Monday, March 14, 2016

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.

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