manufacturing

Kenya: What should be demanded of the next administration

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This article first appeared in the Business Daily on February 12, 2017

The election year in Kenya is contextualised in two conflicting realities: on one hand the country is among those growing the fastest in Africa and the world and is successfully attracting mega investment. On the other hand, companies have shut down or left the country, poverty and unemployment levels remain high and cost of living continues to rise. How do we reconcile these two conflicting realities?

The first is to acknowledge that the economy is growing; by 6.2 percent in Q2 and 5.7 percent in Q3 of last year. Juxtapose this with an African GDP growth rate of about 1.4 percent and a global growth rate of about 3.4 percent in 2016. Analysts point to several sources for this growth; agriculture, forestry and fishing; transportation and storage; real estate; wholesale and retail trade as well as mining and quarrying. Kenya was not only buffered from the decline of commodities, Kenya saved nearly KES 50 billion in the first half of 2016 alone due to low global petroleum prices. Further, the Kenya Shilling remained steady with regards to major currencies, standing at around KES 100 to the US Dollar. This is important for Kenya which is an import economy; currency depreciation places upward pressure on inflation. With regards to inflation, the country remained within the Central Bank of Kenya’s (CBK) inflation target range of 5 plus or minus 2.5 percentage points; annual average inflation dropped from 6.5 percent in November to 6.3 percent in December, the lowest reading since November 2015. In addition, the country made progress on the Ease of Doing Business Index. Kenya ranked 92nd up from 113 in 2015; this is the first time in seven years Kenya has ranked among the top 100.

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Further, Kenya’s profile as an attractive investment destination grew in 2016. FDI Markets ranked Nairobi as Africa’s top foreign direct investment destination with inflows surging by 37 percent in 2015. Indeed, reports indicate that Kenya recorded the fastest rise in FDI in Africa and the Middle East. The FDI intelligence website indicates that a total of 84 separate projects came into Kenya in real estate, renewable and geothermal energy as well as roads and railways worth KES 102 billion, all of which provided new jobs for thousands of Kenyans. Additionally Peugot announced a contract to assemble vehicles in the country joining Volkswagen which opened a plant last year, Wrigley invested KES 5.8 billion in a plant in Thika and a contract worth KES 18.74 billion was signed with the French government to build a dam.

However, the reality elucidated above seems theoretical in the minds of millions of Kenyans, most of whom are not feeling the positive impact of all these rosy statistics. Media reports indicate that that thousands jobs were lost last year due to company restructuring or company shut down altogether. 600 jobs were lost when Sameer Africa announced that it would shut down its factory. Flourspar Mining Company also shut down, leading to a loss of between 700-2000 direct and indirect jobs. Oil and gas logistics firm Atlas Development also wound up operations and the Nation Media group shut down three of its radio stations and one television channel. But perhaps it is in the banking sector where job losses were most pronounced. This paper reported that more than six banks announced retrenchment plans in 2016: Equity Bank released 400 employees; Ecobank announced it would release an undisclosed number of employees following a decision to close 9 out of its 29 outlets in Kenya; Sidian Bank, formerly known as K-Rep, made plans to release 108 employees, and the local unit of Standard Chartered announced plans to lay off about 600 workers and move operations to India.

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(source: http://youthvillage.co.ke/wp-content/uploads/Fired.jpg)

Why is this happening? How can economic growth be juxtaposed with massive lay-offs and economic hardship? There are several factors at play here. With regards to the employment cuts in the banking sector, these are linked to two factors, the adoption of technology and the interest rate cap. Technology adoption has translated to the reality that millions of Kenyans no longer have to visit banks to access financial services as they can make financial transactions digitally, transactions that range from money withdrawals and transfers, to loan applications and disbursement, and the payment of bills. This automation has led to the attrition of jobs.

Secondly, the interest rate cap has placed pressure on the profit margins of banks leading to job forfeiture. The interest rate cap effected by the government stipulates that banks cannot charge interest rates above four percentage points of the Central Bank Rate (CBR). Interest rate spreads have several functions for banks, of which perhaps the most important is insulating banks from bad borrowers. There is an asymmetry of credit information in Kenya due to the fact that the creditworthiness of most Kenyans cannot be established. As a result, when banks make loans to Kenyans, they often do not know if the borrower will be a good or bad one. Thus to insulate themselves from the risk of lending to bad borrowers, interest rates are raised in order to ensure that the bank recovers as much money from the borrower in as short a time as possible. In removing this provision, the interest rate cap is essentially forcing banks to lend money to both good and bad borrowers at the same rate. This in turn threatens profit margins as there is a real risk that the bank now has no buffer against bad borrowers. As a result, some banks have responded to the interest rate cap by shedding jobs to cut down operating costs and safeguard profits.

However, the interest rate cap is having a more insidious effect on the economy. A report by the IMF released last month states that the interest rate controls introduced in Kenya could reduce growth by around 2 percentage points each year in 2017 and 2018. The IMF also expects a slowdown in the growth of private sector credit linked to the cap. Additionally, the growth of the economy has been revised downwards due to the cap. What does this mean for the average Kenyan? The interest rate cap means that SMEs and individuals who used to get loans, albeit at higher rates, are likely to get no credit at all. Banks will simply not lend to individuals and businesses whom they think cannot service the debt credibly at that capped ceiling. Sadly it is the most vulnerable who will be disqualified first as these are seen as high risk and high cost borrowers. As they are shut out of credit SMEs cannot implement growth plans and are unable to create jobs and wealth. The contraction in liquidity engendered by the cap may also mean there will be less money moving in the economy; Kenyans will feel that there is less money around and feel more broke as they cannot get loans to grow their business or meet personal costs.

However, one of the biggest factors behind why Kenyans don’t feel the rosy statistics is because most Kenyans operate in the informal economy whose performance is generally not captured in official figures. GDP growth and Ease of Doing Business data do not capture the reality of dynamics in the informal economy where over 80 percent of employed Kenyans earn a living. Therefore, one cannot extrapolate positive overall statistics as reflective of performance of the informal economy. Perhaps the incongruence Kenyans feel stem from the fact that the economy from which millions earn a living is largely ignored. The hardship and challenges of Kenyans living and working in the informal economy continues to be neglected and thus policies and action that could help most Kenyans are never developed or implemented. Until the gross negligence of the informal economy is addressed, one can expect the average Kenya to feel a disconnect between economic growth and their lived reality in the informal economy.

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An additional factor leading to the disconnect between economic growth and the lived reality of most Kenyans, is that the country seems to be in a ‘jobless growth’ rut where GDP growth doesn’t lead to formal job creation. This is partly because Kenya’s economic growth is services driven, and services produces far less jobs than manufacturing. Until the manufacturing sector is given the attention it requires such that economy is driven by export-led manufacturing, the ‘jobless growth’ challenge will continue. Bear in mind that manufacturing in this country is under threat because the cost of doing business for manufacturers in Kenya remains high particularly with regards to electricity, transport, cross-county taxes and, frankly, corruption. Kenya is currently deindustrialising as the manufacturing sector grows at a slower rate the economy. The manufacturing sector grew 3.6 percent in the Q1 and at 1.9 percent in Q3 of 2016. Compare this with a GDP growth rate of 6.2 percent in Q2 and 5.7 percent in Q3 of 2016; this means the share of manufacturing in GDP is shrinking. This should be of concern because, as analysts point out, industrial development is crucial for wealth and job creation. Exacerbating the already slow growth of the sector this year are the drought and cheap imports. As the Kenya Association of Manufacturers points out, the drought is having an impact on raw materials in sectors that rely on agricultural products. The drought will also lead to a higher cost of goods and services for Kenyan as electricity tariffs are adjusted upwards. The manufacturing sector is also threatened by the fact that the country has allowed the entry of cheap goods, particularly from Asia, to flood the market; goods that benefit from protection and subsidies in their home economies which is not reflected here.  These constrain the growth of the sector in Kenya.

Finally, financial mismanagement at both national and county levels is compromising growth. The top allegations of the financial mismanagement of public funds according to media reports include the laptop tendering debacle, NYS scandal, Ministry of Health and the GDC tendering scandal. It seems that government funds that are meant to be economically productive and generate economic activity do not reach intended projects. Thus the economic stimulus that ought to be garnered from public never happens because projects are either under-financed or not financed at all as public officials siphon money away from them. Further, business routinely complain that bribes have become a basic expectation of county officials around the country. A report released by the Auditor General last month revealed that Kenyans are asked to pay up to KES 11,611 by county officials; Mombasa County officials top the list of bribe-seekers followed by Embu, Isiolo and Vihiga. As long as this continues, jobs and wealth that government investment and financing could have created will not materialise.

So what should Kenyans demand from those vying for power in this year’s general election? The first and foremost is ending financial mismanagement where even opposition is culpable as counties under opposition engage in corruption as well. Kenyans must demand a clear plan that will take serious steps to make financial structures more robust and punish those engaged in the financial mismanagement of public funds. Secondly, Kenyans should push for the government to provide a detailed analysis on the impact the interest rate cap is having on Kenyans and the economy. If the analysis elucidated herein is anything to go by, Kenyans should also seek the reversal of the interest rate cap as soon as possible. Thirdly, Kenyans ought to demand the development of a policy aimed at supporting and developing the informal economy at both national and county level. The gross neglect of this sector must end given that it is in the informal economy where most Kenyans earn a living and are employed. Finally, Kenyans should push for a detailed plan on industrialisation for the country. While the Ministry of Industrialisation has developed the Kenya Industrial Transformation Programme, a detailed work plan and timeline of deliverables ought to be developed and shared so that Kenyans can reap the dividends that green industrialisation can create.

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

Dynamics to look out for in 2017

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This article first appeared in my column with the Business Daily on January 1, 2017

As 2017 starts it is important to take note of key dynamics that will define the year in Kenya. Most of the dynamics will be related to the elections at both national and county levels. There are several issues married to this concern the first of which is political and civil stability. There are already signs that the race for office at both national and county levels will be intense with potential for unrest. It is important that all aspirants as well a security minimise any instability that may emerge from the elections to limit its potentially negative effects on the economy. Kenya’s election year tends to be associated with lower economic growth. It is time to break away from this by securing stability regardless of whether it is an election year or not. This can only be achieved if aspirants from both sides of the political divide are responsible in their speech and actions and are all committed to well governed elections.

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Secondly, there has been and will continue to be an intensification of tribalism associated with the elections. The problem with tribalism is not only that is it morally abhorrent, it is foolish. The folly of tribalism related to electing leaders is that is engenders a culture of unaccountability in leaders. Regardless of how the leaders of the ruling or oppositions parties behave and perform, they are guaranteed that Kenyans will vote for them depending on tribal bent. Thus leaders do not need to meet promises made, develop the country or be accountable because they know when elections come around, none of the aforementioned will affect their vote; only tribe will. Thus it is wonder that Kenyans complain about poor leadership yet it is the obsession with tribe in this country that feeds that culture of unaccountability in leadership. This year Kenyans should start the process of ending the culture of tribalism by demanding ideological positions from aspirants on how they will rule at national and county levels.

Another big dynamic will be fiscal policy and management. With regards to fiscal policy, the budget will be read in the middle of the year at the height of electioneering. It is important that Kenyans pay attention to fiscal policy to understand the financial plan for the country going forward. This is important as there may be a change of guard before the end of the fiscal year either at the political or technocratic level. Secondly, election year is a good time for Kenyans to ask hard questions on the management of public budgets. The issue of fiscal management or the lack thereof has beleaguered Kenya for the past five years both at national and county levels. The allegations of graft at national level have been well publicised yet those at county level are essentially ignored. This is a dangerous dualistic mind-set as continued graft at county level poses a clear and present danger to the ability of devolution to deliver on development. Counties in both ruling party and opposition dockets are culpable; this is a non-partisan issue. Therefore this year Kenyans should demand, at both national and county level, clear strategy by all aspirants on how they will address this issue of fiscal mismanagement. This should be coupled with an expectation from aspirants to devise prudent fiscal policy at national and county level.

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(source: http://www.charlesclifton.co.uk/wp-content/uploads/2016/06/Fiscal.png)

The final big issue is the development agenda for the next five years; what theme will define the next era of rule? It is clear that over the past five years, infrastructure has been a key theme for the government. Will this be continued for the next five years? My view is that there should now be a shift from infrastructure to manufacturing and green industrialisation. The share of manufacturing in GDP in Kenya has been stagnant for decades. As a result, Kenyans have not fully benefitted from the related job creation, rise in disposable income and penetration of Kenyan products in the African market. The time is now for the next administration to develop a clear strategy and plan for manufacturing and green industrialisation as the theme that will define the next five years.

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

Factors affecting the Kenyan economy

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This article first appeared in my weekly column in the Business Daily on November 20, 2016

I have been getting several questions pertaining to what is ‘really’ happening in the Kenyan economy. Many Kenyans see incongruence between economic growth statistics and their own lived experience. According to the World Bank the economy is expected to grow by 5.9 percent in 2016; the Kenya National Bureau of Statistics reported that Kenya’s economy expanded by 6.2 percent in Q2 2016.  However, several companies have closed down operations in the country and thousands of jobs have been lost this year alone. There are numerous variables that may be informing why Kenyans do not seem to be feeling the positive effects of economic growth.

The first is that GDP growth and Ease of Doing Business data do not capture the reality of the growth and Ease of Doing Business in the informal economy where over 80 percent of employed Kenyans earn a living. Therefore, one cannot extrapolate positive overall statistics as reflective of performance of the informal economy. To what extent does Ease of Doing Business research reflect improvements in the business environment for informal businesses? Parameters such as increased ease with regards to tax compliance and business registration inform Ease of Doing Business performance, yet these are parameters with which informal businesses largely do not intersect. Thus, perhaps the incongruence stems from the fact that the economy from which millions earn a living is largely ignored by official data gathering and analytical efforts.

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(source: http://www.standardmedia.co.ke/business)

With regards to companies closing and job loss, several factors at play; I will focus on manufacturing and the banking sector. Manufacturing in this country is under threat because the cost of doing business for manufacturers in Kenya remains high particularly with regards to electricity, transport, cross-county taxes and, frankly, corruption. Additionally, the country has allowed the entry of cheap goods, particularly from Asia, to flood the market; goods that benefit from protection and subsidies in their home economies which is not reflected here. The combination of these factors is making Kenya an increasingly uncompetitive location for manufacturing which is diametrically opposed to the Government’s industrialisation agenda. With regards to the banking sector, job shedding seems to be informed by automation and the interest rate cap. Mobile and e-banking means that many customers do not need direct human contact to effect the transactions they require. The interest rate cap has removed a key risk management tool that banks used to manage information asymmetry with regards to credit worthiness. As a result, banks seem to have limited space to make numerous loans as the risk buffer is no longer present. Fewer loans means fewer staff are needed to monitor loan compliance.

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(source: http://www.theeastafrican.co.ke/image/view/-/1428984/medRes/371054/-/maxw/600/-/lpr3kh/-/manu.jpg)

Kenyans are also concerned that economic growth is not associated with job creation; the country seems to be stuck in the ‘jobless growth’ rut. Again, this is informed by several factors. Firstly, Kenya’s economic growth is services driven, and services produces far less jobs than manufacturing for example. The main services sub-sectors that are labour intense are health, education and hospitality; sub sectors such as telecoms and financial services need far less labour. It is no secret that tourism in the country has been hit leading to job losses; and even when there is marginal recovery, a limited number of jobs are created and those are seasonal. Until the manufacturing sector is given the attention it requires such that economy is driven by export-led manufacturing, the ‘jobless growth’ challenge will continue. Finally, the education system in the country is doing a gross disservice to the youth by making millions of young people essentially unemployable. 62 percent of Kenyan youth aged 15-34 years have below secondary level education. Further, Kenya is characterised by a persistent mismatch of skills between what is taught and the skill requirements of the labour market. Thus most youth are poorly educated and those who are well educated are not trained in skills the labour market seeks.

Finally, financial mismanagement at both national and county levels is compromising growth. It seems that government funds that are meant to be economically productive and generate economic activity do not reach intended projects. As long as this continues to occur, jobs and growth that could have been created by government investment and financing will not materialise.

All these factors inform the disconnect between rosy economic statistics and the reality Kenyans feel on the ground; and these will persist if there is no change in financial management and economic development strategy going forward.

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

What Kenya and South Africa can learn from each other

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This article first appeared in my column in the Business Daily on October 16, 2016

Last week South Africa’s President Zuma made a state visit to Kenya highlighting the relations between the two countries. Beyond the agreements that have been reached, there are key lessons each country can learn from the other in terms of fostering robust and sustainable economic growth.

One key lesson for Kenya from South Africa is education; South Africa’s literacy rate is about 98 percent, Kenya’s is about 82 percent. But the real disparities reside in tertiary education. Currently only 4 percent of Kenya’s student population make it to tertiary education; in South Africa this figure is 20 percent. In terms of leading universities on the continent, South African institutions regularly top the list. In the Times Higher Education Ranking of the top ten universities in Africa, half are South African; and none are below number six. Only one Kenyan university (University of Nairobi) features in the top ten, and at number eight.

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Beyond ranking, a key concern of the Kenyan education is curriculum relevance. A report released by the World Bank this year stated that tertiary education in Kenya is characterised by a persistent mismatch of skills between what is taught and the requirements in the labour market. This is not to say that South Africa is perfect but at least there is an active, public interrogation of curriculum with active participation from government.  Kenya could certainly learn from South Africa here.

A second lesson for Kenya from South Africa is manufacturing and industry. South Africa is the continent’s most industrialized economy. Manufacturing contributes about 15.2 percent to South Africa’s; while in Kenya this figure has been stuck at 10 percent. This is not to say South Africa’s manufacturing sector is perfect, but Kenya could learn about increasing diversity in manufacturing. Manufacturing in South Africa is diverse constituting of numerous industries such as agro-processing, automotive, chemicals, ICT and electronics, metals and, textiles, clothing and footwear. Kenya’s manufacturing sector is dominated by food and beverages which constitute up to 70 percent of the sector according to some estimates. Again, Kenya can look to South Africa and learn how to diversify the complexity and build the role of manufacturing in the economy.

Now let’s look at what South Africa can learn from Kenya. East Africa is a bright spot in Africa largely because region is not commodity reliant. As the biggest economy in East Africa, Kenya’s resilience against the commodities slump is an important lesson for South Africa. A senior researcher at the South African Institution of International Affairs argues that the importance of commodities to South Africa’s economy cannot be overstated as they generate approximately 60 percent of South Africa’s foreign exchange earnings through exports. Indeed, the analyst makes the point that the commodities slump poses serious economic problems for South Africa, not only because of the extensive connectedness between mining and the rest of the economy, but the financial services sector was built on mining.

A look at South Africa’s export profile reveals that the top exports of South Africa are gold, diamonds, platinum, and iron ore.  The commodities slump has fundamentally negatively affected the economy particularly in managing the current account deficit.  South Africa’s economy shrunk by 1.2 percent in the first quarter of 2016; juxtapose this Kenya’s robust growth Q1 growth of 5.6 percent. South Africa could learn from Kenya better buffering its economy from commodities slumps.

The second lesson for South Africa from Kenya is black entrepreneurship. Given the complex history of South Africa and the legacy of apartheid, the face of South African private sector does not reflect the racial composition of its population. In fact there is a story that some in South Africa say that if whites knew how much money they would make by ending apartheid they would have voted against it a long time ago. And while programmes such as Black Economic Empowerment sought to rectify economic racial inequality, all it seems to have delivered is a few blacks contributing to white owned companies and hopping from company to another collecting dividends. South Africa has an important lesson to learn from Kenya in building black entrepreneurship. Indeed, some estimates state that the South African economy could grow by five percent in the future if the government and private sector invest R12 billion into 300,000 black-owned small businesses.

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(source: https://anzetsewere.files.wordpress.com/2016/10/89a66-small-business-in-kenya-invest-africa-businesses.jpg)

Kenya understands the power of black entrepreneurship and as an article in the Mail and Guardian states, perhaps the most meaningful economic change for millions of South Africans can come from a focus on developing small enterprises.

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

 

 

Dynamics in Manufacturing in East Africa

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This article first appeared in my weekly column with the Business Daily on September 4, 2016

Last week I attended and presented at a roundtable on Manufacturing in Kenya hosted by the Overseas Development Institute (ODI). The roundtable was under ODI’s Supporting Economic Transformation Programme (SET) which is supported by DFID. As part of the roundtable I developed a paper on manufacturing in Kenya and thought it would be useful to share some insights I unearthed during my research on manufacturing in the East Africa region.

At the moment, the manufacturing sector in Kenya is the largest in the East Africa region. However in terms of growth, other countries in East Africa are growing at a faster rate. Data from ODI indicate that the growth of the manufacturing sector in Kenya is growing far slower than Ethiopia, Rwanda, Tanzania and Uganda. If this trend continues, other East African countries will begin to dominate manufacturing in the region. Further, governments in East Africa seem to be putting in more pronounced effort to build manufacturing through the creation of industrial parks in countries such as Ethiopia and making land available for manufacturing particularly for labour intensive manufacturing. Uganda and Tanzania are also determinedly positioning themselves as investment destinations for manufacturing in Africa. This impetus needs to be more strongly echoed in Kenya from the highest levels of county and national government.  Further, while Kenya remains an attractive investment destination for manufacturing, other countries in the region are aggressively courting such investment. And frankly there is a growing sense that the bureaucracy and corruption in Kenya as well as difficulty in getting the right information on requirements linked to building manufacturing plants in the country are hampering investment into the sector.

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That said, the good news from a regional perspective is that the East African Community (EAC) is seeking to position itself as the next global manufacturing destination. This is positive and long overdue because clearly there is room for growth in the sector in the region. According to the African Development Bank the combined manufacturing sector of seven countries in Eastern Africa as a whole is only about one-third the size of the manufacturing sector in Vietnam, which has a population one-third the size of the seven countries. If the East Africa region is to become the ‘go-to’ location for investment in manufacturing in Africa, more coordination of manufacturing policy and activity across the EAC as well as with Eastern African countries outside the EAC is needed.

However, from a Kenyan perspective there are issues within the East Africa region that negatively inform the growth of manufacturing in the country. An on-going issue that adversely affects the uptake of manufactured products from Kenya in the region is pricing. Cost of production in Kenya remains high which makes the end price point of Kenyan manufactured goods high. This cost of production issue essentially promotes the purchase of cheap manufactured imports from India and China that have aggressively entered the regional market and routinely undercut Kenyan manufactured equivalents on price point.

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Another dynamic affecting the growth of Kenyan manufacturing in the region is related to the competition emerging between manufacturing sectors in East Africa. Due to development of manufacturing in neighbouring countries a scenario is emerging where neighbouring countries seem to want to reserve domestic markets for domestically manufactured products. Thus there is a sense that neighbouring countries in the EAC seek to prevent Kenyan manufactured goods from entering their countries because they want to keep domestic markets to themselves. Thus, perhaps EAC markets are not as open as one would hope.

What is clear is that it that challenges exist for the Kenyan manufacturing sector from a regional perspective. At the same time, there is ample opportunity for the region to sell itself as the manufacturing hub of Africa. The question is how to balance national ambitions with regional development goals; perhaps it is time for a candid conversation on this issue.

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

Land issues hampering Kenya’s development

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

Kenyans are well aware of the tensions and dynamics around land ownership in the country. The contentious issues around land are often linked to tribal and ethnic tensions; indeed land issues informed the ferocity of post-election violence in 2007/8. But beyond being a tension between different communities, land ownership issues are hampering the country’s economic development.

Firstly, land directly affects agricultural productivity, or the lack thereof. At the moment, statistics indicate that small-scale farming accounts for at least 75 percent of the country’s total agricultural output and 70 percent of marketed agricultural produce. In short, most of the meals eaten by Kenyans come from a smallholder farmer working away on his or her small patch of land. However, one of the reasons why agricultural productivity is so low in the country is precisely because the vast majority of farmers are farming over-worked, nutrient-depleted, small pieces of land that have been subdivided for generations. The situation is made more complex by the fact that many small holder farmers do not have the title deed to the land.

So while there may be a general acknowledgement by their community that the land they farm is indeed theirs, the costs related to registering land and acquiring titles are too high for most smallholder farmers. As a result the farmers do not legally own the land and thus cannot use the land as collateral to access credit that could allow them to make improvements to their farms and farming practices. More importantly, smallholder farms cannot be conglomerated in one large piece that can be more efficiently farmed with higher levels of mechanisation, productivity and profitability. As a result, Kenyans agriculture sector is stuck in a rut with no foreseeable way out because of the land issue. If anything, the situation will worsen as the average size of land holdings continues to reduce due to the cultural practice of subdivisions of the land for each son in the family for inheritance purposes.

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Manufacturing is also affected by Kenyan’s land problem because even if a company wants to expand operations to another part of the country, the process of procuring land on which the factory or plant will be built is daunting. The lack of legal title depresses demand for land because potential buyers do not want to negotiate the complexities of proving ownership. No one wants the nightmare of procuring a piece of land that is then mired in contention that prevents business activity from moving forward. Thus it must be asked: to what extent are land issues hampering the expansion of industry and manufacturing in the country? Further, the lack of legal ownership also makes it difficult for land holders to come together and combine smaller pieces of land into a mass that can more effectively attract capital investment. In short, both supply and demand are affected by the land question.

Finally, infrastructure development is more costly, mired in delays and incredibly complex because of land issues. In some cases communities do not agree with the valuation of land engendering renegotiations, in other cases absentee landlords make the process of land acquisition long and arduous. However, the most complex is where communities live on what they consider their ancestral land but the land is legally owned by another person or entity. Who is to be compensated in such cases not only from a legal, but also moral point of view? How is compensation to be negotiated without engendering protest? Land is a core factor behind the accrual of delays and expenses in some of the infrastructure projects in the country.

(source: http://www.theeastafrican.co.ke/image/view/-/2918134/medRes/528395/-/maxw/600/-/t4i5alz/-/infra.jpg)

In short, a great deal of Kenya’s economic potential is locked in the land. Sadly, due to the way politics is linked to tribal identity and thus land in Kenya, it may be decades before the country sees a crop of leaders prepared to address the land issue and unlock a great deal of the country’s economic potential.

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

Wages, Productivity and Manufacturing in East Africa

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This article first appeared in my weekly column in the Business Daily on July 17, 2016


Africa, East Africa in particular, is gearing up for industrialisation and will continue to position itself as the next and last manufacturing frontier in the world. Wages in Asia continue to rise and in China’s coastal factories noteable increases in wages have occurred over the past 10 years making the country a less attractive manufacturing hub. As a result, factories may relocate and although some may move to inland China, Bangladesh or Cambodia, Africa has appeared on the radar as a viable option.

The World Bank reports that Ethiopian factory wages for unskilled labour are a quarter of Chinese wages. Indeed, East Africa in general is increasingly becoming a focus of attention for the development of manufacturing in Africa; interest in textile and apparel is particularly high. A report by McKinsey makes the point that within sub-Saharan Africa, East African countries, especially Ethiopia and Kenya, are of interest to international apparel buyers. Indeed, for the first time an Africa country, Ethiopia, appeared on the list of countries expected to play more important roles in apparel manufacturing. Kenya and Ethiopia were the top two countries in Africa where global apparel buyers expect to start or increase apparel sourcing. The popular view is that Ethiopia is seen as particularly attractive due to lower labour costs but Kenya is considered to have higher labour productivity. These two factors, namely labour cost and labour productivity, will come under increasing scrutiny if Kenya, and the region, is to effectively position itself as a global manufacturing hub.

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If one were to look at these two elements in Kenya an interesting picture emerges. According to the Kenya Country Economic Memorandum 2016 by the World Bank, Kenya has a higher minimum wage than other countries assessed including India, Pakistan, Uganda, Vietnam Bangladesh and Cambodia. The McKinsey report makes the point that manufacturers listed wages as a key challenge of doing business in Kenya where monthly wages for garment workers are in the $120 to $150 range. So selling the cheap labour story in Kenya is a tough sell if sustained interest in manufacturing, especially labour intense manufacturing such as textiles, is to be maintained.

The other angle Kenya would have to push to stand out from the East African crowd would have to be productivity. Here the story is mixed; in June this year a World Bank revealed that Kenyan workers are less productive than their counterparts in Uganda and Ethiopia. However, this is informed by the fact that almost 80 percent of Kenyans are employed in the informal sector which suffers from particularly low levels of productivity. Low productivity in the informal sector dragged the productivity average down. Indeed the World Bank reports stated that labour productivity in Kenya is significantly higher in the formal than in the informal sector. In fact a World Bank study released this year found that even when formal micro-enterprises are compared to informal enterprises labour productivity for micro firms is about 8.4 times that of informal firms surveyed Thus Kenya is in a situation where most people in the informal sector have very low levels productivity juxtaposed with pockets of people with formal jobs who have high levels of productivity. So key questions are: If Kenya is position itself as a manufacturing hub, will formal manufacturers be the only attractive option due to high levels of productivity? What does this mean for job creation in a country with high levels of unemployment? Other questions include: What in formal employment makes Kenyans more productive? How can labour in the informal sector (including informal industry) be made more productive? And is formalisation the only answer?

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(source: http://www.businessdailyafrica.com/image/view/-/1237146/medRes/295299/-/maxw/600/-/2fg1i1/-/informal+sector.jpg)

The point remains however that on average, wage and productivity dynamics in Ethiopia and Uganda are better than Kenya’s. Some argue that comparing Kenya with Uganda and Ethiopia is not useful because conditions differ so greatly between the countries. Kenya is a democracy while Ethiopia and Uganda lean more towards autocratic rule. From an investor and business environment perspective each governing model has its pros and cons.

In short, in order to position itself as an attractive manufacturing destination, Kenya will have to address the issues raised by wage and productivity analyses, while continuing to work on structural constraints such as access to finance, electricity, transport infrastructure and ICT networks.

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