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Hard truths about Kenya’s state of the economy

By Ken Opalo | March 12th 2016

NAIROBI: Every student of Kenyan economic history knows about the November 1972 International Labour Organisation (ILO) Report on Employment, Incomes, and Inequality in Kenya. The report was a shocker, and quickly became the focal document that informed discussions on the structural distortions in the Kenyan economy that concentrated benefits of wage employment among a small subset of the Kenyan public – mostly along ethnic lines. Needless to say, the government of the day ignored the ILO report and its recommendations. And the country lived to pay for this through numerous conflicts over “historical injustices.”

This week the World Bank released a similarly important report on the state of the Kenyan economy. The report puts Kenya’s growth trajectory over the last 15 years in perspective, and finds it wanting. For example, the increase in per capita income in Kenya has lagged the Sub-Saharan African average over the same period. Our savings rate is significantly lower than in our peer economies. And investment as a share of Gross Domestic Product (GDP) is well below what is required to meet our goal of becoming an upper middle-income economy by 2030. Finally, the report pointedly notes that Kenya has two economies – one fueled by consumption and investments in real estate; and another marked by stagnating productivity and incomes.

I hope that people at the Treasury, the Industrialisation, Transport and Agriculture ministries are combing through the report and internalising its lessons. There is no escaping the fact that in order to achieve the goals of Vision 2030 we must focus on mass job creation, fast. Productivity in the agricultural and manufacturing sectors has stagnated over the last decade. The only booming sectors are services and construction. Well paying jobs in the services sector are only accessible to the highly educated – a fact that locks out millions of Kenyans from decent jobs. The construction sector is dominated by the already well-to-do and mainly circulates resources within the upper echelons of the income ladder (a significant amount of new construction almost exclusively targets high end clients). In effect, Kenya has two economies. There’s the economy dominated by booming services and construction sectors; and another economy of stagnating productivity in agriculture and manufacturing.

Perhaps the best metaphor for this is the fact that many coffee estates in Kiambu County have recently given way to high-end housing and malls. Consumption is the name of the game in town. And we do it like there is no tomorrow.

So what might the government do to encourage more saving and investment in agriculture and manufacturing? First, we need to rejig the financial sector with a view of making it the engine of efficient allocation of scarce investment shillings. There is more to entrepreneurship than land and real estate. To this end I am confident that Central Bank Governor Patrick Njoroge, is up to the task. Second, we need to take the agricultural sector seriously. This means doing all we can to alleviate the bottlenecks that limit the growth of small and medium-sized enterprises in these sectors. The ministries of agriculture and industrialisation owe Kenyans a lot more than they have done.

Lastly, the Transport Ministry – one of the more able outfits in this administration - should continue to reduce the cost of doing business by investing in key infrastructure. This means thinking critically about the kinds of investments that can serve the “informal sector” and help these entities grow in sales, employees, and productivity. We cannot continue to only invest in infrastructure that benefits the so-called “formal” economy. It’s time to engineer a convergence between Kenya’s two economies.

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