Ideas & Debate

Why Kenya’s future lies in rethinking the growth path

Small business owners at a Family Bank Business Club meeting. FILE PHOTO | NMG
Small business owners at a Family Bank Business Club meeting. FILE PHOTO | NMG 

Kenya’s growth plans present an interesting puzzle. Despite our widely acknowledged growth potential, successive five-year Medium Term Plans (MTPs) based on Vision 2030 have missed the targets.

Gross domestic product (GDP) annual growth target of 10 per cent on average has been missed, even with MTP targets set lower than the Vision 2030 targets.

The First MTP (2008 –2012) set the GDP target at 8.66 per cent and reached less than half that — 4.18 per cent on average. With investment set at 27 per cent of GDP, it reached only 20 per cent on average. Even the preceding Economic Recovery Strategy (ERS) of 2003-2007 achieved GDP growth from 2.9 per cent in 2003 to 7.1 per cent in 2007. You guessed it; the just-ended second MTP (2013-2017) returned the symptomatic disappointments.

Officials planning the third MTP 2018-2022 (that will coincide with the President’s last term) invoke anything but accountability or competences.
They cite instead the usual suspects: drought, poor absorptive capacity, etc.

Targeting the shrinking formal sector, we ignore booming SMEs and informal economy that struggle in plain sight to bridge the consequences of growth failures.

Yet SMEs provide 80 per cent of Kenya’s employment, yield over 20 per cent of GDP, and allay socio-economic exclusion for many. The rabble-rousing antics of politicians and vulnerable youths are hard to delink from growth failures, mass unemployment and broken livelihoods. 

To the extent we can change course, it makes sense to shift strategies in the short-medium run of the third MTP for a more prosperous long run, and a legacy for the President.  

The first opportunity is that the Vision itself remains a valid compass for both. It is possible to rise up to the targets of the Vision, create a legacy and deliver a permanent difference in the economy and livelihoods for Kenyans.

For that, we need to call out public officials and captains of the tiny formal business sector, who frequently trample the Vision. Take the recent improvement in Kenya’s ranking in World Banks’ Ease of Doing Business (EDB), for instance.

Some see a shortcut to claim success in economic policy, ignoring the World Bank’s own eminent panel that proposed stoppage of the rankings for acute inconsistency.

Obvious economic flaws must be fixed to impact poverty, high unemployment and a generalised lack of socio-economic inclusion. The issue is never a failure of allocation of public resources to the dream.

Ministries, Departments and Agencies (MDAs) return development allocations annually to the Treasury. From the latter, we have grown accustomed to years of shocking public finances that are now drawing the sneers of the International Monetary Fund — no less.

It is part of the untold truth: The implementers should be called to account for missed targets or misused public resources that stand in the way of Kenya’s transformation. 

How and why must we transform? Leading economists today explain the route to economic transformation as a shift to investment-led growth, which gradually drives national employment and inclusiveness.

They blame leaders and policy makers who tolerate high public-sector wages and consumption spending relative to the drive for growth from investment.

Recent economic debates cite how countries could succeed with the shift. For Kenya, the analysis in the Huffington Post by Siddharth Chatterjee, UN Resident Coordinator in Nairobi, Mbui Wagacha, and Sri Bharatam, in May 2017, pointed out the change imperative and advantages.

In Nigeria, the eminent former Central Bank Governor, Lamido Sanusi diagnosed in 2016 the dangers of debt-and-consumption-led growth compared to an efficient investment and industrialisation-led model of the economy.  The Africa World Economic Forum held in Durban in May 2017 focused on a similar theme.

The Tony Blair Institute’s study — The Jobs Gap: Making Inclusive Growth Work in Africa — explained the model as a politically-smart jump to secure stability and progress. It shows Africa faces a shortfall of 50 million jobs by 2040 if growth is not prioritised. The bombshell contains the risks of unemployment becoming an existential threat and a national security issue.

The all-of-government results matrix

Transformative strategies adjust direction. An all-government-results matrix must be cast in stone, in a growth model dedicated to investment-led growth, and delivered in the next five years.

The strategy to transform the economy needs rigorous accountability for results in an agenda called the Results-Based Framework. Once inaugurated, the third MTP should be subjected to rigorous periodic reviews of implementation at the Executive Office of the President, with strict actions taken at that apex level when any reporting MDAs miss their performance trajectories.

Adjustments should become mandatory for implementers. The direct approach to accountability and delivery of target performance recalls President Mwai Kibaki’s historic response (at KICC) to a consultants’ report on the oil pipeline for the Lapsset project. 

Having stated the government had accepted the report, he instructed every ministry and parastatal to implement the parts of the project related to them with strict coordination. The coming MTP-3, 2018-2022 can similarly be re-invented to restore Vision 2030.

At periodic reviews, every leader of an MDA should formally report its strategic results from the matrix, all planned in a results hierarchy of impact, outcomes, outputs, and activities. MDAs should finance allocated budgetary resources to activities that deliver outputs, outcomes and overall intended impact of Vision 2030: Not return development funds to the Treasury.

During the periodic reviews at the apex, each stage of hierarchy should be verifiable with professional indicators. Risks should be addressed with corrective measures, including beefing up skills at MDAs to alleviate repeated skipping of the targets.

Winners in economic transformation

The growth model has produced verifiable success stories. When China, Korea and Ethiopia (a recent success but already running ahead of Kenya in growth performance) adopted the investment-led model, their economies pulled ahead in relative world terms.

They improved their masses of the poor, absorbed unemployed labour and grew to prosperity and inclusive economic activities.

China commenced its pragmatic transformation six decades ago, with the reform policies of Deng Xiaoping adopting far-reaching market-economy reforms tempered with trade and foreign investment. A ratio of 76 per cent of GDP in consumption in 1952 was transformed by 2011 to only 28 per cent.

The investment ratio was raised to over 48 per cent. SMEs increasingly contributed to China’s economic growth, making up over 99 per cent of all enterprises in China today.

In the interim, the strategy of investment-led growth increased national savings (public and private), augmented with foreign inflows, to pave the way for the raised investment ratio.

This strategy forged employment-creation and highly inclusive takeoff in the 1960s, including China’s export drive. From 1978 to 2011, China’s real GDP growth averaged about 10 per cent per year — remember Kenya’s target repeatedly missed in Vision 2030.

The increase in the level of China’s output exceeded 20-fold. By the end of 2012, China became the second largest economy by GDP size after the US.

China’s GDP per capita was $205 in 1980. It reached $6,075 in 2012. With economic openness and trade, China accumulated $3.3 trillion in foreign exchange reserves, ranked top in the world, and used strategically to maintain competitiveness.

By 2000, China had largely absorbed into employment about 80 per cent of its poor working-age population. In the new phase, China’s GDP growth has to rely on increased output per worker, that economists call an increase in labour productivity.

Landlocked Ethiopia and also Tanzania provide upcoming African examples. The latter has eight industrial parks nationwide. Ethiopia in 2016 unveiled one of the world’s largest parks — the $250 million Hawassa Industrial Park. It covers 100 hectares, hosting investors in 15 textile and garment firms from China, India, America, Sri Lanka, and six Ethiopian companies.

The park has 35 factory sheds and 19 buildings. A planned second phase will be twice as large. In total, Ethiopia has promoted industrial parks for textiles, leather, agro-processing and pharmaceuticals as part of its Vision 2025.

About $1 billion will be invested in setting up industrial parks in the next decade. Using its national savings and foreign direct investment as part of gross investment, Ethiopia developed a cement manufacturing plant funded by the Nigerian investor Dangote, after giving the key incentive of lower electricity costs that then lowered cement costs by 60 per cent.

This has fuelled an employment and construction boom, including roads. Other areas of transformation are low-cost production of shoes, with one of the biggest shoe manufacturers in sub-Saharan Africa exporting to markets such as the US. Ethiopia’s infrastructure has also been transformed.

In agriculture Ethiopia leads the region in reforming the coffee value chain. Assisted in financing by the International Finance Corporation, the sector went from earning only 10 per cent of revenue base for the farmer to 70 per cent through domestic drying, preparation, packing, branding and sales.

This undercut foreign companies that historically thrived from buying raw Ethiopian coffee for blending and packaging with Latin American coffees for profitable sales worldwide.

Kenya’s Opportunities

Kenya’s transformative opportunities as of 2017 are exceptional. It is in the cusp of a labour bulge called the demographic dividend, providing the strategic labour force of 15-65-year-olds needed for a transformative strategy.

Second, in unprecedented macroeconomic opportunities for growth via investment, a rich savings mobilisation potential and strategy combines traditional funding of investment with national saving (private and public), booming non-debt creating capital inflows (not borrowing), and potential savings mobilisation innovations in mobile money.

Third, new natural resource discoveries such as oil, coal and titanium provide a new frontier of Kenya’s transformation. That can be mainstreamed into development financing and saving for future generations.

Fourth, resilient industrial and micro and small enterprises (MSEs) often relegated to the sidelines can be consolidated seamlessly in a drive for renewed value chains in industrialisation.

Fifth, a vibrant agriculture provides a baseline for agro-processing via Kenya’s world-renowned cooperatives model. Finally, Kenya enjoys a well-developed and innovative financial sector.

Dr Mbui Wagacha is Senior Economic Adviser, Executive Office of the President.