Premature deindustrialisation

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

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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.

(source: http://media.oregonlive.com/business_impact/photo/chinafactory5jpg-1c120a5a64eae8c7_large.jpg)

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.

(source: http://www.southafrica.be/wp-content/uploads/2012/04/Trade2-copy.jpg)

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

 

The implications of the digital revolution for Africa

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This article first appeared in my weekly column with the Business Daily on February 14, 2016

Last week the World Bank released their World Development Report (WDR) that focused on the digital revolution and how it has allowed some to reap digital dividends. These dividends are growth for businesses, job creation for people and better service delivery by government. Further digital technologies have supported development by promoting innovation, efficiency and inclusion.

(source: http://www.worldbank.org/content/dam/photos/780×439/2016/feb/ca-wdr-2016-780.jpg)

However, the report argues that there is a growing digital divide as 60 percent of the world’s population is still offline and 2 billion people do not own a mobile phone. In addition the spread of digital technologies have spread unevenly; men are more likely to be connected than women, those in urban areas are more connected than rural areas and the young are more integrated than the old. In short, young males in urban areas are far better poised to reap digital dividends than old women in rural areas. Further, as digital technologies have spread, there are new risks that mitigate the spread of the benefits. These new risks include the fact that digital technologies are used by autocratic governments to control access to information in a manner deepens control rather than empowerment and inclusion. Digital technologies also create new regulatory uncertainties as new apps and tools are created that cross sectors. For example, should Uber, which is active in Kenya, be regulated as a transport service or as an ICT tool? Further, if the business environment is not open and competitive, digital technologies can create a concentration of market power and monopolies.

The report speaks of analogue components that have to be focused on as the digital revolution continues to unfold to ensure dividends rather than detriments preponderate. These are rules and regulations that promote competition and entry, skills that allow populations to leverage technology rather than be replaced by it, and institutions that are accountable to citizens.

Given this background, there key questions to be asked. The first is that jobs are being automated into extinction and this has two-fold negative implications for countries such as Kenya. The first is Kenya has a serious problem with unemployment, thus automation may exacerbate the unemployment problem. It must be asked whether the jobs created by digital technologies will grow at a rate faster than the job attrition it causes. Secondly, the types of jobs being replaced are low skilled jobs often occupied by the least educated members of society. If such people are to lose their jobs due to digital technologies, their future looks grim as they typically will not have the skills sets required for ‘white collar’ jobs less threatened by digital technologies. The low skilled segment of the population may find themselves competing for fewer jobs without the opportunity to re-skill and take on new roles.

Further, will the rise of digital technologies cause agrarian economies such as Kenya to by-pass industry all together? Advanced economies benefitted from the Industrial Revolution which employed millions of people and created the robust foundation of manufacturing and the export of goods. Africa has been undergoing premature deindustrialisation due to globalisation and trade which have hollowed out industry on the continent as other countries supply finished goods for African consumers. The uptake of digital technologies may exacerbate this as human labour cannot compete with cheaper technologies in terms of cost and efficiency. In fact some western companies have brought production back to automated factories by-passing the need to hunt for cheap labour. Will digital technologies therefore exacerbate the premature industrialisation Africa is already experiencing? The Financial Times surmises that in the absence of industrialisation as a path towards economic development, the best hope for developing and emerging economies is to train workers that are more highly skilled. Is this feasible in Kenya and Africa?

(source: https://centerforfinancialinclusionblog.files.wordpress.com/2012/10/samasource-3.jpg)

Therefore, although there are great benefits to be reaped by the digital revolution, new risks have to be managed. Momentum for the digital revolution is substantial. Therefore, governments ought to create policies that ensure an equitable spread of digital dividends, effort should be made to ensure all levels of private sector reap the benefits, and finally Kenya needs to rethink its education system to ensure labour is being skilled in a manner that functions effectively in the context of a digital economy.

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