The role of real peculiarities of African economies in the design and implementation of short term economic policies and long term development initiatives - A case study of Kenya

1.0. Introduction

After independence, Kenya promoted rapid economic growth through public investment,

encouragement of smallholder agricultural production, and incentives for private (often foreign)

industrial investment. Gross domestic product (GDP) grew at an annual average of 6.6% from

1963 to 1973. Agricultural production grew by 4.7% annually during the same period, stimulated

by redistributing estates, diffusing new crop strains, and opening new areas to cultivation.

Starting in the 1970s, several factors started to negatively affect Kenya’ growth potential.

Among them a series of trade shocks, poor macroeconomic responses, and a change in the

structure of the economy in which the government started to become an increasingly dominating

force.

From 1991 to 1993, Kenya had its worst economic performance since independence.

Government expanded largely and expenditures increased by 60% in 1972-94. The fiscal

imbalances that accompanied the expansion put pressure on domestic credit and inflation.

Domestic credit provided by the banking sector expanded from 12% of GDP in 1966 to a peak of

56% in 1992. Money and quasi money swelled from a low 27% of GDP in 1988 to a high 45%

in 1997, an election year. And, from a low average of 5% in the 1960s, inflation fluctuated

between 10 and 20% annually from the mid-1970s to the mid-1980s, and accelerated further in

the 1990s reaching a peak of 46% in 1993. As a result of these combined problems, bilateral and

multilateral donors suspended program aid to Kenya in 1991.

In view of the forgoing discussion and just like many other Sub-Saharan African (SSA)

countries, it is clear that Kenya has had a number of peculiarities that have been a hindrance in

the design and implementation of short term economic policies and long term development

initiatives.

In the analysis of Collier and Gunning (1999) the reasons behind slow African growth is grouped

as policy and exogenous destiny on one hand and domestic and external factors on the other.

Kenya is neither exceptional in this categorization and a similar criteria is used in identifying

these peculiarities and assessing the role they have had in Kenya’s development path since

independence time.

2.0. Peculiarities and their impact in Kenya

2.1. Erratic weather patterns and agricultural backwardness

Agriculture in Kenya continues to dominate Kenya's economy, although only 15-17 percent of

Kenya’s total land area has sufficient fertility and rainfall to be farmed and only 7-8 percent can

be classified as first-class land. This sector experience numerous challenges which includes

changing and unpredictable raining seasons, limited access to extension services in most parts of

the country, limited use of modern science and technology in agricultural production, losses

caused by pests and diseases, costly and lack information on the right type of farm inputs,

depletion of soil nutrients, declining yields and environmental degradation due population

pressure and high transportation costs for agricultural inputs and products due to poor rural roads

and other key physical infrastructure.

On international export market position, the exports are limited to primary produce notably

horticultural produce tea and coffee which not been able to reverse negative trend of the Kenya’s

terms of trade.

However, a lot can be done to make Kenya’s exports more appealing and yield good returns if

turn-around competitive mechanisms are put in place. Such measures may include:

Effective logistical operations at the port and low cost internal transport facilities

Duty free access to imported inputs and capital goods

Timely customs administration

Physical security and reliability in warehousing

Reliable power supply

Reasonable shipping costs to major parts in Europe, U.S and Japan.

Hence unless more holistic and integrated measures is employed in the agriculture economic

backwardness will continue to be witnessed as majority of Kenyans depend on agriculture for

their livelihood.

2.2. Unfavorable demographic trends

Like the demographics of Africa in general, Kenya is plagued by high infant mortality, low life

expectancy, malnourishment (32% of population) and HIV/AIDS. While these concerns remain

grave, a trend towards improvement is reported in the period of 2006 to 2010: Infant mortality

was at estimated at 59.26 deaths/1,000 live births as of 2006, decreasing to 54.7 deaths/1,000 live

births as of 2010. Life expectancy was estimated at 48.9 years as of 2006, and has risen to 57.9

years as of 2010. Total fertility rate has decreased slightly, from 4.91 children born per woman

(2006 estimate), to a value of 4.38 (2010 estimate).

Perhaps the biggest demographic challenge in Kenya is the HIV/Aids whose effects are more

devastating than Malaria. It is likely that the HIV scourge will continue to slow down economic

prospects of Kenya and Africa at large. The pandemic is fast depriving the country her work

force at an arming rate of 700 lives a day and approximately 1.5Million people in Kenya has

succumbed to the scourge. The most vulnerable groups are women aged 20-24 and men in the

30-39 age bracket.

More specifically the effects of HIV/Aids are felt in the economy in the following ways:

AIDS deaths are more prevalent among the experienced youth and it is wiping out the

working population at its most productive years. As result more experienced workers are

replaced by inexperienced young workers which leads production decline.

High social costs by way of providing health care to the infected as well as affected

means less government revenue available for investment as well as reduced savings. This

adversely affects capital accumulation, employment creation and other development

activities.

Decline in worker productivity and investment is likely to reduce more job creations in

the formal sector. Consequently, workers may start being subjected to lower wages in

order to compensate for their reduced output.

This is an attestation that even though the effect of HIV/Aids is gradual, the long term

consequences do not augur well with economic development.

Even though Kenya is one of the first African countries to have experienced a demographic

transition, there is little prospect of the socioeconomic changes that would lead to lower fertility

occurring, and that without a reduction in the rate of population growth, progress in

socioeconomic development is unlikely.

2.3. Market integration, efficiency, Kenya and ethnicity

In Kenya, the importance of ethnicity for rural-urban migration and labor markets goes back as

far as the seventies with Huntington (1977) showing how ethnic linkages improve migrants'

chances of finding work in urban areas. More recently, since the opening up of political space in

the early nineties, Kenya has had periodical surges in, mostly election-related, riots and violence.

Oucho (2002) documents this for the period 1991-1995, and since then a host of Kenya political

scientists have written about the ethnic fissures running through Kenyan society, culminating of

course in the widespread post-election violence of January and February 2008. These, often

politically orchestrated, bouts of inter-ethnic violence, reinforce the aforementioned issues of

trust and increase transaction costs of arbitraging/trading along non-ethnic lines.

The 2008 post-election crisis probably increased the extent to which markets were segmented as

there is ample anecdotal evidence showing how transportation of goods was severely disrupted

between spatially separated locations, making it impossible to move goods across certain areas

affected by the violence. I argue that one of the consequences of this type of transport problems

would be shortages of certain goods in certain locations, segregation of markets and thus a

lessening of the intensity of price signals over geographical spaces. I.e. price shocks would be

less strongly transmitted.

As has been noted by several observers/researchers, voting in Kenyan elections cannot entirely

be predicted by looking at ethnicity alone. As for example Bratton and Kimenyi (2008) state:

“while ethnic origins drive voting patterns, elections in Kenya amount to more than a mere

ethnic census".

2.4. Initial Conditions, Colonialism and Kenya’s Growth

Masanjala and Papageorgiou (2005) in their quest to assess the initial conditions and colonialism

on post-colonial economic growth in Africa, they found that factors governing growth in Africa

are significantly differently from the rest of world. To that end, they hypothesized that those

differential impacts were largely because of the interplay between Africa’s geography and

colonialism. This gives a clear picture geographical and ecological variables are more important

in explaining Africa’s and thus Kenya’s post-independence economic growth.

Gallup, Sachs and Mellinger, (1998) indicates that the geography hypothesis postulate that

geographical and ecological variables shape economic development directly, by influencing

productivity, and indirectly, by influencing the choice of political and economic institutions. But

where climatic conditions did not favor European settlement, Acemoglu, Johnson and Robinson

(2001) asserts that the post-colonial growth impact was directly through institutions. The

colonial masters used the elite extract minerals and valuable commodities for the benefit of home

nations. Since these extractive colonies had already created institutions for effectively extracting

resources, the legacy of these institutions has endured after independence and is reflected in the

share of agriculture in GDP.

The effect of economic growth through colonialism in Kenya was somewhat different in terms of

timing and duration of colonialism. Whereas other regions experienced colonial rule for almost

300 years, the stint in Kenya lasted for about 70 years. The colonial masters arrived in Kenya

late extracted as much as they could and left early. Therefore, at independence Kenya’s general

level of development was significantly lower than the level of development in other countries

outside Sub-Saharan Africa.

Thus Kenya’s colonial experience and coupled with geographical conditions had severe

implications on economic performance even after independence.

2.5. Political climate and uncertainty associated with the run-ups to general elections and transition

Political upheavals that characterize general elections deeply affect Kenya’s credibility in the

international community, as reflected in the fall of international aid back to pre-1980 levels.

Further Kenya Economic Update (2011) has reviewed Kenya’s economic performance during

elections over the last 30 years and has revealed, in election years, the average growth rate was

only 2.4%, and growth was even below 2% in four of the election years.

Equally challenging has been the management of post-election dynamics. Kenya achieved a

modest 2.7% in post-election years, and three of the last six elections were followed by low-

growth, especially in 2008, when post-election violence disrupted the country’s achievements of

previous years. Without the disruptions during election years, Kenya would have grown at a

respectable 3.9%.

2.6. Restrictive trade policies at Regional and international arena

In recent decades, African governments adopted exchange rate and trade policies which were

typically anti-export and accumulated large foreign debts.

In Kenya, trade policies responses were also weak. For instance, when the natural market

afforded by the regional customs zone with Uganda and Tanzania broke down in 1977, Kenya

failed to implement the needed policy shift towards a more export-oriented approach. Instead, it

continued to protect local business. Even weaker was the response to the oil crises.

The rapidly deteriorating terms of trade of the 1970s led to the balance of payments crises of

1974 and 1978-80. With the first oil shock the terms of trade fell 24 percent (1972-75); rose 41

percent in the next two years with the coffee boom; dropped again 28 percent with the second oil

shock; continued falling all through the 1980s another 30 percent; and finally improved to pre-

shock levels by 1994 and thereafter .The external balance followed a similar pattern, falling in

the red during the first oil crisis, recovering during the coffee boom, and falling again in the

aftermath of the second oil shock. The deficit in the trade balance will persist to the present with

the exception of 1994, the year after the 81 percent devaluation of the Kenyan Shilling.

2.7. Weak macroeconomic management and policies

Poor economic policies have also contributed to slow growth in Kenya. For instance, economic

performance in the 1990s and beginning of 2000 continued to be very poor. High real interest

rates combined with high transaction costs and high business uncertainty resulted in low

employment and slow output growth (IMF). Weak macroeconomic management, slow progress

in structural reforms and failure to address governance issues are some of the reasons behind the

continued economic downturn.

2.8. Government interventions in the industrial sector

Government interventions undermined the functioning of product markets in many countries. To

start with, Import substitution was the strategy adopted by the government to support industrial

development. The strategy promoted capital-intensive technologies and kept Kenya out of the

labor-intensive manufactures, such as garments, footwear and light assemblies. Protection of

local industry gave rise to an over regulated, over concentrated and uncompetitive industrial

structure. The strategy worked in the short term and delivered annual growth rates of 5 and 11

percent in the 1970s and 1980s. But with the fall of the regional customs union, falling private

sector investment in manufacturing and violence against businesses after the failed 1982 coup

attempt, industrial production.

An overextended and monopolistic public sector became involved in both manufacturing and

services. Investment requirements of parastatals crowed out private investment and decreased

investment efficiency in the country. The World Bank estimates that investment efficiency

plunged by 70 percent in the last two decades, greatly affecting growth potential in the Kenyan

economy (WB 2001).

2.9. Unfavorable investment climate in Kenya

The World Economic Forum’s Africa Competitiveness Index ranks Kenya 22nd out of 24

countries surveyed in 2001. Transparency International’s corruption perceptions index ranks

Kenya at the very top of its corruption scale (although below Uganda, which does not seem to be

penalized for it). Policy obstacles to doing business in Kenya include tax and customs regulation

and administration, and business licensing. In addition, a corrupt judicial system provides little

or no recourse against the breaking of contractual agreements.

3.0. Conclusion

Kenya’s peculiarities and their role the design and implementation of short term economic

policies and long term development initiatives are both policy and destiny oriented. Economic

policy and governance, which receive the largest share of economists’ attention, are important,

but perhaps other factors such as tropical geography, demography, and public health have also

impeded, economic growth in Kenya.

Policy makers pursue a broader view in the attempt to deepen their understanding of the linkages

between the policies, physical environment and social outcomes. The complex linkages among

geography, demography, health, and economic performance surely require much more intensive

and systematic examination. For Kenya and other African countries to move forward, there is

need for much analysis of all aspects such as demography, agronomy, ecology, geography, and

economics.

Kenya is among other Africa’s countries that experienced absolute decline in export earnings

between 1980 and 1996. This is not only a vivid illustration of Kenya and other African

countries’ marginalization in the world economy, but also a proximate cause of slow growth,

since there’s lack of enough foreign exchange earnings needed to invest heavily in capital goods.

It seems clear, therefore, that Kenya’s economic development will require major commitment to

policies and institutions that will promote export of manufactured goods other than agricultural

fresh produce and raw material. This orientation has greatly worked for majority of the

successful tropical countries in East and Southeast Asia. Clearly, general points of economic

reform, such as macroeconomic stability, currency convertibility, low inflation, and so forth, are

important in this regard, but they are not enough. International competitiveness in manufactures

requires a set of effective institutions linking the domestic economy with world markets. More

direct focus on export diversification and manufacturing-sector competitiveness is needed. Most

of the major coastal port cities of East and West Africa are candidates for a greatly expanded role

in export-led growth.

Much more creative effort is needed to promote infrastructure investment, especially as

infrastructure in Kenya is often shockingly poor. Infrastructure is vital in connecting the

production areas to key markets. Many of the factors that contribute to growth trap operate

unabated or may even be tightening their hold, further weakening the country’s connection to the

world markets and thus its prospects for economic growth and development.

On the other hand improvement in health and education, the incipient decline of fertility provide

some hope that the growth challenge will be successfully confronted. On the other side, rapid

population growth, environmental stress and the HIV/AIDS epidemic are enormously

disconcerting. It is evident that strengthening the orientation of economists towards the forces of

geography, demography, and health in economic growth crisis constitutes a necessary step in

planning more effective approaches to the development challenges.

References

Paul Collier and Jan Willem Gunning from the Journal of Economic Perspectives, Vol. 13, No. 3,

(summer, 1999) on “Why Africa Has Grown Slowly”

Jeffrey D. Sachs and Andrew M. Warner from the Journal of African Economies, December

1997, Volume 6, Number 3, pp. 335-376 on “Sources of Slow Growth in African Economies”

Gordon P. Hagbert from the Annals of the American Academy of Political and Social Science

1961 , Vol. 335 on “The Peculiarities of Geography: Africa”

Winford H. Masanjala and Chris Papageorgiou from the Department of Economics Louisiana

State University Working Paper 2006-01 on “Initial Conditions, European Colonialism and

Africa’s Growth”

David E. Bloom, Jeffrey D. Sachs, Paul Collier, Christopher Udry from the Brookings Papers on

Economic Activity, Vol. 1998, No. 2, (1998), pp. 207-295 on “Geography, Demography, and

Economic Growth in Africa”