Why economic growth is not the answer to our problems

The economy grew by 4.7 per cent last year. This is the third year in a row of sub-five per cent growth. To be sure, it is inching up very slowly—by 0.1 per cent per year. At this rate, ceteris paribus, we are on course for five per cent growth in 2017, and the Vision 2030 target of 10 per cent by 2057.

I don’t subscribe to the 10 per cent growth target, not least because I don’t believe that economic growth should be the centre-piece of a national vision. A national vision, in my view, should be about ends, not means and economic growth is a means, not an end in itself.

I also happen to believe we have an enduring national vision that no power point, however sleek, can improve on. It goes like this: Justice be our shield and defender, May we dwell in Unity, Peace and Liberty, Plenty be found within our borders. It is not, I think, happenstance that plenty comes last in the order of our national values—that is where it belongs. But I digress.

Every country, like every individual, should strive to achieve its full potential. What is our economic growth potential? Think about the economy as your business. Let us say the business of producing salt. Economic growth is nothing more than the increase in production from year to year. Let us say the business produced 105 bags last year, up from 100 bags in 2012. That is five per cent growth. The question is how the five extra bags of salt were produced.

BROKEN DOWN

It could have been that you got a big order and got some workers to work overtime. It could also have been a result of employing more workers because you noticed some machine time was idle. It could be you bought a new machine because you realised you could produce more with the same workforce.

Or it could be because you added both machine and workers. It could be that you implemented kaizen, six sigma or other management tool that raised production with the same equipment and workers.

Economics categorizes all these possibilities into three sources of growth, namely labour force, investment, and productivity. Productivity growth can be further broken down into three namely labour productivity, capital productivity and total factor productivity (TFP). The kind of productivity from process improvement such as kaizen belongs to the TFP category. It is usually difficult to distinguish between labour and capital productivity so we tend to lump all productivity into TFP. Back to our economic growth rate.

A few weeks ago, the Cabinet Secretary for industry was asked how many jobs the government had created and he said he didn’t know. Refreshingly earnest, but bad PR. The politically savvy answer was that the data was not ready and would be available soon. But I digress again.

When launching the Economic Survey, Planning and Devolution Cabinet Secretary told us that the economy created 743,000 jobs in 2013. Actually, her counterpart in Industry was right. The number in the Economic Survey is the number of jobs created outside small holder agriculture. We do not keep track on employment in smallholder agriculture from year to year — we are only able to know the employment in smallholder agriculture when we conduct a Labour Force Survey every five years or so.

In economies like ours where over 80 per cent of the labour force is engaged in smallholder agriculture and informal enterprises, conventional measures of employment and unemployment are problematic. (READ: Kenya faces an uphill task in bid for 7pc growth)

PROBLEM HERE

We have no way of knowing how many of the 743,000 jobs “created” are people who shifted from smallholder agriculture for example because they got some money to start an enterprise from one of the many government slush funds, or got work from the many local contractors and suppliers to County Governments.

An increase of 740,000 workers represents a 5.8 per cent growth over 2012. The average for the last five years — 2009 to 2013 — is six per cent. The economy on the other hand is estimated to have grown by 4.4 per cent on average. There is a problem here.

The economic growth rate is lower than the employment growth rate. If every additional worker is as productive as the ones who are already working, output should grow at least as fast as employment.

If employment is growing faster than output over an extended period of time, it means the labour productivity is falling.

The data suggests as much. Output per worker in 2013 was 4.3 percent lower than five years ago and a disturbing 17 per cent less than a decade ago. Given that our new entrants in the labour force are young people without skills, it can be expected that they will have lower productivity than the experienced ones already in the labour force. But this should be partly offset by their being better educated, meaning that the stock of human capital in the economy is rising. Research shows that human capital is the most significant driver of productivity growth.

So our data is telling us that labour force growth alone should be giving us more growth than what we are registering. They are suggesting that all the investment and productivity growth that we observe, from information technology for example, is more than offset by declining labour productivity. This is a grave conclusion. Before we draw it, we need to be sure the data is not playing tricks on us.

There are two potential sources of bias in the data. One is the observation we made earlier relating to agricultural employment to the effect that some of the new jobs are simply people who have “changed jobs” from smallholder agriculture. A quick way of checking that out is to take agriculture out of the equation. Doing that reduces the decline in output per worker in the last five years from 4.3 per cent to 3.2 per cent. So that is part of the problem but not too significant. It does however square with the poor performance of agriculture last year, as there was no drought which is the usual cause.

The second potential source is that our GDP is underestimated. You may have heard the big news that Nigeria has become the biggest economy in Africa by rebasing its GDP. GDP estimating should be rebased every five years. Nigeria had not done it for 20, meaning that all new sectors like mobile telephony and the phenomenal Nollywood were not properly captured.

Our GDP is due for revising and rebasing as our 2001 is also a bit out of date—but nowhere near as bad as Nigeria. The GDP will be rebased to 2009. The results will be out in September, but the Kenya National Bureau of Statistics has published some of the preliminary findings from the exercise in this year’s Economic Survey (how I wish the rest of Government was as professional as the KNBS). (READ: Review of GDP good for Kenya’s economy)

The data suggests that the current GDP is understated by about 20 per cent. The way to check whether this is the problem is to bump up output per worker in 2013 by 20 per cent and compare that with a decade ago in 2003. The 2003 output per worker is Sh140,600 in 2003 and the adjusted 2013 figure is Sh149,600, both in 2001 prices. This translates to a 0.6 percent per year increase in output per worker.

If output per worker is rising, GDP growth should be higher than employment growth. Employment has grown by six per cent per year over the last decade. Moreover, investment has grown by eight per cent per year, faster than employment growth which implies that capital per worker is also rising—by 1.8 per cent per year on average. We cannot tell however what this translates to in terms of the growth of the capital stock since some of the investment goes into replacing old capital stock. However, since new equipment is usually better than what it is replacing, an increase in investment rate should increase the productivity of capital.

In effect, six per cent growth of the workforce plus the contribution of investment should be giving us a growth rate of at least seven per cent per year. But the average measured GDP growth over the same period is only 4.6 per cent. Could our base year bias be understating growth by that much? A quick way to check is to bump up the 2013 GDP by 20 per cent and calculate the growth rate from 2001, the base year of the current GDP series. It turns out that the implied growth rate is, wait for it, eight per cent per year.

What difference does it make? In practical terms, not much. It is no consolation for the hungry and the jobless. It does however tell us that economic growth is not the panacea for our socio-economic challenges.

Hopefully it will temper some of the obsession our policy makers have with double digit growth, so that we can focus on the more important things — the ones that come before “plenty” in our national anthem.

David Ndii is managing director of Africa Economics. [email protected]