manufacturing

TV Interview: State of the Kenyan Economy

Posted on

On April 5, 2019, I spoke to Rachelle Akuffo of CGTN America about the current state of Kenya’s economy.

TV Interview: The Big 4 Agenda

Posted on

On Wednesday February 20, I was part of a panel on Citizen TV discussing the Big 4 Agenda in Kenya, with a focus on manufacturing and affordable housing.

 

TV Interview: Value Addition in Africa

Posted on

I was part of a panel on Talk Africa of CGTN, discussing how Africa can build manufacturing capacity and scale value addition.

 

How to Achieve Kenyatta’s Big Four

Posted on Updated on

This article first appeared in my weekly column with the Business Daily on January 7, 2018

Last month, President Kenyatta indicated that his last term would focus on the big four for economic development in Kenya. These are food security, affordable housing, manufacturing and affordable healthcare; the article focuses on the first three.

A considerable challenge with food security at the moment is that it is dominated by small scale farmers who operate at a subsistence level with limited financial resources and technical support that would allow them to make their farms more productive and get their products to market. A key element for this sector would include a reinstatement of technical support to rural farmers in the form of agricultural extensions officers. Additionally, storage of food products has to be vastly improved in order to ensure food does not rot before reaching market, but also allow farmers to use stored produce as collateral for credit to improve farm inputs. Finally, financial support should be targeted at the sector to improve the quality and cost of farm inputs and encourage the strategic use of farm technology. Linked to this is the crucial need for government entities that purchase food products from farmers to pay in a timely manner such that farmers can have a seamless farm cycle.

Image result for agriculture Kenya

(source: https://agra.org/news/wp-content/uploads/2016/11/MWfarmer-maize-green-790×527.jpg)

Manufacturing is linked to agriculture. The manufacturing sub-sectors of focus are the blue economy, agro-processing, leather and textiles, all of which require agricultural inputs. Government first ought to coordinate manufacturing inputs with agricultural strategy such that factories have robust source markets. And as the President pointed out, the skills gap for the sector has to be addressed so that there are enough individuals with the appropriate skills sets to drive manufacturing. In addition, the cost of production must be cut in order to make Kenyan products more competitive. Thus the step taken to cut the cost of power is important although clarity is required on how it will be implemented and implications for fiscal policy. Finally, the sector ought to benefit from fiscal incentives such as tax rebates, tax deductions and other strategies to encourage the development of industrial capacity.

Image result for manufacturing Kenya

(source: https://www.africa.com/wp-content/uploads/2016/03/Kenya-factory-jobs2.jpg)

It is encouraging to see affordable housing as a priority, as this sector has been direly neglected in the past. As of 2015, the annual housing requirement in Kenya stood at about 132,000 units with a backlog of 1.85 million units. This has created a dynamic where excess demand fuels price escalation in terms of home prices and rents charged. First, government ought to encourage the adoption of technology and materials that reduce construction costs. Secondly, government must improve access to land and facilitate the registration and transfer of titles. Thirdly, financing for the construction and purchase of affordable homes must be incentivised. Savings and Credit Cooperative Organization (SACCOs) have overtaken commercial banks and mortgage providers in the provision of home construction loans in Kenya and account for more than 90 percent of home loans in Kenya. However, there are no fiscal incentives that target SACCOs- this must be rectified. Finally, government must create a registry of whom qualifies for affordable housing. Currently, when cheap houses are constructed, wealthy individuals purchase several units and rent them, locking out low income individuals from purchasing the homes- this must stop.

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

China taking over manufacturing in Africa?

Posted on

This article first appeared in my weekly column with the Business Daily on September 10, 2017

Earlier this year, McKinsey and Company, released a report on Sino-African relations that assessed the activities of Chinese businesses in Africa as well as Sino-African economic partnerships. There are about 10,000 Chinese-owned firms operating in Africa today and about 90 percent of these are privately owned debunking the myth that Chinese business activity in Africa is dominated by State Owned Enterprises and overly influenced by state craft. Of particular interest is understanding how the Chinese presence is informing industrial development, a chronically underdeveloped sector on the continent.

31 percent of Chinese firms in Africa are in manufacturing and they already handle about 12 percent of industrial production in Africa with annual revenues of about USD 60 billion; revenues in manufacturing outstrip that of any other sector listed. Chinese factories are focused on Africa’s domestic markets, 93 percent of revenues come from local or regional sales in Africa.

Image result for manufacturing Africa

(source: https://cdn.static-economist.com/sites/default/files/images/print-edition/20140208_MAP001_0.jpg)

One third of Chinese firms report profit margins of over 20 percent in 2015. In manufacturing this is attributed to ample pricing headroom in Africa; prevailing market prices for manufactured products are so high that Chinese firm earn comfortable profits and their profit levels are higher than those of African firms. Interestingly although manufacturing is capital investment and commitment heavy, 31 percent of firms made investment decisions within a week. 67 percent of firms investments are self-financed and Chinese companies are optimistic about the future of the African market with most firms indicating plans for expansion.

Chinese firms are also generating local employment as 89 percent of employees are African; this figure is 95 percent in the manufacturing sector. 61 percent of firms upskill African employees through professional training and/or apprenticeships, an indication that Africa is poor at educating Africans with skills relevant for employment. In terms of management, 44 percent of managers are African, this figure is 54 percent in the manufacturing sector. Chinese firms contribute to African markets mainly by introducing new products, services, technologies and methods.

Image result for chinese business  Africa

(source: kessbenfm.com/kfm-data/china-in-africa.jpg)

The report is clearly optimistic of Chinese firm activity in Africa, for example more content is focused on detailing the benefits than to delineating the costs; one wonders why. And the costs are significant, there are concerns of Chinese firms engaging in dumping where they sell products in export markets at prices below those in domestic markets. This may be leading to ‘unfair’ capture of export markets from African firms. Breaches of labour regulations are more common among Chinese firms than in other foreign-owned firms. These include inhumane working conditions, work without contracts, exceeding legal limits on work hours and threatening to fire workers who refuse to work in unsafe conditions.

Clearly Chinese firms will continue to make inroads into Africa and the continent will accrue many benefits from this but will also have to vigilantly manage the costs. With regards to industrialisation, it will be interesting to see how African industrial policy will be structured to encourage a stronger indigenous presence in the sector given the ability, innovation, efficiency and commitment of Chinese manufacturing firms, firms which also benefit from African trade deals as they are domicile here. Chinese firms make it clear that there is a lucrative domestic market that indigenous firms have failed to fully tap and thus African firms have a lot to learn from Chinese firms. If trends continue, a situation may emerge where African industrialisation is owned and dominated by Chinese firms. While this is welcome in terms of contributions to Africa’s development, can it then be termed ‘African’ industrialisation?

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

Economic Agenda for the Incoming Government

Posted on

This article first appeared in my weekly column with the Business Daily on August 13, 2017

 —

With elections complete, it is time to focus on how the next five years can be fully leveraged towards making concrete socioeconomic gains in the three main sectors of Kenya’s economy.

The first economic setor is agriculture which constitutes 35 percent of the GDP and 61 percent of total employment. One problem with this sector is that on one hand the export-oriented segment of sector is very productive and profitable, yet domestic food security is still a major concern. Tea was the largest export earner for the country in 2016 alongside coffee and horticulture, yet domestic food consumption is constrained by subpar production exemplified by the maize crisis which was exacerbated by a severe drought. The next administration should focus on several issues: first is increasing allocations to the sector from the current 1.8 percent of the budget to, at a minimum, the African average of 4.5 percent. Secondly, effort must be made to address the challenges in sector coordination between national and county governments; clear roles and responsibilities must be delineated for each level of government. Finally, there ought to be a focus on active learning from productive agriculture sectors and lessons shared with less productive sectors with a focus on smallholder farmers.

Image result for kenya agriculture

(source: https://www.iatp.org)

The second sector is manufacturing which is a mere 9.2 percent of GDP; the share of manufacturing in GDP has actually declined over the last five years and the sector formally employs only 300,000 people. Manufacturing can play a central role in driving economic transformation and job creation in Kenya as there is a window of opportunity for Kenya to capitalise on positive underlying factors in the global economy, including rising wages in Asia, the rebalancing underway in China, and expand Kenya’s capabilities and presence in export-oriented, labour-intensive manufacturing within the next 20 to 30 years. The incoming administration ought to make sure that the country’s manufacturing strategy as articulated in the Kenya Industrial Transformation Programme be prioritised in the implementation of the third Medium Term Plan of Vision 2030 due to start in 2018.

Image result for kenya tvet

(source: http://www.kenyaengineer.co.ke/media/k2/items/cache/672afa8031e8618a8e9b5df0ce808169_XL.jpg)

The third sector is services which is currently driving Kenya’s economic growth, constituting about 55-60 percent of GDP. Leading sub-sectors include food and accommodation, ICT, real estate and, transport and storage. However, the key service sub-sectors that ought to be prioritised are education and healthcare. Interventions in health should focus on better fiscal support to the sector. In FY 2017/18 donor funding of development expenditure in healthcare is estimated to be up to 63 percent; such dependence is concerning. Secondly, there should be an emphasis on building the capacity of county governments, especially in terms of technical and administrative human resources, to better meet the health needs of their constituents. In education the focus should be on better aligning curricula and training to better meet labour market needs as well as reorient the country’s economic structure to one in which manufacturing plays a larger role. Finally, county governments ought to be supported in better equipping and expanding the reach of Technical and Vocational Educational Training Institutions (TVETs) and link students to practical apprenticeships at county level.

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

Use imports to develop domestic manufacturing

Posted on

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

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

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

Image result for imports

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

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

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

Image result for manufacturing

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

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

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