Ideas & Debate

What it will take for Kenya to achieve industrialisation dream

epz

Workers at the EPZ in Athi River. PHOTO | FILE

As the general belief in the power of the market system gained strength from 1980s, the idea that the State has an important role in promoting industrialisation was discredited by many. The government does not know how to “pick the winner,” they argued.

Since 1960s, Kenya has consistently espoused a market-based approach to economic management. Yet, in practice the State has often been highly interventionist. Even today the government’s Industrial Transformation Programme (announced in 2015) proposes many subsidy schemes for priority sectors.

Policy inconsistency is not unique to Kenya. The United States (US) and the United Kingdom, the leading proponents of market systems today, had been unabashedly protectionist in the early days of their own industrialisation.

So, should Kenya play an activist role? The debate often becomes ideological. The real question is why the State may have a role in accelerating industrial growth. There are two fundamental reasons.

First is the coordination problem. In a late industrialising country, setting up a new industry can be a daunting challenge because many supporting sectors do not exist.

For instance, leather shoes happen to be a promising industry in Kenya, but without the associated industries emerging to supply soles, inner linings among other components, prospective investors may hesitate. This is where the State can step in and coordinate the related investments, thereby giving all parties confidence to proceed.

Second is the increasing returns problem. The cost of production, especially in high-technology industries, tends to decrease as the scale of operation increases contrary to the classical economic theory of increasing marginal costs.

The physical scale of production matters, but accumulated production experience seems to be even more decisive in increasing productivity.

Japanese cars were known for low prices in the early days of exporting to the US market; today they are renowned for high quality and competitive prices. Behind this is the enormous experience Japanese automakers have built up through the production of millions of vehicles.

These two factors come together in the issue of avoiding ruinous over-competition. Closing down factories and moving redundant capital to another industry is costly. More damaging is the loss of the accumulated know-how.

Thus nurturing the right number of firms over a long period becomes important for building internationally competitive manufacturers.

Some countries have done this well, by managing the entry into key industries and coordinating reduction in production by the viable firms in economic downturns. Hyundai Motor Company resulted from conscious support of this kind by South Korea.

Before anyone concludes that Kenya must adopt activist industrial policy, I should touch on some broader issues.
First, industrial policy can be disastrous in the wrong country context. If Kenya wishes to practice it well, it must be simultaneously building an inclusive political economy.

An inclusive economic system limits elites’ access to economic privileges and promotes true innovation and competition. Without it, interventionist instruments, generally involving public subsidies, can easily become another source of rent.

Given that the government has already announced its intention to take a more active role in industrialisation, it becomes all the more important to make a decisive move to reduce the influence of those with connections.

The second point is the importance of learning what industrial policy requires. Japan started to experiment with interventionist tools in the 1930s, during the global depression, but it was only in the 1950s that the Ministry of International Trade and Industry found the successful formula. With experiences elsewhere available, Kenya can expect to learn the ‘art’ of industrial policy much faster.

National vision

Still, it is essential to build a capable institution that can design, implement, and learn from various forms of industrial policy. With the limited experience Kenya has with the East Asia style approach, it is advisable to start by improving the general investment climate first, and then gradually experiment with more targeted interventions.

Third, some believe that it almost requires an authoritarian State to implement industrial policy well, as seen in South Korea and Taiwan. However, such an approach was used effectively in democratic states as well, for instance Finland, France, and Japan in the second half of the 20th century.

What seems critical is the existence of a broadly shared national vision around the importance of industrialisation and the willingness of the people to make the necessary collective sacrifice today to achieve much better living standards tomorrow.

The experiences from northeast Asia show that an inclusive political economy order is fundamental to sustained and rapid economic growth. In fact, accelerating industrialisation with policy support was an essential element of the strategy to create such a high-powered economy.

But, they have to be a package deal. I hope these observations will help frame the much needed debate over the appropriate approach to industrialisation in Kenya.

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