Kenya can't imitate China's economic model, as things stand

Friday October 27 2017

By KWAME OWINO
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No country, judging from the history of economic development, has managed the feat that China did in the last 30 years, with as large a territory and population.

In essence, this country overcame centuries of absolute poverty of its people and managed to pull a population estimated at 280-300 million out poverty.

It is certainly not the only country to perform this feat during the last century but it is one that has accomplished it by sheer size of the population.

Besides its domestic land and agriculture reforms, China did remarkably well in attracting investments and inserting its workers and firms into value chains for exports both regionally and globally.

Many people read this performance as one that relied fundamentally on low wages for exports, and that Kenya, or any other African country could exit poverty by manipulating the prices of labour and other commodities to serve global manufacturing markets.

OPEN TO TRADE

My bet is that, Kenya specifically, and other developing countries, will need to be far more nimble than China was in negotiating manufacturing success.

A report by the Centre for Global Development finds that only a few countries in Africa have the advantage in labour costs that would predict their ability to become manufacturing hubs.

Kenya, which has a comparatively diverse, large sector, is not among them, despite the fact that Kenya's long term growth prospects depend on the country's ability to unlock manufacturing efficiencies. The report appears to pour cold water on the wisdom informing Kenya’s industrial strategy.

Policy choices incompatible with being a regional manufacturing hub undermine the structural changes Kenya requires. If you agree with the report's conclusions, you may realise that Kenya’s overall development strategy is incoherent.

To start with, global or regional hubs for manufacturing tend to be countries that are open to trade. It is almost an oxymoron but good export countries tend to also be importers.

This is because manufacturing success today is based on regional and global value chains which require portions of a product to be imported for processing and value addition, before being passed onwards to another firm within the same country or outside.

Restricting imports as a mechanism for domestic industrial development is therefore wrong-headed.

EXISTING FIRMS

With its highly protectionist trade policy, anchored on preserving market share and the dominance of existing firms, Kenya loses opportunities to adjust trade tariffs and introduce measures that attract processing into the country.

In other words, we trade off new investment in industry for the benefit of existing firms.  

So far, Kenya's manufacturing focus is too highly determined by what existing firms need as opposed to the focus on expanding the range of goods that can be processed in part within the country.

Based on the new reality, Kenya’s manufacturing success should not be measured by the number of existing firms and their output alone, but by the depth of value chains in which Kenyan firms are embedded.

HIGH WAGE ECONOMY

Due to global competition, manufacturing firms are very keen on both reasonable wages and quality of workmanship.

Kenyan manufacturing is locked into a comparatively high wage economy because labour productivity has not been growing, implying that manufacturers can get their products made elsewhere at lower cost.

An alternative approach must be to examine what products could be competitively produced within the range of Kenya’s labour cost.  This leads to questions as to why Kenya is a high labour-cost economy because high minimum wage is only part of the answer.

The main reason is that established firms in the food and other retail markets are not subjected to domestic competition.

This absence of competition explains the high basic costs that ratchet upwards the real costs of living in Kenya.

Public investment in energy generation was intended to increase the quantum of energy and thereby reduce costs to manufacturing. This approach is unlikely to unlock manufacturing potential because manufacturing success today is not about the manipulation of a single factor such as labour costs, energy prices or the exchange rate. Every competing nation would copy that if it was an elixir.

Instead, Kenya’s struggle to expand manufacturing shows the difficulty lies in getting into regional and global value chains.

The fashionable minute adjustments to one variable or another will not work. Kenya must become the regional voice for greater openness in trade and investment to build the indispensable regional value chains.

Kwame Owino is the chief executive officer of the Institute of Economic Affairs (IEA-Kenya), a public policy think tank based in Nairobi. Twitter: @IEAKwame