Beyond the Kenya, S. Korea rhetoric

It is that time we will be hearing from presidential candidates — sounding like a broken record — about how Kenya was at par with Singapore, Malaysia and South Korea.

This is always followed with the promise that upon voting them in, they will take us back to that path of industrial prosperity.

This story always starts with the reminder that in 1963 Kenya gave out a $10,000 loan and relief food to South Korea but today the Asian country now sits at the table of G20 major economies whilst Kenya struggles as a lower-middle-income economy.

There is no doubt that South Korea is a success story to draw inspiration from. It was able to move from being among the poorest countries in the world to joining the ranks of industrial economies within a single generation and become a member of the lower-middle-income(OECD) in 1996.

Poverty fell over the subsequent three decades while income increased six-fold despite a population explosion from 26 million in 1961 to 42 million in 1987. Per capita rose from $80 in 1961 to exceed $5,000 in 1987. Education dramatically improved from 38 percent of primary school transition to middle school in 1961 to 100 percent in 1987.

During the same period the number of high school students who transitioned to university rose from six percent to 29 percent. Average life expectancy increased from 52 years to 70 in 1987. On the other hand, Kenya was retrogressing in all these indices.

But the lesson we wish the candidates to borrow from South Korea is its structural transformation.

First, is avoiding the middle-income trap, which basically means that an economy attains a middle-income status but fails to transition to a high-income economy due to failure to compete internationally in standardised, labour-intensive goods because of relatively high wages, and at the same time can’t compete in higher value-added activities because productivity is too low.

This middle-income trap is a situation many developing economies are stuck in, including Kenya, South Africa and Nigeria.

One of the reasons for this failure is the structure of the economy divided between a modern sector and a traditional sector. The traditional sector is largely agrarian dominated by low productivity but employs the largest working population whilst the modern sector is a functioning commercial economy controlled by a few owners of capital.

South Korea was able to transition its rural population between 1960 and 1990 from 64 percent to 18 percent while urban workers increased from nine percent to 31 percent.

Professionals and administrators in various fields and numerous small business proprietors accounted for 44 percent of the total working age population by 1990. This was achieved by a robust industrial policy known as the Heavy and Chemical Industry drive.

Second was the competition policy. When the industry policy was launched, well-connected family business took up much of the business opportunities through favourable policy-oriented loans.

These family-based business groups were known as Chaebol, and at one point pushed South Korea’s economy to the verge of a debt crisis because of heavy borrowing to invest but less output.

The South Korean government adopted macroeconomic stabilisation measures and began to liberalise the economy to rid it of the Chaebol dominance by abolishing price controls and opening more trade and investments to enhance competition.

This is one of the measures the next President of Kenya will have to undertake. Much of the celebrated legacy of the Kibaki government had to do with the fact that he liberalised the economy and Kenya enjoyed sustainable growth.

Unfortunately, the Uhuru administration chose to reverse those efforts and had economic power concentrated in the hands of a few business owners who are holding back Kenya’s private-sector capacity.