Why the structure of Kenyan economy is wanting

The recent governors’ summit was dominated by discussions on sharing revenues, the money collected by the government through taxes and possibly borrowing.

It would be interesting to find out what each county contributes to this revenue before it’s shared. I suspect many governors would love to avoid that question. After all, the key attraction of devolution was that every county or read Kenyan would share the national cake, but not necessarily it’s baking.

Farmlands in Western Uganda on the slopes of the Ruwenzori Mountains. It’s time we shifted from agriculture to other sectors. [Photo: XN Iraki]

The pronouncement that devolution is working is very subjective. If Kenya National Bureau of Statistics (KNBS) can give economic growth rates by counties, we could compare the growth rates before devolution and after devolution. We cannot say devolution is working just because counties get the money. We can ask the same question in a convoluted way; which sectors contribute to the Kenyan economy? We leave it for you to find out which county plays a key role in these sectors.

Data on sectoral contribution to growth is publicly available from KNBS. We look at the period 2010-2014, post new Constitution. In future, we shall compare data before 2010 and after to see if there have been constitutional dividends in our economy.

This data shows that for the post-Constitution period, the agricultural sector has been making the greatest contribution to the economy averaging 26.18 per cent, more than a quarter. Kenya is still an agricultural country, a fact British settlers realised more than a century ago. They settled in the white highlands with plantations that today are small farms.

Growing of crops and animal production form the backbone of agriculture. Surprisingly, the contribution was higher in 2014 than 2010. Could this be the effect of the new generation of farmers, the young who have realised there is money in food?

Two leading dailies in Kenya have a weekly pullout on agriculture. It seems that this sector is going through a renaissance sort of. With rising population, it was inevitable that this sector would not remain in the backwaters. Compare Kenya with South Korea, one of our benchmarks. Agriculture contributes 2.6 per cent, industry 39.2 per cent and services 58.2 per cent.

It is paradoxical that while agriculture is the biggest contributor to GDP, it is the least respected. Being a farmer is considered equivalent to being unemployed. I have not got any business card with profession inscribed as farmer. If we classified farming as a real job, our statistics would show a significant fall in unemployment. The fact that farmers are too many dilutes their prestige, just like in teaching compared with say medicine or law.
In universities, agriculture is shunned and struggles to attract enough students. In our media headlines, farmers rarely get recognised. We hear of Nairobi businessmen, not Nairobi farmers.

Considering the unpredictability of the weather, and non- recognition, clearly our farmers are our unsung heroes. Yet, you are more likely to visit State House if you are preacher than if you are a farmer who keeps the nation alive. It is no wonder that farm subsidies are such a contentious issue in World trade Organisation (WTO) talks because most counties realise the strategic role played by farmers, despite their meagre contribution to GDP.
The farmer might not be dressed in a matching suit, except may be on a Sunday, but never look down upon him or her. Your life depends on his sweat.

In business schools, case studies based on farms are rare. How many would enroll in MBA (agriculture)? Students brighten up when you mention stock exchange not stock on the farm. The next contributor to our economy is manufacturing averaging around 11 per cent. Interestingly, almost half of this manufacturing is based on food, beverages and tobacco—agriculture again. The contribution of this sector has declined from 11.3 per cent in 2010 to 10 per cent in 2014. This sector has huge barriers to entry, particularly capital. How much would you need to set up a steel mill or a car manufacturing plant?

Just like food, manufactured products have become part of daily lives. How many products do you use from the time you wake up to the time you sleep? The beauty of manufacturing comes from value addition resulting in higher profitability and the potential to create high value jobs. A steel mill need accountants, engineers, technicians, managers and many other workers. Manufacturing, and many scholars and practitioners have observed, can be the fulcrum on which an economy can rotate. Think of South Korea or any industrialised country. Let us think loudly. A Boeing 787, dream liner costs about $350 million (Sh35.691 billion). What percentage of the Kenyan budget is that?

Mortgage accounts

Protection through trade secrets, patents, copyrights, trademarks etc make manufacturing very lucrative. These protections are rare in agriculture. While we could grow genetically modified maize, it still grows on soil and upwards. The heavy capital intensity keeps off competitors. No wonder there are two global firms that manufacture most of the commercial aircraft, Boeing and Airbus. How many towns in Kenya can boast of an industrial area?

Wholesale, retail and repair contribute about eight per cent. Does this explain why supermarkets and kiosks are everywhere? To layman, this sector should be making a higher contribution to the economy. But it does not because value addition is low unlike in manufacturing. What value do you add getting goods from manufacturers and distributing them? That value could be from transportation or storage and that is being eroded by e-commerce. Dubai has ridden on this sector to become global leader, exploiting its strategic location and making money from volume. Does the building of malls indicate this sector will play a more vibrant role in our economy?

Transport is another key contributor, about eight per cent. From matatus to lorries, planes and boda boda, there is lots of activities. This sector contribution might reduce because of lower petrol prices, as consumers shift their money elsewhere. But in the long run, low oil prices could increase the contribution of this sector. We shall buy more cars, more motorbikes, which increase the productive capacity of the economy. Now you see why we should be manufacturing?

Real estate contributes about eight per cent. It was 8.3 per cent in 2010 reducing to 7.8 per cent in 2014. This sector is very sensitive to interest rates, and politics. Its stagnant contribution in the last five years is surprising. Lots of real estate developments are coming up, but targeting high end so that vast majority of citizens are shut off this sector. No wonder the whole country has about 20,000 mortgage accounts. The rest of the citizens are waiting for inheritance.

A financial service and insurance contribution has grown from 5.6 per cent in 2010 to 6.7 per cent in 2014. This probably represents the M-Pesa and innovations around it. Other sectors that make noticeable contribution include education about 5.5 per cent, public administration and defence 4.5 per cent. Others are entertainment, health, professional, scientific and technical activities that have low contribution to the economy. It is surprising that the sectoral contribution has not changed much in the last five years. Why? Could our regulation be the culprit? What of politics? Luckily there are bright spots ahead like formation of Competition Authority of Kenya. What of our education? Has it opened up our kids to new possibilities?

Of more concern is that our economy appears immune to new constitutional order. This data shows that our economy needs restructuring, so that high values sectors like manufacturing become leaders. Through the 2010 Constitution, we brought new political order, never mind the unintended consequences. The new economic order seems far.

The bigger question is who will lead in restructuring our economy, the invisible hand of the market or the visible hand of the government. May be a mixture of both. South Asian nations like Singapore and South Korea used both and so did China. Structural transformation of the economy to focus on sectors with higher value addition could end the tug of war between governors and the national government over money.

Could our failure to restructure the economy to fit into the new constitutional order be the cause of the problems bedeviling us, from corruption to fighting over resources and endless scheming to push CEOs in public owned or controlled firms out of offices?

—XN Iraki is a senior lecturer at University of Nairobi’s School of Business