How mega projects can help fight poverty and spur growth
Dr David Ndii (Left) and Dr Bitange Ndemo. The two have been debating on whether mega-projects such as the proposed Standard Gauge Railway (SGR) and Konza Technology City offer viable models to stimulate economic growth. PHOTO | NATION MEDIA GROUP
What you need to know:
- Dr Ndemo thinks such projects are crucial to Kenya’s economic growth, job creation and in dealing with the pressing problems associated with rapid urbanisation and a bulging youth population.
- Dr Ndii emphatically disagrees and sees such projects as misallocated resources and founded on the wrong models of economic growth.
- One aspect that most analysts seem to ignore is the very high complementarity of returns between infrastructure and human capital— meaning that investing in infrastructure boosts the returns to human capital a great deal.
- By and large, if we want to focus on inclusive growth, we must target policies specifically on the poor— where they live, their activities, assets, markets and enhancing their participation in decision-making.
Over the last few weeks, two scholars and my good friends, Dr David Ndii and Dr Bitange Ndemo, have engaged in what I consider to be a healthy intellectual debate on economic growth.
This debate has largely centred on whether mega-projects such as the proposed Standard Gauge Railway (SGR) and Konza Technology City offer viable models to stimulate economic growth.
Dr Ndemo thinks such projects are crucial to Kenya’s economic growth, job creation and in dealing with the pressing problems associated with rapid urbanisation and a bulging youth population.
Dr Ndii emphatically disagrees and sees such projects as misallocated resources and founded on the wrong models of economic growth.
He instead emphasizes the need to invest in human capital — education and training. In my view both make good points and there is room to harmonise their positions — it is neither one nor the other.
Based on fairly reliable data, we know that investing in human capital associates with high returns. In fact, the returns to human capital are generally underestimated.
My own work with former colleagues then at the Kenya Institute for Public Policy and Research Analysis (KIPPRA) – Germano Mwabu and Daminao Manda — computed returns to human capital for Kenya using new methods and found exceedingly high private returns to university education— 24 per cent for all men, 18.8 per cent for rural males, 36 per cent for urban males, 21.7 per cent for rural women, 67.8 for urban females and 62.5 per cent for all females.
HIGH RETURNS
These are extremely high returns to an investment and there is no question that we should focus more on higher education. Our results are particularly interesting in that they show the absolute necessity of focusing on female education as the returns are very high. Also, we found that educated women have a large salutary impact on the returns to education of all other groups — that is, educating women not only increases their own returns, but also for all other groups.
Therefore, Dr Ndii’s assertion that investing in education is key is well supported by empirical evidence.
There is no question that to achieve the growth we desire, there must be a focus on human capital investment at all levels.
But the evidence does not preclude a focus on investing in large infrastructure projects. In fact, recent empirical studies find returns from infrastructure to be also very high.
Where these projects are located may be another matter, but overall, investing in infrastructure is key and we have ample evidence that poor infrastructure has been a major constraint to growth in Kenya, and, indeed, in Africa.
Although more difficult to compute, there is ample evidence showing the various benefits of infrastructure to an economy: Direct job creation, improved productivity of the private sector, property values, stimulating market exchanges and creating value, reduced costs, improved international competitiveness, etc.
Added all together, the returns to infrastructure can be extremely high.
INTRINSICALLY LINKED
One aspect that most analysts seem to ignore is the very high complementarity of returns between infrastructure and human capital— meaning that investing in infrastructure boosts the returns to human capital a great deal.
In essence, we should be careful when we separate the effects of physical from those of human capital—they are intrinsically linked together. What we need is a deeper empirical analysis of the returns to various infrastructure investments. For example, evidence shows that paved roads may not necessarily yield as high returns as well-maintained non-paved rural roads.
In debating infrastructure and the role of some of the mega projects, we need to go beyond a Kenyan model of growth to a regional model and, in fact, a continental model. We know that the small sizes of markets in Africa are a real hindrance to market exchanges, specialisation, growth, etc.
In this sense, we need to apply more dynamic models where we look at the region and how best to connect the economies and this will not be possible without large investments in infrastructure.
The current model that emphasizes regional integration to boost intra-Africa trade and develop regional value-chains is a good one and necessarily demands good infrastructure and thus justifies large regional projects.
From a historical and international perspective, we also have convincing evidence on the role of infrastructure in stimulating economic growth and development.
I am aware that context matters and we should not necessarily do what other countries have done. However, there are some constants and one, I believe, is the role of large investments in infrastructure on growth.
RAILWAY ECONOMY IMPACT
Taking America, as an example, we find that investments in railways in the 19th Century had a major impact on economic activity—opening up the interior, promoting farm production and markets, spurring industries and the growth of cities.
A large volume of literature has documented how major infrastructure projects—dams, public housing, public parks, and many others helped spur America from the Great Depression. Likewise, the Eisenhower Inter-State Highway of the 1950s and 1960s is credited with major economic progress.
We should, therefore, not dismiss mega-projects outright, especially without well-documented empirical evidence.
Another issue that has arisen from the Ndii/Ndemo debate on economic models pertains to investments such as Konza technology city that concentrate technology activities in the same place.
This issue is an important one — does it make sense to invest in such cities? If so, should we target smaller investments spread around the country?
Nobel Laureate Paul Krugman has expounded on the theory of agglomeration economies, which basically shows that concentrating same and closely related economic activities results in increasing returns to scale.
This arises from cost reductions because of what is referred to as localised external economies. The result of agglomeration is the emergence of industrial clusters in specific localities.
Generally, such industrial clusters arise from market forces as is the case of Silicon Valley or Hollywood in California. This is true for the emerging Nollywood movie industry in Nigeria.
The examples are countless. Mr Krugman cites the case of China, where 60 per cent of the world’s buttons are manufactured in the town of Qiator. Wenzhou produces 95 per cent of the world’s cigarette lighters and Yanbu is the underwear capital of the world. Another well-known example is the concentration of automobile industries in Detroit in the United States.
These industrial clusters, localised in the same places have been shown to greatly increase productivity and competitiveness. There are numerous examples of agglomeration in the textile industries all over the world, including poor countries such as Bangladesh and Cambodia.
Unfortunately, there are few industrial clusters in Africa and this has been one of the reasons for failed economic transformation.
GO SLOW ON CRITICISM
From the perspective of agglomeration economies, there seems to be clear justification to invest in concentrating economic activities such as in the proposed Konza City. We can expect that all different types of producers would locate there— many producing parts and components that feed other producers who make the final products.
Specialised labour will move to the city and overall costs of production would be expected to decrease and innovative activities to increase.
We should, therefore, not rush to be criticise this initiative unless we have hard evidence to counter the theory of agglomeration economies.
However, there is a need to evaluate whether in future this is the right model to the path of agglomeration.
Would more be gained by creating smaller such clusters in rural areas? Which type of clusters would be suited for different locations?
Would establishing such clusters be ideally suited for counties? I believe these are the right questions to ask and they again require rationalised debates.
The two scholars have raised an important issue of whether Kenya should focus investments in the urban or rural areas. In answering this question, we need to focus on one serious problem that we face — poverty and increasingly inequality.
We have to admit that our past approaches have not achieved inclusive growth. When debating the appropriate economic models, the focus must necessarily be more on achieving inclusive growth—and more specifically pro-poor growth.
The evidence we have is that the trickle-down models do not necessarily benefit the poor but tend to concentrate wealth in a few. In this sense, it is good to investigate whether investment in projects such as KonzaTechnology City will spread benefits to the majority of Kenyan youth and the poor.
By and large, if we want to focus on inclusive growth, we must target policies specifically on the poor— where they live, their activities, assets, markets and enhancing their participation in decision-making. For Kenya, this suggests a concentration on rural activities, especially agriculture and labour-intensive industries.
However, there are many poor people in the urban settings too and they must also be part of the focus. As such, the issue is not whether to invest in urban or rural areas but instead targeting the poor — wherever they are and their activities.
Prof Kimenyi is a Senior Fellow at the Brookings Institution, Washington, DC. He has also been the Director of the Africa Growth Initiative.
