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Trade growth under threat as new world order begins

By Frankline Sunday | January 24th 2017 at 00:00:00 GMT +0300

World Trade Organization (WTO) Director General Roberto Azevedo gestures as he speaks during a press conference on the sidelines of the World Economic Forum, on January 20, 2017 in Davos. / AFP PHOTO /

Last week, Chinese President Xi Jinping took to the stage at the 43rd summit of the World Economic Forum, (WEF) in Davos, Switzerland. He was the first Chinese president to ever address the annual conference.

At an exclusive ski resort on the Swiss Alps, President Xi, flanked by some of China’s billionaires, made a spirited defence for globalisation. He started his 54-minute address by referencing the opening of Charles Dickens’ A Tale of Two Cities.

“Today, we also live in a world of contradictions,” he said.

“On the one hand, growing material wealth and advancements in science and technology have seen human civilisations develop as never before. On the other hand, however, frequent regional conflicts, global challenges like terrorism and refugees, as well as poverty, unemployment and the widening income gap have added to the uncertainties of the world.”

Few countries understand the import of globalisation as clearly as China does since adopting more outward-looking market reforms in 1978.

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The reforms, dubbed gaige kai- fang, which loosely translates to “change the system, open the door”, saw China emerge as a strategic cog in the global value chain.

Economic miracle

Strategic sectors of China’s economy, including manufacturing and the financial sector, opened up to international trade and foreign direct investment. The country became a major assembly outpost for everything, from iPhones to nuclear reactors.

For close to 25 years straight, China’s GDP growth averaged nearly 10 per cent annually. The country accomplished what the World Bank defines as a near economic miracle – the fastest sustained expansion by a major economy in history that lifted more than 800 million people out of poverty.

So when Xi took to the stage in Davos in defence of globalisation, he was also defending his country’s business model, which is now under threat from a possible trade war from the new president of the United States.

In his inauguration speech, President Donald Trump issued an edict to the international community: “From this day forth, a new vision will govern our country: America first. Every decision from trade to taxes, immigration and foreign affairs will be made to benefit American workers and American families.”

Like most of the developed world, Kenya is today finding itself having to re-imagine its position in a shifting global economic landscape.

As economies in the Eurozone continue to grapple with Britain’s decision last June to leave the European Union, the focus of the Western world in the coming years is anticipated to be more inward looking.

Countries in sub-Saharan Africa that rely heavily on aid and trade concessions from Western bilateral partners, principally the US and Britain, could soon find themselves forced to look elsewhere.

Days before taking the oath of office, the Trump administration made startling queries about the US’ financing of health and anti-terrorism programmes in Kenya.

These include the US President’s Emergency Plan for Aids Relief (PEPFAR) that has made the US sub-Saharan Africa’s biggest donor, committing more than $70 billion (Sh7.3 trillion) to HIV and Aids programmes since being enacted by George W Bush in 2003.

PEPFAR reports that its funding in Kenya has enabled more than 900,000 adults and children to receive anti-retroviral therapy in the past decade.

Should Mr Trump follow through with his intention to slash bilateral aid programmes to sub-Saharan Africa, Kenya will be one of the biggest losers. It will have to seek alternative funding sources for crucial budgetary needs.

In the short term, Kenya will be looking to capitalise on already existing trade relations with all its bilateral partners, and consolidate recently signed partnerships.

These include infrastructure deals with China, and trade partnerships with its Asian neighbours and rivals Japan and India, which have both displayed intent to aggressively expand their footstep in the region.

Value sectors

At the same time, Kenya will have to reassert its waning economic clout in the East African Community (EAC) to safeguard its exports.

The EAC is one of Kenya’s main export markets, accounting for 21 per cent of the country’s total exports in 2015.

This crucial market for Kenyan exporters is, however, shrinking and has gone down by 6 per cent in the last five years as imports from China and India crowd out Kenyan goods in Uganda, Tanzania and Rwanda.

In the long term, Kenya stands a better chance of improving its fortunes in international and regional markets by fixing challenges that have grounded what should be the country’s key value sectors: agriculture and manufacturing.

The output of Kenya’s manufacturing sector to the country’s growth has remained stagnant the last 15 years.

The World Bank further warns that Kenya’s manufacturing sector is uncompetitive and overall productivity is waning, crippling the country’s standing in the global market place.

“The economy has struggled to develop the deep public-private networks of regulation, facilitation, skills and infrastructure which advanced manufacturing economies need,” said the World Bank in a recent report.

“It is revealing that Kenya does well in sectors where networks are somewhat easier to establish, as in banking and telecom, but struggles with the more intensive network capabilities needed for modern manufacturing.”

As experienced by China, domestic manufacturing value chains offer one of the best opportunities for economies to achieve the elusive goals of job creation and export growth.

In Kenya, however, Government policy and a tightly held manufacturing sector have prevented the expansion of the sector, and locked out millions of prospective jobseekers from gainful employment.

The situation is similar with the decline of the country’s agricultural sector that is the mainstay of the economy.

Over the past 10 years, Kenya’s agricultural output has shrunk from 26 per cent of GDP to 22 per cent, a major variation.

The World Bank notes that sectors that have been liberalised and see less Government intervention, such as horticulture, have thrived, while major food and cash crops like maize and sugar have underperformed.

The need to improve Kenya’s competitiveness in these key two sectors has been made more urgent by new data on global competitiveness released by the World Economic Forum last week.

Crucial sectors

Kenya was ranked 96th in competitiveness out of 140 global economies in the ranking that explored how countries across the world stack up against each other in trade and investment opportunities.

The annual ranking scores economies on 12 key pillars, including institutions, infrastructure, innovation and labour market efficiency.

Kenya’s macro-economic environment was ranked 122nd out of 140 economies, with executives who participated in the survey citing corruption, high taxes, access to financing and inefficient Government bureaucracy as the top impediments to doing business.

In East Africa, Rwanda has been an example of how sub-Saharan economies can reform crucial sectors and make them attractive to regional and international investors.

The nation has the highest competitiveness score in East Africa at position 53, with most pillars way above sub-Saharan Africa averages.

Rwanda was further ranked seventh and 13th in labour market efficiency and institutions, respectively, with the biggest challenge to investors listed as access to finance.

This means that for Kenya to hold on to its economic lead in the region, it has a lot of work to do. Among its looming tasks is correcting internal imbalances in the economy that reduce the country’s exports to the international market and starve job growth.

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