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We need more interventions to save manufacturing

Monday October 28 2019

By BITANGE NDEMO
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Last week, my article on this column highlighted grave issues that are contributing to the imminent collapse of manufacturing sector in Kenya.

The sector’s contribution to GDP has dropped from a high of 15 percent to the current 7.4 percent. I decided to find out what is going on and sought the views of experts in the sector.

Although manufacturing contributed a paltry 7.4 to the GDP last financial year, it contributed more than 20 percent of the tax collection in Kenya over the same period. Agriculture, where the country spends much of the resources, contributes only three percent to the tax collected. The failure of manufacturing, therefore, will have a far-reaching implication on tax revenues.

Agriculture and manufacturing complement each other. Indeed, the dominant manufacturing activity is food and beverages, which accounts for between 40 and 70 percent of manufacturing in the country. The sector is under the greatest threat ever, with an increasing number of foreign retailers in the country preferring to import most consumer goods.

A casual survey of two foreign-owned retailers revealed that only three percent local content can be found on their shelves. The implication of increasing preference of imported foods over local produce is that the local supply chains will be severely impacted, as farmers will have nowhere to sell their produce in their own country. They will be discouraged from farming and poverty will increase as a result.

It doesn’t have to be that way. It is simply not sustainable even for those basking in wealth out of the facade of capitalism.

TRADE POLICY

Unfortunately, this is happening in the glaring eyes of policy makers. There isn’t a trade policy on local content. The 2017 National Trade Policy has all the right descriptions like “Transforming Kenya into a Competitive Export-Led and Efficient Domestic Economy” but extremely falls short of its intentions.

If I were to summarise it, it is an assemblage of the country’s challenges and a veritable promise that policies that can grow our Micro Small and Medium Enterprises (MSMEs) into competitive enterprises will one day be developed.

The policy’s chapter three on revitalising domestic retail trade completely misses the opportunity to stamp out misbehaviour by multinational retail companies. For example, the policy correctly identifies constraints and challenges affecting the retail subsector supply chain but the policy interventions recommended include:

  • Promote domestic trade development through establishment of Brand Kenya initiative product development incubators/centres targeting products with revealed domestic and international market potential.
  • Promote development of Brand Kenya retail outlets for enhancing domestic market access for Brand Kenya products initiatives.
  • Facilitate capacity of traders to cope with domestic market outlet demand.
  • Capacity build MSEs on government procurement procedures.

None of these prescriptions would really turnaround the problems MSMEs face. For the past 50 years we have used capacity building as reasons why we perform sub-optimally in trade but no one has ever questioned pedagogical methods used in entrepreneurial training in the country.

MUNDANE CURRICULUM

I am of the view that the narrative is driven by conflicted officials who want to continually pay consultants to teach mundane curriculum in entrepreneurship. Since participants are paid to attend in some cases, the incentive to continue with ineffective programs is higher than otherwise.

The correct policy should have been to mandate the investor to collaborate with local entrepreneurs to progressively increase local content, especially manufactured goods. Such a policy will, for example, stimulate local production and create a multiplier effect in the economy that would benefit farmers and ultimately lead to a sustainable development of the country with a greater number of middle-income earners becoming customers.

At the meeting with experts, it emerged that large vertically integrated companies influence policy at regional level and undermines MSMES in the country. For example, those companies with operations in other East African countries will influence input tax on resources they control elsewhere such that a local MSME manufacturer has a tax burden of up to 25 percent as duty whereas the regional player has no tax burden as they can simply tap from the regional investment.

The trade imbalance has seen many MSMEs fail even as the policy statement promises to transform them.

Some companies have used regulators to silence competition. In the recent past, Kenya has witnessed what regulatory overreach can mean. For MSMEs, the options for survival are very slim.

It is for the government to try to balance regulation and the risk of unemployment. There isn’t black and white in any regulatory regime.

MIDDLE GROUND

A good regulatory regime allows for progressive implementation of the desired outcomes. Shutting down a factory employing hundreds of workers may seem brave but it is also inconsiderate to families that will go without food as a result. There is need to always find a middle ground.

In simple language, MSMEs can’t transform where both large and multinational companies are bent on eliminating them. There is no space for fair competition where very few companies have the monopoly and power to influence policy under the guise of a free market economy.

Additionally, these companies have the resources to demonise local products/produce as primitive, indigenous, poor quality, sub-standard and with many other pejoratives descriptors.

We have fooled ourselves into believing that free market economy is the remedy for all economic development and reduction of poverty needs. We fail to read motives and intentions of large and multinational enterprises.

Other countries have had to variously alter the original thoughts of capitalism to create an ideology that is sustainable but with a human face. Al Gore and David Blood in their manifesto came up with sustainable capitalism that sought to preserve humanity and the planet, while reducing externalities and bearing a resemblance of capitalist economic policy:

“Sir Patrick Cormack, Rupert Goodman came up with the concept of responsible capitalism that requires a fundamental integration of the needs of the wider community, care for the communities in which the business operates …. while applying the principles of moral and social responsibility in the running of their business, combining social commitment with business acumen and innovation, and building a coherent philosophy in which the company’s success is judged over the long-term by criteria that include sustainability, equity, and moral justice as well as standard financial benchmarks.”

It is therefore not anti-capitalism to demand a fair method of distributing wealth sustainably. It is government policy that can dictate this way of thinking.

It is about time Kenya began to wear a human face in its philosophical approach to economic development. Unless rich people are moderated, they will always exploit the poor.

Our manufacturing sector is a den of these characters using power to influence policy at the expense of multitudes of people.

Manufacturing is an Agenda Four priority that will define President Uhuru’s legacy. Lets act on it before it is too late.

The writer is a professor of entrepreneurship at University of Nairobi’s School of Business. @bantigito