potential role in economic development and do so in a manner that fosters links between agriculture and manufacturing and between services and manufacturing.

The reality is that at present, without growth in industry and manufacturing, Kenya and indeed Africa will face limited growth prospects and will remain vulnerable to external shocks, adverse changes in terms of trade, and remain the eternal producer of raw fuels and metals to which little value is added and which are volatile raw export commodities. With such grim prospects, there should be a greater impetus to boost industry performance in Kenya and indeed the continent.

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