Africa must stop making bad investment deals

Africa is the second most attractive investment destination in the world, behind North America. According to the Nielsen report, which provides a ranking of business prospects for leading markets in Sub Saharan Africa, Kenya, Tanzania and Uganda are among the top investor destinations on the continent.

According to McKinsey, the rate of return on Foreign Direct Investment (FDI) is higher in Africa than in any other developing region. Moreover, with rising labor and production costs in Asia and elsewhere, manufacturers in China, Turkey and India turning to Africa with larger investments. However, FDI flows to Africa are imbalanced. Huge proportions of FDI have been directed to extractive resources (mining and hydrocarbons), infrastructure and services. It is estimated that more 2,000 Chinese companies have invested in Africa’s extractives, finance, construction, infrastructure, and energy sectors.

So far the benefits of increased FDI have been everything but equitable. The job market has been feeble at best, with a hundreds of thousands of poor quality, low wage jobs created in sectors like retail, transportation and hospitality. The surge of FDI has coincided with the longest run of jobless GDP growth. In Kenya, Uganda and Tanzania, inequality and poverty have deepened. This is hardly surprising because limited investments have been directed to sectors like manufacturing and agriculture, which potentially have the greatest multiplier effects in the larger economy.

The surge of FDI in Africa has without doubt sparked tremendous GDP growth. The tragedy is that this growth has failed to create good jobs for Africa’s large and growth youthful workforce. Something must be done to end this blistering summer of jobless GDP growth. In my view, Africans must deliberately plan their development path, and choose an optimal mix of FDI portfolios. It would be imprudent on our part to imagine that companies and countries that invest in Africa are angelic, full of compassion and have a preordained mission to help us.

Relations are sovereign or corporate and the currency is self-interest. In dealing with investors we must not be naïve. We need a simple criteria for negotiating investment deals; if does not drive quality GDP, with jobs and poverty reduction there is no deal. In Donald Trump speak, Africa is making some really bad deals and our so-called friends are ripping us off. We need to start winning.

Africans must begin to talk straight with potential investors. Priority investments should be in agriculture and manufacturing. A critical requirement for investments in the service sector must be to support the emerging agri-business and manufacturing sectors. Synergy must be the sine qua non for doing business and investing in Africa. No more primary products from the Africa. Products will only get onto the ship if they are semi-processed. For investors in our booming service sector, 40 percent of component parts must originate from the continent. Africa must be a warehouse economy no more.

But writing bold and tough deals alone won’t cut it. We must invest in building high caliber human capital. The masses of semi-literate youth we churn out of our school system will not do if we demand FDI in agri-business and manufacturing.

The curriculum reform that is afoot in Kenya must be about learning. The problem with 8-4-4 is not content. The problem is that students are not learning. Reforming the curriculum alone won’t cause students to learn. We need an army of well-trained, well-paid and dedicated teachers.

We must restore the joy of learning, shorten the school day and make transition from primary to secondary not conditional on national examinations. Moreover, standardized examinations, undermine learning, privilege rote learning and incentivize cheating.

Educated youth deserve jobs in the formal economy

What investments and policies are needed to create stable formal sector jobs? We are in an epoch of jobless GDP growth. The proportion of youth in formal employment is perilously low. Only about 1 in 10 jobs created in 2014 was in the formal sector. Nearly 1 in 2 young Kenyans are jobless.

The proportion of youth in formal employment is perilously low. Only about 1 in 10 jobs created in 2014 was in the formal sector. Nearly 1 in 2 young Kenyans are jobless. In 2011, 75% of adult Kenyans said they went without a cash income, “many times”, “several times” or “always” during the year. In response to this dismal record in job creation, our society expects youth to create jobs. In response to this dismal record in job creation, our society expects youth to create jobs.

What happened to jobs? According to the 2016 Country Economic Memorandum released early March, 72 percent of the increase in Kenya’s GDP came from services. In contrast, the share of agriculture and manufacturing to our GDP declined or stagnated in the same period.

The irony is that 7 in 10 Kenyans depend on agriculture for their livelihood; jobs, food and nutrition. And many of us believe that agriculture is the mainstay of our economy. Moreover, while the country has registered impressive headline GDP, our record in job creation and prosperity has been dismal and unflattering. Tens of millions of young Kenyans are jobless and the most Kenyans who are in employment are drowning in inflation, gasping for wind.

The headline GDP could be many things. But opportunity for young people and shared prosperity for all is not one of those things. According to data from Kenya’s Economic Survey 2015, the informal sector employed 11.8 million people in 2014 against 2.4 million in the modern or formal sector. This means that over 83 percent of Kenya’s working age population is employed in the informal sector, which is dominated by low wage and low productivity jobs in jua kali, petty trade, transportation and hospitality. 

Out of 799,700 created in 2014, only 106,300 were in the formal sector. This high level of informal sector jobs says nothing about the entrepreneurial genius of the Kenyan people. It says everything about the inability of the formal sector to absorb the huge number of mostly young people entering the job market. This large number of informal sector workers is a most powerful indictment of an unbalanced and underperforming economy.

Informal sector jobs are, as we know, are characterized by meager and unpredictable incomes, poor working conditions, especially lack of basic entitlements like paid leave, health insurance and pension. The informal sector in many ways traps tens of millions of Kenyans in poverty. I am sure you can imagine how hard it is to feed, clothe and educate children when your income is miniscule and sporadic. It is hardly surprising that shared prosperity and poverty reduction have not been distinguishing characteristics of the Kenya rising narrative.

Kenya’s moment and future are defined by the convergence of a large youthful population and rapid urbanization. These twin forces also happen to coincide with the reality that Kenya’s agriculture has enormous but untapped potential. Master Card Foundation has recognized this potential and has committed about $300 million to leverage Africa’s youthful population and address the continent’s low agricultural productivity. Our own Kenya Commercial Bank will invest $493 million to build a new cadre of youthful entrepreneurs in sectors such as agriculture through its “2JIAJIRI” program.

However, harnessing Africa’s youthful population and its untapped agricultural potential to drive prosperity must be directed by evidence, not just kind-heartedness on the part of do-gooders. There is not a large reservoir of Kenyan youth itching to take up farming. A youth survey commissioned by the East African Institute of Aga Khan University reveals that Kenyan youth with primary level of education had the highest interest in farming, compared to youth with post–secondary education. Similarly, 41 percent more youth with primary education would go into entrepreneurship compared to youth with post-primary education. Only 1 in 5 youth with university education are in self-employment; engaged in agriculture or off-farm enterprises.

The bad news is that the proportion of youth with primary school as their highest level of education – the reservoir of eager farmers and entrepreneurs – is declining precipitously. Moreover, 63 percent of Kenyan youth feel the government must create employment, put more educated youth into well-paying jobs. A majority of educated youth yearns for formal sector jobs, not farming or entrepreneurship.

Kenya’s economic growth is unbalanced. This epoch of jobless growth is socially, economically and politically unsustainable. The hard work of structural transformation must begin urgently. The growing numbers of young and well-educated Kenyans deserve well-paying jobs in the formal economy.

Kenya’s economy unbalanced, underperforming

The World Bank published the Country Economic Memorandum 2016 report for Kenya last week. The report is unflattering. Our economic performance is less than stellar. Among our peers, Kenya has had the lowest per capita GDP growth since 2003. The cost of doing business here is too high. Transport, energy, land and labor costs are higher in Kenya compared to competitor economies.

The two decades between 1980 and 2003 were characterized by stagnation. The spurt of economic recovery that picked up in earnest in 2004, after two decades of stagnation was buffeted by venomous, demonic mayhem in 2007. Agriculture and manufacturing have stagnated, with the consequence of limited addition of formal sector jobs for Kenya’s large youthful and relatively well-educated youth. Most of the jobs have been created in the informal economy and are concentrated in low productivity sectors; transport, trade, hospitality, and jua kali.

While the rapid expansion in education at levels­­ – from primary through to university – is laudable there are serious concerns about the ability of our education system to produce a critical mass of human capital that can drive the country forward. The poor quality of our graduates across from primary to university will exacerbate unemployment. Although employers are generally happy with the mastery of subject matter among graduates, most of them bemoan significant gaps in reliability, teamwork, analytical and problem, writing, analytical, and problem solving skills.

Moreover, Kenya’s modest economic growth is yet to trickle–down. Nearly one in two Kenyans live below the poverty line. For hundreds of thousands in the so-called middle class tenancy is tenuous and life is essentially paycheck-to-paycheck. It is hard to save and most middle class families have no durable or fungible assets and are one calamity away from economic ruin. The poor and the middle class are on their own.  Our modest prosperity is not shared.

Shared prosperity will be hard to achieve as long as our children’s quest for learning is subverted by teachers who cannot teacher and are absent from school 50 percent of the time. Shared prosperity will remain a dream as long as our health spending remains below two percent of GDP and more than 35 percent of our children are malnourished.

But is there such a thing as trickle down? In his Apostolic Exhortation released in November 2013, Pope Francis wrote; “Some people continue to defend trickle–down theories, which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world”.

As noted in the Country Economic Memorandum, the dominance of the service sector in Kenya’s growth structure is markedly dissimilar from our competitors, especially Egypt and Ethiopia. Why is Kenya’s growth feeble and unbalanced? Unprecedented high levels of public sector spending in the last 14 years, especially in infrastructure have buoyed Kenya’s economic output immensely. This has helped fuel massive expansion of the service sector, perhaps at the expense of meaningful investment in agriculture and manufacturing.

Kenyan goods are losing market share in the EAC region. In 2006, Kenyan accounted for 11 percent of imports in the region. Our contribution to imports in the EAC plummeted to a paltry six percent. We are losing to China, Egypt, and India and guess who else, Ethiopia. Moreover, Kenya’s export-to-GDP ratio has declined steadily since 2005. According to the Country Economic Memorandum, our innovation standing is less than impressive. We are outspent by Egypt, Ghana and South Africa in internal R&D, training, expenditure on software and machinery. It is horrifying to note Kenya’s main source of information for innovation is not intramural R&D or university or research institution, but customer feedback and the Internet. This is interesting!

We need to examine the logic of our current growth. While it is commendable that expansion in the service sectors accounted for nearly 66 percent of economic output between 2006 and 2014, we must to ask some fundamental questions. We ask fundamental questions about the boom in wholesale and retail trade, and in the expansion in the transport sector. Who manufactures the goods we are transporting, buying and selling? As I said in this column recently, we are a warehouse economy.

We must strive to achieve balanced economic growth through meaningful investment and growth in manufacturing and agriculture. And most of all, we must leverage urbanization and our youthful population to achieve durable and equitable economic growth.

Invest in learning to improve transition rates

I would like to congratulate all the 522,870 students who sat KCSE in 2015. I am also mindful that there are 5,101 students whose results were cancelled. Most of us cannot even begin to imagine how they feel. The industrial scale cheating witnessed in last year’s national examinations dented the credibility of Kenya’s education.

Our assessment system does not pass muster. Personally, I am not satisfied that we have done enough to get to the bottom of the crisis in our education system. Parents are not blameless here.  We need drastic measures to redeem credibility of our education.

But let us assume that cheating or other forms of irregularities involving about one percent of the candidates does not inflict grievous harm to the integrity of trustworthiness of KNEC or our education system. About 21 percent of the KCPE class of 2011 scored a C plus grade and above in KCSE and will, hopefully, proceed to university. Let me say this in another way. Only 13 percent of the standard one class of 2004 qualifies to go to join university. Bear in mind that the 522,870 who sate KCSE are only 42 percent of the of the 1,252,400 children who joined standard one in 2004. As we celebrate the achievements of the KCPE class of 2014 does anyone think about the 729,530 boys and girls who did not complete primary school or transitioned to high school?

I will repeat this. Only 42 percent of the standard one class of 2004 completed high school. The fate of 58 percent or 729,530 who have no high school education remains unknown. But they are about 19 years old this year. Only 13 percent of the 2004 class, which is the second cohort of free primary education, will join university. Fellow Kenyans and esteemed readers, I think this is a veritable human capital tragedy. This is a disaster.

The transition rates in our education system, 42 percent and 13 percent, are shameful. The transition rates are deplorable and unconscionable in a knowledge-intensive economy. In fact many now believe that we are on the cusp of a post-knowledge economy, which only make matters worse for hundreds of thousands of Kenyan children, especially because we are in live in a globalized world.

These terribly low transition rates from primary school to secondary and from secondary to college are a powerful indictment of our education system. Something needs to be fixed urgently. Let me be a little dramatic here just to make a point. Imagine that our education system was an airline company called Fly 844 and that our transition rates were a flight safety record. We fly in two parts to our final destination. Our safety record on the first leg is such that six out of 10 planes fall of the sky. On the last leg only 13 percent of our flights land safely.

Obviously, an airline company with such an atrocious safety record would be out of business in a couple of days. I should have mentioned that even when our children complete university they struggle to find work not just because jobs are hard to find but also because potential employers say they are not up to up to snuff. Moreover, students who enter university are often ill prepared for self-directed or independent learning. The bad habits of rote learning acquired throughout primary and high school are hard to shake off.

Perhaps you are wondering if things are really that bad. I think we are in trouble. We are throwing away the future of this country by failing to make effective investments in education. I have said before that many credible studies have shown that the problem with our education is not the syllabus or infrastructure or technology.

The problem is that 50-65 percent of teachers in both private and public schools don’t have basic reading and math skills required to teach grade four pupils. The problem of awful teachers is compounded by chronic absenteeism in public schools. A service delivery indicator report released by the World Bank shows that our teachers are absent half of the time they are required to teach.

The future of this country is in the tender hands of our children. We must stop this reckless plunder of our future and invest to improve transition rates in our education system. We owe our children a better country.