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Tuesday, March 10, 2015

Kenya’s economic growth is shallow

Kenya has made progress in the last decade. We are resilient. We bounced back when ethnic bigotry threatened to destroy our country. But the task of building a stable and prosperous society could never more urgent.

A report by the Institute for Security Studies revealed that with 40 percent of the population living in extreme poverty, Kenya is the sixth poorest country in Africa. Last week the World Bank declared that Kenya’s economic growth is among the fastest in Africa and GDP was expected to reach 7 percent in 2017.

This paradox is not inexplicable. Ambitious government spending in infrastructure, especially in energy and the standard gauge railway due to expansionary fiscal policy characterizes Kenya’s impressive headline GDP. But a majority of Kenyans remain poor, disconnected from the benefits of economic growth because Kenya’s manufacturing sector is stagnant and agriculture is comatose.

Kenya’s formal manufacturing sector is minuscule and the outlook is bleak. It employs 280,000 accounting for just 12 percent of Kenya’s labor force. Moreover, productivity of the manufacturing sector is depressing. The value added per worker in Kenya’s manufacturing sector is only $1.11 per day (about Sh. 100). Kenya’s average share of manufacturing value added in GDP is estimated at 10 percent, unchanged from the 1970’s.

A majority of Kenya’s farmers and agricultural workers are trapped in collapsing rural economies. The dysfunction of Kenya’s rural economy has been aided by poor infrastructure, especially roads, energy, water and essential social services such as health care and high quality schools. Low investment in agricultural research, compounded by broken extension services has contributed to low productivity and little innovation. Productivity in Kenya’s agricultural sector is estimated by the World Bank at about $1 per worker per day, compared to about $13 in Nigeria.

Kenya’s export sector has been sluggish for the past 25 years. Tourism has been buffeted by insecurity and poaching, especially over the last couple of years. About 40 percent of Kenya’s manufactured goods are exported to the East African Community. But our regional exports are under competitive pressure from imports from China and India. Furthermore, depressed economic output from the European Union has huge consequences for Kenya’s export sector as well as tourism.

A strong hand of the state through expansive fiscal policy underlines Kenya’s growth in the past decade. However, as exemplified by low productivity in both the agricultural and manufacturing sectors, the fundamentals for a broad based growth are feeble. Moreover, integrating into global financial markets through sovereign bonds makes Kenya vulnerable to external financial shocks. Hence, a large part of Kenya’s impressive GDP growth is not organic and is therefore unsustainable.

The path to economic prosperity takes more than a narrow expansionary fiscal policy vision.  Inclusive growth and shared prosperity demands careful social and fiscal policies that re-engineer’s Kenya’s flawed economic structure.

Of what value is an ultra modern railway line and a 10,000 MW energy capacity achieve when agriculture and manufacturing are declining? We must invest in higher education and research capacity to drive growth in productivity to boost output and competiveness. Our universities must be the engines of growth and structural transformation, through research-intensive programs, unleashing technological advancement and innovation.
Public universities are underfunded and burdened by intensive and mediocre teaching programs. We are woefully short of vital execution capacity. This is why we have Tony Blair leading Mr. Kenyatta’s Presidential Delivery Unit. And there are innumerable expatriate advisors in the civil service.

The same zeal for public spending on security, roads, railways and energy must be applied to building technological capacity, human capital and investing in smallholder farmers and pastoralists. Critical public research infrastructure must move to the university. Hence, research organizations like Kenya Agricultural and Livestock Research Organization, Kenya Medical Research Institute, Kenya Industrial Research and Development Institute should be integrated into research and teaching programs in public universities.

Sustainable and inclusive economic growth will not come inevitably through expansive fiscal policy. There is no such thing as trickle down from big government spending. Building inclusive prosperity demands careful, deliberate investment especially in research and teaching in our universities to shape public policy, drive technological advancement, spur innovation and raise productivity on our farms and rangelands, and on the factory floor.

GDP growth will not count until tangible wellbeing outcomes flow to farmers, pastoralists and the semi-skilled laborers who toil hard and long for this great land.

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