productivity

The link between the mobile economy and the informal economy

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This article first appeared in my weekly column with the Business Daily on September 11, 2016


The growth in the use of mobile phones in Kenya and indeed Africa has created a mobile economy that is estimated to have generated 6.7 percent of GDP in Africa in 2015. According to GSMA, an association that represents the interests of mobile operators globally, mobile technologies and services contributed about USD 150 million of economic value on the continent. Closer to home, mobile subscriber penetration in East Africa hit 46 percent in 2015 and smartphone adoption is due to hit 54 percent in 2020. Kenya is well aware of how access to mobile phones has deepened financial inclusion through the provision of access to financial transactions. Indeed a study by CGAP, an organisation that seeks to promote financial inclusion, indicated that in Kenya, mobile money transfer has overtaken even informal financial groups as the most used financial service. CGAP found that even in more rural areas, 61 percent of people were registered mobile money transfer users while only 51 percent and 36 percent were using informal financial groups and banks respectively. Indeed by 2014, 58.4 percent of all Kenyan adults had a mobile account and approximately 90 percent of all senders and recipients of domestic remittances used a mobile phone.

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(source: http://mobileworldcapital.com/wp-content/uploads/2015/09/M-PESA.jpg)

In my view the emergence of the mobile economy and specifically mobile money, mobile banking and mobile lending intersects with the informal economy and indeed enables this section of the Kenyan economy. About 82 percent of Kenyans in employment are employed by informal businesses and organisations across the country which indicates that most Kenyans seem to derive their livelihood from the informal economy. And although the informal economy is not without its challenges, such as serious productivity problems, it is an important part of the story of Kenya’s economy.

There are three ways through which the mobile economy intersects with and enables the informal economy. The first is through facilitating financial transactions that enable informal businesses to receive payments for goods and services from clients and customers. Many informal businesses have a mobile money facility through which they can receive payments in a more secure and convenient manner than cash transactions.

Secondly, mobile money allows informal businesses to communicate with and make payments to suppliers and distributors. This allows informal businesses to manage and coordinate activity and transactions with numerous parties in their value chain across the country. It would be useful for more research to be done on this issue in order to better understand the extent to which the mobile economy has informed improvements in efficiency and productivity in informal firms and how this can be leveraged further.

Image result for mobile money kenya (source: http://ithubkenya.com/wp-content/uploads/2016/09/mobile-money-800×445.png)

Finally, the mobile economy has created an avenue through which informal business people can apply and qualify for loans through their mobile phone. Indeed, it is not unheard of in Kenya for informal businesses in large informal markets to borrow money at the beginning of the business day to purchase stock, and pay the loan off at the end of the day after the sales of the day are complete. Mobile lending offers a convenient alternative to travelling and applying for normal bank loans, particularly for businesses operating in more remote areas far away from brick and mortar banking halls. Further mobile lending may allow informal business people who may not qualify for loans from mainstream banks, to get access to mobile micro-loans thereby boosting informal business activity.

Perhaps the mobile economy, and specifically mobile money and mobile lending, intersect and enable the informal economy effectively because it accommodates informal financial behaviour. However, there is clearly a need to better understand the relationship between the mobile economy and informal economy. Of particular interest would be on how mobile tools and applications can be used to improve the productivity and profitability of informal businesses.

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.

https://i2.wp.com/www.fashionatingworld.com/images/kenya.jpg (source: http://www.fashionatingworld.com/images/kenya.jpg)

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

New Ideas for Africa to boost growth

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This article first appeared in my column with the Business Daily on May 15, 2016

Last week I attended an event organised by the University of Pretoria Gordon Institute of Business Science (GIBS) titled Africa Economic Outlook 2016: Strategic Thinking in Complex Times. The one day conference articulated issues facing the continent and provoked questions that I think ought to be asked. I took great interest in a presentation by GIBS Dean Professor Nicola Kleyn which addressed issues in management as I have seen numerous shortcomings in management in the region. Previous research in which I participated pointed to key gaps in management in East Africa. For example, we found that for senior management, while there was consensus there is competence in hard/technical skills such as finance, HR and operations, important management gaps exist in areas such as ethics and integrity, managing ambiguity, and soft skills.

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(source:http://novatechservices.com/wp-content/uploads/2016/02/ManagementLeadership.jpg)

Kleyn’s presentation provided ideas on how to manage effectively in complex environments such as Kenya where factors such as lack of a functioning legal system or ethnic competition make effective management difficult. She argues that six attributes can enable companies to effectively manage and thrive in complex environments; I will only address the three in this column.  The first attribute is that a spirit of enquiry must be encouraged where organisations encourage a culture of questioning their approach because without such questioning, more effective approaches cannot emerge. Embracing humility is also key, and this particularly resonated with me because in Kenya there seems to exist a ‘big man complex’ where hubris immediately accompanies one’s promotion to a position of power. Kleyn argues that, especially at top level management, a spirit of humility must persist rooted in an openness to learn from junior staff and even those in the field who may not be as technically qualified as management. Such humility again, allows innovations and insights from unexpected corners to percolate thinking in management in a constructive manner.

The third is a willingness to experiment (again and again). Again here I looked back at what my previous research on management gaps had highlighted: the general inability for managers in East Africa to manage in an environment of change. A key element of addressing this is by managers having an openness to experiment (within reason) and try new ideas until the best fit emerges; and a willingness to change the model when the environment changes again…and again.

Why is this important? Well because, management affects productivity. The World Bank acknowledges that although that there are differences in productivity on the Kenyan landscape, more effort is required to boost productivity such that economic growth is more sustainable. Effective management is a key element of making this a reality. The question for Kenya (and Africa) then becomes how thought innovations such as those elucidated above can be adopted by firms. Do we have a culture that accommodates thought disruptions that challenge current management practices?

Another presentation of interest was by Professor Lyal White from GIBS who shared the Dynamic Markets Index 2016 (DMI). The Index broadly seeks to measure competitive performance of countries through the evolution of their institutions or institutional reforms and looked at 144 countries of which 39 were African. Basically the DMI asks, do institutions in countries such as Kenya create a dynamic economy that thrives? The GIBS DMI measures looks at six pillars between 2007 and 2014; the first pillar is Open and Connected which looks at indicators such as trade policies and the movement of people. Second is Red Tape with indicators such as corruption perception. Third is Socio-political Stability with indicators such as civil liberties and political rights. Fourth is the Justice System which looks at indicators such as the time and cost of enforcing contracts and director liability. Fifth is Macroeconomic Management with indicators such as state debt burden and monetary stability. The final is Human Capital with indicators such as demographic energy and skills levels. All these pillars are weighted differently and create a score between zero (worst) and 200 (best). In the DMI Kenya scored 72.45 and was classified as an adynamic market due to factors such as terrorism, high corruption perception, political instability in 2007/08 and poor performance in the justice system; all these resonate with me.

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(source: http://www.travelstart.co.ke/blog/wp-content/uploads/2014/05/Nairobi1.jpg)

Although the DMI has shortcomings such as not factoring the informal economy into the index, having to contend with incomplete data sets and, for Kenya, not factoring in (positive) shifts due to the new constitution, it starkly highlighted country shortcomings. So the question is, how can Kenya and other African countries) consider issues raised by the DMI such as areas in which countries may have regressed?

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

The Kenyan economy continues to exhibit key weaknesses that must be addressed

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This article first appeared in my column with the Business Daily on March 13, 2016

On Tuesday last week the World Bank launched the Kenya Country Economic Memorandum with the theme ‘From Growth to Jobs & Prosperity’. Apurva Sanghi Lead Economist and Program Leader at the Bank made three core points during his presentation.

The first is that economic growth in Kenya is volatile, non-inclusive and marked by stagnation in agriculture and industry. In terms of volatility Kenya’s growth has been volatile since independence and domestic shocks such as political instability (especially during election years) affect GDP growth more than external ones.

The second point was that growth is not inclusive and the country continues to register high poverty levels, the estimates of which sit between 36-42% in 2016. Further, job creation has been marginal and slow, clearly only able to absorb a fraction of the working age population that enter the labour market each year. Further, of the jobs created, the vast majority have been informal jobs.

(source: http://www.businessdailyafrica.com/image/view/-/2765356/medRes/770583/-/maxw/600/-/swae72/-/jua+kali.jpg)

Another important point made by Sanghi was that economic growth in Kenya has been led by services which has been resilient with clear stagnation in agriculture and manufacturing.  Services exports are catching up with goods exports and this is partly because the sector is less dependent on raw materials and not truly affected by changes in commodity prices. In terms of agriculture, the main factors informing the stagnation include over-involvement of government in maize and sugar markets which keep prices high. In terms of manufacturing, it has marginal contribution to GDP, and Kenya has dropped 8 places in the rank of economic complexity of goods produced by the sector; in fact Kenya’s top exports are among the least complex. Sanghi also mentioned that achieving the Vision 2030 GDP growth rate target of 7% has thus far been elusive with the country reaching 7% only four times since independence. In order for Kenya to grow more robustly and with less volatility, both savings and productivity have to increase, the performance of both manufacturing and agriculture need to improve, and public investment management by government has to improve.

How feasible is this? Well with regard to savings numerous factors negatively inform Kenyan saving habits among which is the reality that there is no real social security net in Kenya. Yes government has a cash transfer system for the very vulnerable and poor but the lived reality for most Kenyans is that they cannot usually rely on government when they fall ill or lose a job. As a result, middle income pockets of Kenyans are under immense pressure for it is the middle and upper class that finance costs such as school fees, hospital bills and funerals for friends and relatives. Coupled with high dependency ratios linked to high levels of unemployment and underemployment, Kenya’s middle class has limited lived disposable income which of course makes saving very difficult.  I have thus long held the view that the hype about the spending power of the African middle class is Panglossian.

(source: http://i.telegraph.co.uk/multimedia/archive/02181/expatrate_savings_2181869b.jpg)

In terms of productivity, the report itself makes the point that levels of productivity vary greatly between sectors and within sectors. Further, most Kenyans are employed in the informal sector which is characterised by low productivity due to a myriad of factors such as poor management skills, poor education levels and the lack of access to finance, technology and innovations. Therefore, the question on which government ought to be focussed is how to increase productivity, particularly in the informal sector. This is not necessarily synonymous with pushing for the formalisation of the informal sector but rather, supporting Kenyans trapped in the primarily low income informal sector by skilling up the population in informal labour, developing apprenticeship programs and loosening finance into the sector.

Finally, public investment must improve with a preponderance of development rather than recurrent expenditure. Public investment strategies must be devoid of corruption in order to ensure government spending is strategic and effective.

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