The manufacturing sector in Kenya is dying. Its contribution to GDP has decelerated from a high of 13.5 percent in the early 90s to 7.74 percent in 2018.
Several manufacturers have either closed down or shifted their focus to offshore production. Their main reason is the unprecedented influx of unchecked cheap imports, reduction in custom duties for imported goods under the EAC Common External Tariff, importation of counterfeits, arbitrary taxation and high wages in Kenya.
Some of the largest manufacturers, including multinationals, have moved out of the country, only retaining their marketing and distribution departments to distribute their products manufactured in neighbouring countries.
Dairy farmers and milk processors too are on the death row over cheap milk imports at the time supply is at an all-time high.
Bakeries too are taking flight to neighbouring countries. The consequences of losing the manufacturing sector are serious. Kenya will more than likely lose the opportunity to take advantage of the rising consumer expenditure in African which the Brooking Institute estimates will have grown from $1.4 trillion in 2015 to $2.1 trillion in 2025 and $2.5 trillion in 2030.
The World Development Report 2020, Trading for Development in the Age of Global Value Chains, show that incomes grow most when countries break into simple manufacturing (see Figure 1 below).
Most of Asia’s Newly Industrialised (NICs) countries moved millions of people out of poverty on the backdrop of simple manufacturing. They have gone through learning curves so much that today they are breaking into advanced manufacturing.
The World Bank Chief Economist and Vice President, Pinelopi “Penny” Koujianou Goldberg said in Nairobi recently that “there is no proven case of any country leapfrogging directly to advanced manufacturing without having gone through simple manufacturing.”
Yet there are people thinking that one day we shall wake up and manufacture a fighter jet without having gone through the manufacture of simple fighter jet parts.
With the Big Four Agenda, which seeks to raise the GDP contribution of the sector to 15 percent by 2022, we could have done much more than simply celebrating the announcement. We should have leveraged the gains made after prioritising manufacturing in the Vision 2030 in 2007.
Indeed a 2015 analysis by the World Bank, Global Experiences with Special Economic Zones: With a Focus on China and Africa, noted that except for Mauritius that excelled with Special Economic Zones (SEZ) Kenya, Lesotho, and Madagascar, had a modest transformative impact when compared to other sub-Saharan countries.
We should have done better with China losing basic manufacturing. Instead we are watching India gobble all the jobs in low-end manufacturing.
The analysis revealed that African SEZs perform dismally when compared with those outside of the continent; they account for a smaller share of employment in virtually every SSA countries except for Lesotho; structural transformation as measured by diversification into manufacturing, took place fairly rapidly in SEZ-intensive countries outside Africa, is limited in Africa than in other places and have provided weaker enabling conditions than those in the rest of the world.
Although Ethiopia and Kenya have underperformed after transitioning to basic manufacturing, Ethiopia is rapidly improving (see Figure 2 below).
While Kenya has some incentives to attract investment into manufacturing, the country needs to make serious sacrifices in order to build a sustainable manufacturing sector. We must let go used imports and provide incentives for local content production especially in textile and motor vehicle assembly.
It doesn’t make sense importing between 8,000 and 10,000 vehicles a month against purchase of only 500 new ones in the same period. We must deliberately seek to produce affordable products to boost manufacturing in the country.
One of the policies that the defunct National Economic and Social Council advocated was the productivity improvement centers. They wanted deliberate measures be taken to improve the quality of Kenyan products. The initiative was never followed through. We need to revive it and begin to deliberately assist Small and Medium Enterprises to incorporate quality practices in the manufacturing sector.
Indeed, when international buyers insisted that their Kenyan contract farmers adopt quality standards to support better traceability of their product along the entire supply chain, incomes increased and Kenya has become competitive against other nations.
Such interventions deal with issue as high wages in Kenya and create a competitive environment.
Firms that are linked into the global value chains are capital intensive but they also see faster growth and contribute to rise in employment. As such, the government must make deliberate measures to revive institutions such as Kenya Industrial Estates and link them to research centers to specifically support SMEs to acquire the necessary resources to compete.
We can list many interventions that the government should be making but without passion to see the industry grow, it is useless to list any more interventions. The potential to create and scale manufacturing enterprises is there.
The market potential in Africa is huge. Let’s build quality products, provide attractive tax incentives, block imports of counterfeits and elevate our entrepreneurial spirit to exploit Africa’s market potential. That is the only way to save our ailing manufacturing sector.
The writer is a professor of entrepreneurship at University of Nairobi’s School of Business.