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Inequality fears rise as economy gathers pace

Audit finds that inequitable sharing of fruits of growth is slowing down progress. Photo/GRAPHICS
Audit finds that inequitable sharing of fruits of growth is slowing down progress. Photo/GRAPHICS 

Kenya’s economy defied last year’s downturn to create more jobs than in the previous year but the sharing of the fruits of that growth remained skewed in favour of a small fraction of the population, denying the country the big push it needs to get to the next level of advancement, economists said.

Though the foundation being laid through funnelling of public expenditure into key infrastructure programmes is expected to pull the economy out of the depressed growth seen in the last two years, concern is rising over the slow pace at which jobs are being created compared to the thousands of youths entering the labour market.

Kenya’s economy is estimated to require 750,000 new jobs every year but only 55,000 jobs were created last year leaving a gap of nearly 700,000.

An audit of Kenya’s development blueprint Vision 2030 by the Society for International Development (SID) has found that a widening of the income inequality gap has become the Achilles’ heel of the ambitious programme that hopes to turn Kenya into a middle income country in 20 years.

Mr Mugo Kibati, the director of Vision 2030, agrees that inequality is a major challenge to Kenya’s long term growth but maintains that social harmony based on equitable distribution of national resources and the fruits of economic advancement is one of the ultimate goals of the blueprint whose implementation has only began.

“We have barely finished laying the groundwork for the Vision 2030 and that has paved the way for work to begin on flagship projects that should soon make it possible to measure our performance,” he said.

The SID economists say that the formal sector as currently structured is incapable of producing the number of jobs needed to absorb the thousands of young people entering the labour market annually, even at very high economic growth rates of above 10 per cent.

Key pillars

“And there is a huge price to pay for that,” says Mwangi wa Githinji, who teaches economics at the University of Massachusetts-Amherst, and is one of the authors of the SID report.

“Anybody who fails to get a job in the formal economy ends up in the informal and smallholder sectors where their number further suppresses the already low wages,” he says.

It is this cascading of large numbers of young people to the low-paying informal sector jobs that is widening the incomes gap in the population, increasing the risk of social stability that is one of the key pillars of Vision 2030.

Kenya has been undergoing major social and economic shifts in the past five years that have seen the ranks of the lower middle and bottom income groups rise to constitute 80 per cent of total households up from 73 per cent five years ago, thinning out the middle income segment to a mere 18 per cent from 27 per cent in 2005, according to the Target Group Index (TGI) survey conducted by Consumer Insight, a market research firm.

Under the Vision 2030 plan, the government is focusing on key economic sectors that can deliver positive returns to the majority and help lift them out of poverty.

But the SID economists say the danger remains in the widening inequality gap seen to be pulling back consumer goods market growth and ultimately threatening to take the steam out of growth.

Tabitha Kiriti-Ng’ang’a, who teaches economics at the University of Nairobi, says the widening gap between the rich and the poor remains the biggest threat to Kenya’s growth.

A rise in the number of households with limited access to education, health and other crucial services ordinarily leaves demand for goods and services in the economy to a tiny fraction of the population closing sales opportunities in the consumer goods market.

Consumption is a key barometer of the real economy’s health, whose decline ultimately weakens a country’s ability to create wealth.

“Because of the relatively high level of inequality in the country, improvements in incomes associated with growth are skewed in favour of the top end of the social strata,” said researchers at SID.

Impressive economic growth in recent years has not helped change the dynamics because the benefits have not trickled down to the lower income groups, leaving their incomes to lag far behind the rate of inflation and the cost of living.

The 2010 Economic Survey indicates that while wages grew at an annual average rate of four per cent last year, faster than the rate of economic expansion at 2.6 per cent, the pace of inflation was more than double at 8.6 per cent, wiping out any purchasing power gains that workers made.

Ultimately, success of growth interventions anchored in Vision 2030 is bound to be measured by one data point — the ability to reduce poverty and start closing the inequality gaps in the population, the economists say.

Labour intensive

“The Vision 2030 does not address the structural determinants of inequality and unless they are dealt with, the gap will increase,” says the SID report co-authored by Dr Mwangi, Dr Maureen Odongo, an economist at the Planning ministry and Dr Betty Maina, an economist at the National University of Ireland.

“The government should therefore aim at boosting the use of labour intensive employment methods, land redistribution via tax policy to enhance household incomes and food security.”

Revelations that Kenya might not narrow the inequality gap any time soon represents yet another drawback in the country’s ambition to enter the league of economies that are growing at double digit levels.

The latest findings are expected to stoke the old debate as to whether the Vision 2030, which is grounded on a high economic growth––at 10 per cent–– will have any impact on Kenya’s proverbial mountain of poverty that has left more than half of the population in the bottom income band.

Dr Mwangi says gender and class-based income inequality presents a dicey dilemma to policy makers that could erode the economic gains realised in the past few years.

“A highly unequal country will require higher growth rates or more specific pro-poor growth policies to reduce poverty.”

Unemployment among the youth remains one of Kenya’s top policy headaches to which the government has responded with successive step gap measures such as revolving funds and Kazi kwa Vijana programme.