Kenyan economy through the eyes of the World Bank, are we growing?

It is rare to find a report on the Kenyan economy distilled off politics and emotions. The World Bank report on Kenya, “From Economic Growth to Jobs and Shared Prosperity” tried to do that. The 128 pages is an easy read, with minimal esoteric equations and graphs. It was officially launched on March 8. The report notes lack of current data on our economy. Innovations like night lights approach is helping close this gap on data. Lights at night can be a proxy measure of economic activities and satellite https://cdn.standardmedia.co.ke/images can easily capture that.

Apurva Sanghi, the World Bank Lead Economist & Programme Leader for Kenya, Rwanda, Uganda and Eritrea notes that the main objective of the report is to start a public debate and discussion on Kenya’s growth model. He says the previous growth model may have worked in the past but it is time to recognise some of the current and future economic realities to re-design this growth model.

The report in chapters 1 and 2 start by highlighting Kenya’s high noon in economic growth-the period between 2002-2007, the only period of accelerated growth since uhuru with GDP growth hitting 7 per cent. Interestingly, Kibaki’s name is not mentioned in the report; no president is mentioned except Moi once.

The report notes that Kenya’s economic growth is characterised by volatility caused by internal and external shocks. Politics and inflation are identified as some of the causes of internal shocks. External or exogenous shocks emanate from oil prices, drought and global economic crisis. Food explains most of variations in inflation, not oil as most of us believe. I was curious that structural adjustment program (SAP) is not mentioned anywhere in the report.

Kenya’s economic growth rate is however lower and more volatile compared to her peers in sub- Saharan Africa and Asia such as Burkina Faso, Ghana, Senegal, Tanzania , Uganda, Bangladesh, Vietnam, India and Pakistan. Domestic shocks explain most of variation in GDP growth. Perhaps it’s time we stop blaming outsiders.
The report observes that service sector is emerging as the key driver of the volatile growth making up two thirds of increase in growth for 2006-2014. Communication and financial services are key performers while mining and energy was above average.

The contribution of agriculture to the economy particularly horticulture is acknowledged for the period 2005-2013. Efficient air transport has also contributed to growth of this sector. Michael Porter had noted much earlier that the other driver of horticulture mostly flowers is lack of government interference. Tea and tobacco have done well as coffee declined. Maize and sugar should be cheaper by global standards.

Manufacturing has lagged behind, yet it’s the key driver of rapid and sustained economic growth globally. Consumption has been a key driver of the economy on expenditure side, because of easy credit, and formal employment. Investment contribution to growth has increased since 2003 compared to the two preceding decades.
However, exports have declined from 2005-2012 due to high cost resulting from port inefficiency, real exchange rate appreciation, and weak manufacturing sector. Service sector is bright even in exports.

Key determinants

The report notes that achieving upper middle income status for Kenya is not easy in line with Vision 2030, but it is achievable if gross national income grows by up to 10 per cent in the next 15 years and GDP grows by 6.8 per cent per annum. The good news is that GDP growth is projected to be above potential growing at around 7 per cent from 2015-2018 if the internal and external environment remain the same.

Interestingly, the report suggests that Kenya debt is sustainable, and there is low risk of debt distress, hence a moderate increase in budget deficit is possible. Have politicians read this report? Key determinants of Kenya’s growth are well highlighted. They include human capital where Kenya is doing better than her peers with an average of 6.5 years of schooling except that marginal groups in ASAL are yet to catch up. But surprisingly, we are worse off than our peer in tertiary education despite the rapid growth in university education in the last few years.

The other key driver of growth is urbanisation which accelerates growth through agglomeration and increased productivity. Our urbanisation is driven by services, not manufacturing as in other countries.

The other driver is a vibrant financial sector which has been mobilising savings and allocating it to productive sectors. Our capital markets are a bright spot too.

Investment has been low among peers except Cambodia and Pakistan. Trade openness is low among peers but policies to promote regional trade and beyond have paid off. Trade openness help in transfer of technology, boost productivity, increases competition and lead to efficiency.

Government spending can stimulate growth if well focused e.g. on infrastructure, education and health. It is noted that too much of our government spending goes to wages even in devolved units.

Other growth drivers include good governance which create enabling environment for broad economic growth. Bright spot in delivery of services such as Huduma centres, open data and performance contracting are highlighted.

Political culture and patronage based politics are seen to reduce the effect of institutional reforms centred on new Constitution and new laws.
On the macro economic front, monetary policies have stabilised inflation and exchange rate is close to equilibrium but terms of trade have been worsening.

The report notes that Kenya’s economic model not inclusive. Poverty is high despite GDP growth. The poor are hurt by high food prices, transportation and volatility which affect agriculture. Solutions to poverty such as diversification to non- farm income, giving rural folks more education, better transport, public goods, access to credit and land tenure are well explained. Social protection, like cash transfers to the poor is another avenue to poverty reduction. The focus on rural areas, forgotten by elites except during electioneering period is a plus for the report.

The report states that improvement in agriculture is key to reducing poverty, despite dominance of services. Job creation is the other area highlighted by the report. Population growth is higher than job creation and more jobs are in informal sector which does not contribute to government budget except through VAT. Paradoxically, productivity is increasing in the formal sector with fewest workers, not in jua kali and manufacturing where it matters most.

The informal sector is mostly ran by one man firms, pay low wages, are mostly owned by youth under 40 years with formal education and cite lack of finance as the biggest problem. Regulation hurdles from taxation to registration keep many of these firms informal.

To create more jobs, the reports call for improvements in business environment particularly in regulation. We need to equip graduates with appropriate skills such as analysis and problem solving, expand technical and vocational schools. Skills matter more than years of schooling.

Labour regulations specifically on minimum wage and health surveillance should be revised to create more jobs. The 2007 labour law is a great disincentive to job creation.

Productivity which creates more jobs can be enhanced by offering market information and building skills. To create more jobs, productivity of small scale farmers should also be enhanced. And finally, more jobs can be created by diversifying into non-farm income by promoting urbanisation since agriculture provides 70 per cent of employment in rural areas and 2/3 of exports. The reports discuss how we can improve on Special economic zones (SEZ) or EPZ to create more jobs by learning from our Asian peers.

National savings rate

Chapter 3 discusses the need to enhance the low national savings rate which hampers long run investment and growth. It is suggested that savings can be enhanced through change in pension policy, stabilising growth which boosts confidence of households to save, reduction in youth dependency ratio, keeping inflation in check, reducing interest rate spread and by making the banking sector more competitive.

Borrowing from behaviour economics concludes that savings has a lot to with how we think, not lack of income. Kenyans like saving in immovable assets like land though that is being diluted by SACCOS. If we lower the cost of savings and give savers incentives, they will save more.

Chapter 4 addresses the low level of manufacturing which separates Kenya from her peers. High energy costs, poor business environment, high labour costs, logistics and corruption have muted the growth of this sector. An interesting observation is that Kenya and her peers are experiencing de-industrialisation at a much lower level of development compared with developed countries.

Kenya manufacturing sector is more diversified than peers but complexity is low; firms are capital intensive and have high churning with new entrants not raising productivity. Agglomeration is attracting new firms particularly to Nairobi.

The report noted that services are taking over from manufacturing and now constitute the largest and most dynamic part of Kenyan economy. However, labour costs are rising fast which is likely to reduce the competitiveness of the sector.

The report alludes to innovation as a source of growth but observes that only about 15 per cent of Kenyan firms rely on in-house R&D and do not invest enough in innovation.

Chapter 5 dwells on newly discovered oil which will be a curse or blessing depending on how we shall spend or save oil revenue. It is suggested we put the money in health and education, ensure transparent decisions on oil and put some money in sovereign wealth fund. The report calls for management of expectations on oil. Oil can harm economy leading to Dutch disease and reduction in competitiveness of domestic industries.

The coming oil economy will need an institutional framework involving two levels of government and local communities because oil is found in already volatile regions. Weak institutions and powerful interest groups can lead to adverse development outcomes in an oil economy, the report concludes. Lessons on how to manage oil wealth from Chile, Norway, Kazakhstan, and Timor-Leste are well discussed.

Mr Sanghi concludes that “In the long run, Kenya’s growth prospects will depend a lot on the “IOU”: Innovation, Oil, and Urbanisation. And that needs to be complemented with mobilising resources and efficient spending.”

The report is generally optimistic about Kenya’s economic prospects if we get things right. It is a must read for policy makers and even ordinary Kenyans.

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