Can Kenya become the next economic miracle?

Since 2003, Kenya’s growth has accelerated perceptively. Yet, it is nowhere near what many believe Kenya is capable of, including Vision 2030 which projected about 10 per cent GDP growth.

In a recent presentation to a Kenyan audience, Ken Ohashi (Senior Economic Adviser to the Presidency) pointed out that if Kenya aspires to an “economic miracle” of the East Asian kind, it should revisit their experiences to decipher the real ‘secrets.’

Reflecting on Japan’s own history, I believe his observation is pertinent.

In the past, “neoclassical economists” argued East Asian countries succeeded by making the market system work, whereas the “developmental state” view insisted “the state played a critical role in promoting growth.” Why many countries attained very different outcomes while following a similar approach demands a deeper explanation.

Since 1960, while GDP per capita of the Philippines doubled in real terms, that of Thailand has increased by nearly tenfold. The key difference is the degree of elite dominance. The top 40 families have controlled the politics and economy in the Philippines for a century.

The more open Thai elite class has encouraged massive foreign direct investment (FDI) inflows since the 1980s which helped Thailand build a formidable manufacturing sector (over 32 per cent of GDP), and a significant middle class has emerged.

Yet, Thailand’s underperformance relative to South Korea and Taiwan is evident. Thailand too remains basically an elite-dominated system. With their easy access to exclusive economic privileges, or ‘rent,’ the political and economic elites tend to avoid long-term and risky investments to build innovative and competitive industries. The country has become a low-cost factory for foreign firms, slow to generate its own products and technologies. It is caught in the ‘middle-income trap.’

Inclusive economies

South Korea and Taiwan have built more inclusive economies and promoted high-value industries.

They closed off political connections as the main source of business opportunities, and drove the entrepreneurs toward value addition and productivity.

Simultaneously, the states strongly supported nascent industries in their bids to become internationally competitive. Better education created a workforce capable of producing high-quality products, and gave everyone a fair chance.

A more equitable income distribution expanded the purchasing power of the households, thereby supporting further growth of domestic industries.
In an inclusive system, rent seeking is curtailed by the state and new ideas are rewarded by the market.

This creates strong incentives for innovation, the source of income growth over time, as seen in the striking differences in the number of patents granted to applicants from these countries.

Where does Kenya stand? Many business leaders are focused on value addition, but say widespread political-level corruption hinders progress.
It reduces the effectiveness of public investment and services, weakening the foundation for private sector growth.

Moreover, public policies and their implementation are often distorted by vested interests; this results in a serious lack of coherence in policies to promote industrialisation.

Kenya must take more decisive steps to establish an inclusive political economy system. If Kenya were to make such a bold move, there are five key areas of action.

1) Kenya must ensure elites no longer see rent seeking as a regular means of making profits. Entrepreneurship must be relentlessly driven toward innovation and value addition. Curtailing land speculation is an important complement to such efforts;

2) Competitive manufacturing and high-value agriculture need to be nurtured. They are vital for the national interest; yet, the high risks involved tend to cause under-investment in these areas. This market failure should be offset by public policies;

3) Though considered the best in Africa, Kenya’s education system needs improvement. The completion rate must rise and the graduates better prepared for work. A well-educated labour force supports the growth of innovative firms; in turn such firms create well-paying jobs;

4) Kenya needs to establish social norms for equity. A vision of an equitable society can be embodied in concrete public policies, such as social protection programmes, promotion of pensions (which also increases savings to fuel industrial growth), and universal health insurance; and

5) The State’s capacity to formulate and implement effective policies needs to be built up. The far-reaching transformation will be impossible without competent State institutions. A strong consensus is needed to create a more independent and professional bureaucracy.

Most late starters in development, including Japan, broke out of an elite-dominated political economy system at the time of an existential national crisis. Arguably, Kenya does face a “creeping crisis” because of rising unemployment and widening income/wealth gaps.

Kenya also has a chance to capture a large portion of the global investment flows that are looking toward Africa in general as the next manufacturing base.
This opportunity, however, may be quickly lost if other countries set themselves apart as more attractive destinations. The time is now to act decisively to preempt a future calamity and get on a sustained growth path.

Ms Sano is the Head of Japan International Cooperation Agency (JICA) Kenya office.