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Opinion & Analysis

Services should not hobble industry and agriculture sectors

A report by the Overseas Development Institute (ODI) has analysed four services sectors in Kenya to determine the role of services in economic growth. These are the financial, IT, transport and tourism sectors.

The report argues that services are becoming increasingly important, even for non-industrialised countries such as Kenya, as they have a direct contribution to gross domestic product (GDP), exports and employment.

Indeed according to the report, services account for 50.7 per cent of the share of GDP, a fact with which the World Bank (WB) agrees. Kenya has already become a major exporter of services in areas such as transport, financial and, less significantly, ICT.

In terms of exports of services, they nearly tripled from $1.9 billion (Sh190 billion) in 2005 to $4.9 billion (Sh490 billion) in 2012, far more than the exports of goods.

The ODI report goes on to say ICT and financial services in particular make companies in other sectors more productive, help develop value chains and safeguard jobs, while tourism creates numerous jobs within suppliers.

Further, services have an important role to play in the ‘servicification’ of manufacturing.

Indeed the WB survey made the point that in Kenya, services constitute at least 62 per cent of the cost of manufactured goods illustrating the extent to which manufacturing relies on services.

The position ODI takes goes contrary to dogma in economic theory which argues that the most effective path to development is linear with a progression from agriculture to manufacturing and finally into services.

Yet here is Kenya, a non-industrialised economy, with services as the engine of economic growth.

Given this scenario, the questions to ask include: What are the implications of a services-led economy in the context of a non-industrialised county? Is a such economy sustainable in the long term?

Does a preponderance of services have a negative effect on the development of agriculture and manufacturing? Well, the report acknowledges that there are weaknesses in the service-driven model, especially in non- industrialised countries.

The dominance of services means that it pulls labour in from the other sectors such as manufacturing. This could result in the exacerbation of deindustrialisation as manufacturing jobs are replaced by low-productivity services jobs.

This is a key concern for Kenya which has a significant informal economy, most of which is not very productive and in which services are a notable constituent.

Is Kenya facing a scenario where labour is being pulled into services from other sectors, not into high productivity services which are typically in the context of formal employment, but rather into low productivity informal employment in services?

Further there are questions as to whether the dominance of services in Kenya will lead to skills shortages in agriculture and manufacturing.

The report rightly makes the point that there is a risk emerging where the development of skills for the service sector will preponderate, perhaps to the detriment of skills development in other sectors.

More and more young Kenyans will opt to train to become bankers and HR specialists because it will be easier to find jobs than it would be if they had trained as engineers and scientists. What does this bode for the future of the country?

The final risk of service-driven growth is that, as ODI points out, too much export-oriented services have opportunity costs.

It could lead to Dutch disease effects where the shilling appreciates thereby damaging the manufacturing industry as locally produced goods become expensive and uncompetitive due to a strong shilling.

In terms of the way forward, Kenya should continue to reap the benefits of service-driven growth but go through a deliberate process of rebalancing where highly productive agriculture and manufacturing play a stronger role.

Further, there is a need to ensure that as long as services preponderate, it is associated with notable job creation and secondary effects that benefit the economy as whole.

Ms Were is a development economist; [email protected]

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