BY WAWERU PETERSON
With every new government administration comes expectations for transformative change that not only improves the current state of affairs but one that inspires hope and confidence of better days to the public.
Fundamentally, I believe a nation’s development and transformation rests largely on the shoulders of its industrial sector. Correspondingly, the United Nations Industrial Development Organization emphasizes that the industrial sectors of various developed and emerging economies serve as a source of more stable employment opportunities for the people of those countries when compared to the agriculture sector, and overall have great contribution to the improvement of these nations’ living standards.
This is something that previous government administrations in Kenya knew all too well but couldn’t quite capture the potential of industrialization in the country. The post-independence government was keen to promote industrialization through formulation of suitable trade policy to tap into the dormant production capability of a nation that was at per with Singapore at the time. It is documented that the country undertook import substitution polices in efforts to industrialize its economy and manage its reliance on imports resulting to trade imbalance.
A 1982 University of Nairobi research study examining the effects of import-substitution in Kenya’s manufacturing sector in the period (1964 – 1976) characterized the strategy to include: Government protection of ‘infant’ industries through bans and increase in tariffs on competitive imported goods, a withdrawal from open foreign trade to reduce vulnerability to externally induced fluctuations and a focus on the already established markets for products from the new industry.
While in the initial stages many countries, including Kenya, saw impressive growth of the industrial sector, the observers increasingly doubted the merits of this policy as it became increasingly clear that it wasn’t capable of delivering ‘the structural transformation’ of the Kenyan economy.
One part the policy fell short was in its failure to effectively alleviate the balance of payments difficulties, as the study concludes, “Import substitution industrialization did not lessen Kenya’s external dependence but merely changed its nature.”
Fast forward to 2022: Kenya has long done away with import substitution policy and it now practices some higher level of trade liberalism. Its GPD has grown in leaps since the 1980s to reach $114 billion, the seventh largest economy in Africa) according to data from the IMF. However, the country still struggles with trade imbalance as indicated by its balance of payments.
Kenya’s Treasury reported that the balance of payments stood at a deficit of Sh120 billion as of first quarter of 2022, a 376.9% increase from a deficit of Sh25.3 billion in first quarter of 2021. The deterioration in the balance of payments (BOP) is one of the key challenges that the new administration will face and one that I would like to offer my perspective on a solution that works best for Kenya.
WHAT WORKS BEST
The obvious reason for the trade imbalance today is that the country is importing more than it’s exporting.
The BOP is an essential economic indicator that provides a summary of how resources flow between a country and its trading partners. Over the last 10 years, imports have generally been more than the exports and they continue to grow at a faster pace, creating a large trade deficit.
The government has tried to boost trade in agricultural products such as tea, coffee and horticulture but there seems to be less change in the overall trajectory of the negative BOP. This is because Kenya’s top imports including, mineral fuels $3.5 billion (17.9% of total imports), machinery $1.6 billion (8.1%) and vehicles $1.4 billion (7%) are more expensive than its top agricultural exports such as coffee, tea and spices US$1.5 billion (21.8% of total exports).
With this knowledge it is only logical to take crucial steps in value addition to Kenya’s exports if there is to be any progress in cutting down the deficit and hopefully reach a positive BOP. My perspective is that a mixed approach strategy where limited protection of strategic sectors and export-oriented manufacturing is the only way to sustainably tackle the issue.
A quick look at the country’s imports shows that manufactured value-added items such as machinery and vehicles are some of the most valuable products on the market. So how does Kenya tap into the value chain, if not in the full production of these items? How does the country emerge as a competitive manufacturer of valuable components linked to the production of these items? Also, what are the challenges that would hamper this strategy?
According to the World Bank collection of development indicators, since 2011 the percentage of value-added manufacturing in the overall GDP of Kenya has been decreasing steadily from 12% to 7% in 2021.
Simultaneously, trade (the sum of exports and imports of goods and services measured) in contribution to the total GDP in Kenya was reported at 30.67 % in 2021, following a steady decline from the 2011 record of 58% of trade contribution to GDP that has been shrinking year on year.
This shows that there might be some correlation between the performance of value-added manufacturing and the contribution of trade to GDP as a rapid decrease in the share of value-added manufacturing to the GDP follows a rapid decrease in the share of trade to GDP, with overall indication of the significant contribution manufacturing makes in Kenya’s trade.
Drawing conclusions from the dynamics of manufacturing and trade in the above analysis, the discussion will take an interest in industrialization of Kenya’s manufacturing sector to understand how manufacturing – guided by the right trade policy framework can be used as a vehicle to achieve transformative growth of the economy.
Kenya – Manufacturing, Value Added (% of GDP)
Kenya – Trade (% of GDP)
While import substitution focused on blanket protection measures to the country’s industries, limited protection of strategic sectors would be keen to improve production in specific industries such as iron and steel manufacturing where imports in Kenya were valued at $1.3 billion (6.6% of total imports) in 2021.
The industry is strategic in that its value addition incorporates a lot of other important sectors from mining, metal processing, chemicals, automated production, metal fabrication and machining. The importance of capable steel processing in a country can be viewed by examining South Africa’s steel industry whose direct economic impact on the supply chain creates $2.5 of value-added activity in the downstream for each $1 of value added within the steel industry. The value addition brings the industry’s contribution to 1.5% of the country’s GDP and accounts for some 190,000 jobs as of 2020.
The South African steel industry value chain multiplies the value of its iron ore by a factor of four, and is pivotal to South Africa’s energy and water-supply infrastructures. This why the county has set measures to protect this industry from product dumping through tariffs, bilateral trade agreements and border controls.
According to the World Steel Association, South African steel manufacturers produced 5.7 million metric tons of crude steel in 2019 and in 2021 the total exports were valued at $6.3 billion including those exported to Kenya- an emerging export market of South African steel.
It’s commendable that the current administration has already started to strategize on value addition manufacturing to supplement steel imports in the market, with a milestone opening of the Devki Steel Mills in Kwale.
The mill is a Sh50 billion state-of-the-art raw steel production factory with production capacity of up to 500,000 tonnes a year and one of the largest in East & Central Africa. While the government is also revising strategies to protect the industry from product dumping with hopes that it will revive the iron and steel industry, infrastructure and manufacturing, I am compelled to add that the manufacturing strategy shouldn’t stop at that.
QUALITY MANUFACTURING
The next phase of this plan should be to induce quality to the industry so as to make competitive products that can be sold in international markets. This forms second half of the mixed approach where export-oriented manufacturing drives industrial production policies.
To solve the BOP issue, the country needs valuable exports in trade.
Unlike South Africa that has 18% manufacturing contribution to GDP, Kenya’s manufacturing contribution totals to 7% and is shrinking.
My observation is that the country has not done enough to encourage efficient and competitive value-added manufacturing of valuable products like machinery and vehicles. In fact, Kenya has done abysmally to encourage any manufacturing at all.
A 2015 Strathmore University report on the ‘State of Manufacturing in Kenya’ looking at close to 100 companies in 12 sectors of the production and manufacturing industry attributed some major challenges hindering the effective growth of manufacturing to include lack of an efficient and effective labor force, high cost of power and poor business environment. If only we were to take a closer look on any of these challenges, we could begin to comprehend why manufacturing in Kenya is trailing behind other industrial countries.
For instance, the challenge of limited skilled and semi-skilled labour is one that needs to be better understood. Does it mean that our engineers, technicians and artisans in training or on the job market are not up to the task? Not certainly.
The term limited is used to mean a gap in key specialized fields in the industry of manufacturing namely; machine tools, designing and toolmaking. It has been well said that the foundation of the industrial structure of today rests on machine tools and any person who has given thought to industrial betterment will agree. It is with machine tools all other machinery tools, dies and moulds are produced; standard tools such as metal mills, lathes, drills etc. contribute a great deal in modern mass manufacturing.
Tool and die makers are highly skilled craftsmen who make the tools used on machine tools to do the actual machining of metals, the jigs, fixtures, and other accessories which hold the work piece while it is being machined. They also make dies used in forging and stamping along with metal moulds used in die casting and plastic moulding.
The precision which the work demands requires a high degree of skill which is obtained by long training and years of experience. Required experience can be gathered through on job training and apprenticeship programs.
To extrapolate the essential question for this discussion would be to assess whether this critical field of industrial manufacturing has any roots in Kenya. The overwhelming evidence suggests that there is no tool and die making sector established by the government or private education institutions in Kenya. Moreover, majority of the dies, moulds, machine tools and design are imported. The lack of capacity in this field can even be illustrated by its lack of general data in Kenya.
In comparison, South Africa’s established manufacturing sector has a national educational programme and occupational framework[2]which supports and gives incentives to both the apprentice and tool and die making companies.
Developed and emerging industrial economies all over the world have created associations in which they align the tool and die making sector stakeholders’ interests in providing international markets and training for its members.
Unfortunately for Kenya, even with its aspirations to accelerate manufacturing to add up to 20% of its GDP by 2030, the country has not established such arrangements that boost skilled labour in a sector as vital to the whole manufacturing industry.
HIGH COST OF ENERGY
Not far behind is the challenge of high cost of energy in manufacturing, a challenge I personally made some extensive research on how it diminishes Kenya’s global economic competitiveness.
In the study, it’s established that the cost of energy in manufacturing accounts for 30-40% of input cost. The cost of energy is particularly significant if you take into account that for any substantial increase in cost of energy it ultimately means an increase in the cost of value addition manufacturing.
Currently the cost of power in Kenya is $0.17/kWh compared to other peer countries in the region such as Egypt, Ethiopia and South Africa at $0.061/kWh, $0.02 /kWh and $0.075/kWh respectively, making it the one of the highest power costs in Africa.
Subsequently due to expenses in energy, Kenya has slowly lost multinational investment opportunities and industries to its competitors; such as the 2014 relocation of Cadbury plants from Nairobi to South Africa. Eveready also chose to import dry cells from Egypt rather than make them in Kenya.
Along with these is a host of other manufacturers that have closed down part of production or fully vacated from the country, such as Procter & Gamble, Reckitt Benckiser, Johnson & Johnson, Bridgestone, Unilever and Colgate Palmolive – with most of them either leaving for Egypt or South Africa.
CONCLUSION
To recap this discussion, my view of Kenya’s hope for economic transformation is one informed by the development of industrial manufacturing that plays a greater role in the country’s economy and international trade.
While the country is seeing a rapid decrease in the share contribution of both value-added manufacturing and trade in GDP, my view is that this situation can only be resolved by a mixed approach strategy, where limited protection of strategic sectors coupled with export-oriented manufacturing work hand in hand to resolve the ever-pressing BOP issue hampering economic growth.
The current government administration has made some steps identifying key strategic sectors for protection like iron and steel processing but there has been little done to foster robust export-oriented manufacturing.
Export oriented manufacturing will not only ease the country’s reliance on imports but also serve as the answer to bringing the manufacturing industry up to speed in the value chain of products such as machinery and vehicles.
However, to achieve this there are some key challenges that hamper manufacturing such as limited skilled labor force and high cost of power that needs to be tackled to ensure efficiency and competitiveness in the industry.
Ultimately, given the current situation, it feels like it could take some miracle to turn around years of trade deficits and imbalance.
However, in examining the development of Asian Tigers and the South Korean miracle that used a mixer of different trade policies, I am convinced that with a mixed approach to trade policy and a proper industrial manufacturing plan, the current government can find a unique solution to capture the potential of industrialization and trade where prior regimes fell short.
Waweru Peterson is a fellow at the Tokyo Foundation for Policy Research and Masters graduate from the Department of Diplomacy, the University of Nairobi
