Archives for category: Industrial development

I was slightly depressed after reading the highlights of the 2013 Kenya Economic Survey (pdf). Almost all topics we discuss in this blog, like employment, wages, industrial development and balance of trade, do not look good. Here are some highlights of the highlights:

Industrial development: not really happening

The manufacturing Sector decelerated from an  expansion 3.4 per cent in 2011 to a growth rate of  3.1 per cent in 2012. The slower growth was due to high cost of production, stiff competition from imported goods, high cost of credit and political uncertainty due to the 2013 General  Elections

Employment: 90 percent of new jobs are informal. Wages are falling

  • The labour market recorded 659.4 thousand new jobs in 2012, 89.7 percent of them were in the informal sector representing an increase of 5.5 per cent.
  • Real average wages declined by 4.8 per cent due to inflation.
  • The creation of new jobs in the “modern sector” declined from 74.2 thousands in 2011 to 68.0 thousand in 2012.

 International trade: a growing deficit

  • Kenya’s trade balance worsened further by 8.7 per cent in 2012 compared to 46.7 per cent in 2011
  • The current account deteriorated to a deficit of KSh359.5 billion in 2012 from a deficit of 340.2 billion in 2011.

There are not only bad news in the report, for example there has been increased job creation in the construction sector, ICT industries as well as the education and health activities. And inflation has gone down, which is very good news for the lower income population. But that’s not enough for sustained economic growth over the long term.

Tourism has gone down too by the way. More here

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The African Statistical Journal has an interesting paper by John C. Anyanwu on the driving factors of male employment in African countries. The journal -published by the African Development Bank- is available for free here (pdf). Some interesting facts:

 Fact 1 – There is a substantial variation in male and female employment ratios across African countries. The difference is particularly evident if we compare oil-exporting and North African countries with smaller Sub Saharan African economies. The latter tend to have higher employment ratios for both the male and female population.

 

Source: Anyanwu (2013)

Source: Anyanwu (2013)

Fact 2 – In some African countries, male employment decreased between 1991 and 2010

The author argues that the decline has been particularly intense in some countries such as Niger, Be­nin, Rwanda, Lesotho, Burundi and our beloved Kenya.

Source: Anyanwu (2013)

Source: Anyanwu (2013)

One of these days I’ll have to sit down and try to understand some of these dynamics. For example, Rwanda -the “super star” of the Doing Business Reports – has done so bad in terms of employment, while Zimbabwe – land of the highly criticized indigenisation law – is one of the best performers? I guess there is a number of historical and contextual factors to take into consideration. If you have quick thoughts or further questions please share them in the comment section.

Fact 3 – The data from 1991 and 2009 show an U-shaped correlation between male employment ratio and GDP per capita

 

Source: Anyanwu (2013)

Source: Anyanwu (2013)

 

The paper uses employment data from the ILO and the World Bank –which are probably the most reliable sources currently available – but we should be always highly suspicious when it comes to employment stats in African countries. Informality is too widespread, and employment happens far too often outside the radar of government institutions and statistical agencies. Not long ago, Shanta Devarajan called it the African Statistical Tragedy. Should we therefore discard the arguments in the paper?

Although the stats might not be extremely accurate, I think that the trends could be right, especially if we consider how economic growth is happening in most parts of Africa. As I said in my last post, growth is happening without a structural transformation of the economies towards labour-intensive sectors. In particular, the manufacturing sector, which absorbs large part of the labour force in most emerging economies, is not expanding in most parts of Africa. But more research is definitely needed in this field.

The full paper is here.

Thanks to Cherokee Gothic, I came across this very interesting paper by Herrendorf, Rogerson and Valentinyi (pdf) about the structural transformation of economies in the process of economic growth. The figures are striking:

Source: "Growth and Structural Transformation" (2013), by Herrendorf, Rogerson and Valentinyi

Source: “Growth and Structural Transformation” (2013), by Herrendorf, Rogerson and Valentinyi

These figures focus on a sample of industrialized countries, mostly EU, US and East Asian powers (Japan and Korea). They show that as GDP per capital grows, (1) employment in the agricultural employment tends to decrease, (2) employment in the services sector increases linearly and (3) employment in the manufacturing sector follows an inverted u pattern: it grows initially but then it tends to decrease as GDP per capita grows. The question that we should ask ourselves is whether African economies will follow the same pattern.

My opinion is that ‘yes’ – over the long term African economies will go through such structural transformation. However, the biggest mistake is to say that during the process one sector is more important than the other. If someone concludes that African governments should focus on services and neglect agriculture because that’s how economic growth happens. Well, he or she hasn’t understood much about the topic. As Di Maio recently argued, industrialization and food security are not competing policy objectives.

At the same time, it is clear that growth in the manufacturing sector is one of the key components missing from the puzzle. Kenya is in the initial part of the graph, moving from low-income to middle-income, but that is happening without any significant growth of employment or value-added in the manufacturing sector. This is what John Page calls “structural deficit” in Africa:

Africa faces a significant structural deficit—the result of two and a half decades of deindustrialisation and increasing dependence on natural resources. Today Africa’s manufacturing sector is smaller, less diversified and less sophisticated than it was in the decade following independence. Agro-industry and tradable services are still in their infancy. As industry lost ground, labour moved from higher to lower productivity employment. Without an acceleration of structural change, the region’s recent growth turnaround runs the risk of not sustaining its momentum into a middle-income status.

 

Paul Kinuthia (on the right) – Photo Credit: Business Daily

Paul Kinuthia started a small cosmetics business in the Kariobangi Light Industries (in Nairobi) 20 years ago with a start-up capital of 3000 KSh (less than 40 USD). He sold it to L’Oreal last week for over KSh 3 billion (about USD 35 million). Here’s the story on Forbes and on Business Daily.

Of course extreme success stories like Paul Kinuthia’s do not happen on a daily basis in Kariobangi. But, as I’ve said before, there is large diversity and growth potential in places like Kariobangi, although we like to call them “informal economy” or “survival clusters”. An excerpt from the Forbes article:

Kinuthia has a remarkable story. In 1995, he started off manufacturing shampoos and conditioners from a makeshift apartment in Nairobi with start-up capital of Ksh 3,000 ($40). He made these products manually using plastic drums and a huge mixing stick and heating oils, delivering his products by handcart to local salons and hairdressers. In the beginning, commercial banks refused to fund his venture while mainstream salons, beauty parlours and large retail outlets refused to stock his product because it was too native.

As the demand for his products grew, Kinuthia moved the business into bigger premises in downtown Nairobi and expanded his product range to include hair gels and pomades. While the bigger, sophisticated salons and supermarkets snubbed his products, they were very popular with street side local hairdressers because of their availability and significantly lower prices in comparison to the products on the shelves of the big retail outlets. As the products became more popular with local hairdressers, Kinuthia ploughed back his profits into moving into an even bigger place, financing growth, increasing his production capacity and extending his product range. In 1996, he incorporated a limited liability company and went on to produce body lotions and hair treatments. The new company set up better operational strategies, laying emphasis on quality and improving its packaging. By the late 90s, the company’s products were commercially available across Kenya’s mainstream retail and wholesale chains and were already commanding a sizable market share. By 2001, the company was already exporting its products to neighbouring TanzaniaUganda and Rwanda.

But despite the huge success of his business, Paul Kinuthia maintained one common characteristic of Kariobangi entrepreneurs – he doesn’t like questions from strangers. When Forbes called him for an interview, his secretary kindly relplied “Mr Kinuthia is not available”. I know the feeling very well.

More here

Ethiopia currently has the largest area – one million hectares – of commercially untapped bamboo in East Africa, making it attractive to investment partners from the bamboo industry. However, the Ministry of Agriculture and Rural Development told IPS that they were unwilling to disclose any figures on the bamboo economy, but added that there had been no formal bamboo economy in Ethiopia until 2012.

I tried to get some more stats on the bamboo market and I found this interesting FAO report (pdf)

Export of bamboo products in 2000 (million US$)

  Africa Asia Europe North and Central America Oceania South America Total
Bamboo products 29 1554 739 120 8 5 2455
Market share % 1.2 63.3 30.0 4.9 0.4 0.2 100.0

 Main importers of bamboo products in 2000 (million US$)

USA UK Netherlands Germany France Japan Hong Kong Others  Total
Bamboo imports 899 125 106 169 169 349 163 475 2455
Market share % 36.6 5 4.3 6.9 6.9 14.2 6.6 19.3 100.0

Why is bamboo a good market?

… In comparison to soft wood trees that can take 30 years to reach maturity, bamboo is a fully mature resource after three years, making it commercially and environmentally sustainable. Sub-Saharan Africa has three million hectares of bamboo forest, around four percent of the continent’s total forest cover.

More here

Uhuru and Ruto wrote in the Jubilee Manifesto that they plan to establish a development Bank to “prop up the private players”. Although nobody is talking about it, and although we have no idea if that will happen anytime soon, this could be a huge deal for the future of Kenya. What is a development bank? And is it a good or a bad idea for Kenya?

A traditional definition of a development bank is one which is a national or regional financial institution designed to provide medium-and long-term capital for productive investment, often accompanied by technical assistance, in less-developed areas. Development banks fill a gap left by undeveloped capital markets and the reluctance of commercial banks to offer long-term financing. [full “primer on development banking” here]

We have to keep in mind is that UhuRuto provided no details about how a development bank fits into their grand scheme for economic development in Kenya. For example, we don’t know if the objective is to promote small businesses (like the informal sector or SMEs), whether they want to finance large infrastructural projects, agriculture or large manufacturing industries.  However, the sure thing is that whenever the plan is to increase the government role in the economy, you attract both huge praise and criticism:  that’s the difference between the “industrial policy view” and the “political view”

According to the industrial policy view, development banks do more than just lending to build large infrastructure projects. They also lend to companies that would not undertake projects if it was not for the availability of long-term, subsidized funding of a development bank. Furthermore, development banks may provide firms with capital conditional on operational improvements and performance targets. In such circumstances, we would expect to see the firms who borrow from development banks increasing capital investments and overall profitability after they get a loan.

According to the political view, on the other hand, lending by development banks leads to misallocation of credit for two reasons. First, development banks tend to bailout companies that would otherwise fail (this is the soft-budget constraint hypothesis, e.g. Kornai, 1979). Second, the rent-seeking hypothesis argues that politicians create and maintain state-owned banks not to channel funds to socially efficient uses, but rather to maximize their personal objectives or engage in patronage deals with politically-connected industrialists.

So, whether a development bank is a good idea or not for Kenya entirely depends on your opinion on the current political class: will they be committed-to-development or good-old rent-seekers? For now I want to keep on the optimist side.

World Bank’s Marcelo Giugale has a new article in the Huffington Post arguing that industrial policy has failed miserably in the past and that the “new industrial policy”, though better than the previous version, is unlikely to work either.

If you are over 50 and grew up in a developing country, fond memories of your family’s car or TV set are surely coming to your mind: it carried a national brand, cost a fortune and broke down all the time.

But industrial policy is back in the agenda:

You’d be surprised. Today, developing countries rich in oil, gas or minerals are desperately looking for policies to diversify their economies, not just because the price of natural resources could unexpectedly tank, but because the business of extraction does not create enough jobs. They have money to invest–think Africa. Even in countries that are doing well, governments are searching for ways to make their industries more high-tech and avoid being trapped half-way up the technological ladder–think Brazil. But everyone wants a new–read, smarter–industrial policy, one that avoids the mistakes of the past. They just might be on to something.

So, will this “new industrial policy”, which sounds less exciting and less revolutionary than its previous version, work? Let’s say that it cannot hurt. If done in the open, private-public collaboration is a win-win. But you are entitled to be skeptic, especially if your government has not been able to deliver simpler services–like a teacher in every class, clean water and a decent police force. That is, if you live almost anywhere in the developing world.

More here (recommended)

UNIDO (the UN office for industrial development) just released the International Handbook of Industrial Statistics with very comprehensive data on manufacturing output around the world. Unfortunately the handbook is available only in print and very costly. I wish they prepared an executive summary or a document with the “highlights” of their findings, but I couldn’t find any of that. The press release is quite interesting:

The new publication shows that the world’s industrialized countries experienced particularly low manufacturing value added (MVA) growth, with some dynamism in North America and East Asia was largely negated by the sustained recession in Europe. MVA of industrialized countries grew at an average rate of just 0.3 per cent in 2012.

..the global economic crisis beginning in 2009 has not only forced huge job cuts in the manufacturing sector of industrialized countries but has also pulled labour productivity down. Net manufacturing output in the world’s eight major industrialized economies (G-8) has fallen by a much higher rate than the number of employees, reflecting the fact that many businesses retain a skeleton workforce even during periods when there are no or few orders for their products.

And on the LDCs:

The Yearbook also highlights MVA growth trends in the least developed countries (LDCs), which are facing different constraints related to external trade. In comparison with African LDCs, Asian LDCs have the advantage of closer proximity to fast-growing economies, and this is reflected by an average MVA growth rate over the last decade of 8.7 per cent per annum for Asian LDCs compared to 5.9 per cent for African LDCs.

(A little bit) More here

The “Africa rising” narrative in Kenya is always linked to the ICT sector, in particular mobile technologies, mobile apps, and internet-based applications. I wonder what will happen to this optimism after learning that Mocality, one of the big investors in this field, decided to shut down:

“Mocality has achieved some incredible things over the last four years, and has touched the lives of many people in Africa, but alas, all good things must come to an end.”

Few ICT enthusiasts in Kenya saw this announcement coming. Mocality, the online business directory owned by Naspers, a South Africa-based media company, will close down operations in Kenya and Nigeria on February 28th. In 4 years Mocality managed to register over 100.000 businesses in Kenya. The plan was to expand throughout Africa and create the largest business directory in the continent –none of this will happen.

Is this a hit to ICT-led afro-optimism?

To some extent, I believe it is. Or at least, it has brought some realism back to the discussion on ICT in Africa. In this blog I always argued that the expansion of the ICT sector is a great opportunity, but it has to go hand by hand with expansion in the industrial sector, manufacturing in particular, or it’ll be a hype, or even a bubble, with little effects on job creation and sustained economic growth. But if you look at the media coverage on the topic, hype has been all over the place. Look at Wired UK a year ago:

Want to become an internet billionaire? Move to Africa”:

If you want to become extremely wealthy over the next five years, and you have a basic grasp of technology, here’s a no-brainer: move to Africa.

Wired is not the Journal of Development Economics, and the exaggeration is probably intentional (I hope so anyway), but it signals the hype surrounding the ICT sector in the continent.

Perhaps Mocality made its move in the Kenyan market a little too early. Perhaps the problem is much deeper and the Kenyan market is simply not ripe for this kind of business. Mocality did not explain the reasons behind their decisions to close down, but rumors are that  the operating costs were too high and the returns on the investment were not satisfactory. We can’t forget that the Kenyan economy is still largely informal and being online or not doesn’t make much of a difference for most enterprises.

But Kenya is also a fast-growing and fast-evolving economy, and the optimists among us might argue that Mocality is leaving the market just a little too early. Mocality CEO Neil Schwartzman had a very different opinion, however, stating that:

“reaching profitability was not a reasonable near-term prospect.”

Ouch

Interesting new paper by Bruce Blonigen from the University of Oregon:

Industrial policies (IPs) include such varying practices as production subsidies, export subsidies, and import protection, and are commonly used by countries to promote targeted sectors. However, such policies can have significant impacts on sectors other than those targeted by the IPs, particularly when the target sector produces goods that are key inputs to downstream sectors. Surprisingly, there has been little systematic analysis of how IPs in targeted sectors affect other sectors of the economy. Using a new hand-collected database of steel-sector IP use in major steel-producing countries from 1975 through 2000, this paper examines whether steel-sector IPs have a significant impact on the export competitiveness of the country’s other manufacturing sectors, particularly those that are significant downstream users of steel. I find that a one-standard-deviation increase in IP presence leads to a 3.6% decline in export competitiveness for an average downstream manufacturing sector. But this effect can be as high as 50% decline for sectors that use steel as an input most intensively. These general negative effects of IPs are primarily due to export subsidies and non-tariff barriers, particularly in less-developed countries.

The Kenyan government provides some support to the few steel industries in the country; as far as I know, it is mostly in the form of cheaper (or free) electricity and water. But that of course does little against growing international competition, especially from India and China. So the sector has stagnated: most firms have not expanded in any significant way, some have ceased their operations. (More info on this document, PDF).

The steel sector was (and still is) considered crucial for industrialization in China, so the government has protected it with heavy tariffs and subsidies. If I was the next President of Kenya, I would work day and night to find a market-friendly way to support innovation in this sector. I would definitely not let it collapse.

HT Circle Bastiat