What Kenya must do to spur manufacturing

A modern spinning machine at Rift Valley Textile in Eldoret. [File, Standard]

Like many observers of Kenya, I have puzzled over the disconnect between the plainly great economic potential of the country and the reality of slow growth, especially in manufacturing. Some apologists say an average annual growth rate of 5 per cent over the past 10 years is not bad.

I say Kenya can and should grow at 7 per cent to 8 per cent per year or more. That seemingly modest difference is deceptive. With the population growing at about 2.6 per cent per year, 5 per cent growth in economy means only 2.4 per cent growth in per capita income. At that rate, it will take nearly 30 years to double the income level. If Kenya can raise its growth rate to 7 per cent, the per capita income level will double in less than 16 years. That is big. So, what explains the persistently weak growth and stagnation of manufacturing? Recently, I had a Eureka moment.

I have learned of a fascinating episode of the small milk cooling tank business. In the 1990s, with the Kenya Dairy Board reportedly pushing for the use of proper milk cooling tanks, a domestic industry to manufacture such tanks grew rapidly. It imported refrigeration compressors duty free and fabricated the tank to assemble complete cooling units. 

In the late 1990s, however, a 25 per cent duty was imposed on the compressors while complete units could be imported duty free. This made local manufacturing of cooling tanks uncompetitive. Previously, no one was importing such units, as the customers were satisfied with the domestic products. Suddenly, some traders began importing complete units; even the domestic manufacturers switched to simply marketing imported cooling tanks. 

Many developing countries have gone for the opposite, that is, “import substitution.” They tried to establish a domestic industry to manufacture what had been imported before. Many such attempts have failed, often disastrously, as growing a competitive industry is no easy thing. 

Kenya started off by already having a domestic industry through spontaneous growth. But, it adopted a policy to kill it, so that the country can import the same product instead! Some influential dairy industry insiders reportedly became major importers. They did not have the capability to manufacture milk cooling tanks, but they knew how to make money by importing them. Had the industry been heavily protected, it may have made sense to switch to imports. But, that does not seem to have been the case. 

Short-sighted interest

This makes no economic sense. It benefited some narrow interest group, and I imagine that is why all this happened. But, the country has lost out big time. Precious manufacturing capacity, with all its job creation potential, was sacrificed. With dairy business coming up in neighbouring countries, too, Kenya probably passed up an opportunity to become a major exporter of such products to the region. A picture-perfect example of a narrow and short-sighted interest triumphing over a broader national one.

Sadly, this does not seem to be an isolated story. Take, for instance, the sugar industry. Whereas the domestic sugar producers met 72 per cent of the Kenyan needs 10 years ago, that rate is now down to around 40 per cent in the most recent years. In the meantime, the domestic sugar price has been controlled and set significantly higher than the price in the international market. 

Today, the Kenyan consumer pays around Sh120 for 1kg of sugar, while the Indian consumer can buy it for about half that price. This has been a bonanza for sugar importers. Why has this not stimulated an increase in domestic supply? The only plausible explanation is that there are forces that have wanted to keep it that way by delaying the reform and restructuring of the industry.

This is the story of Kenyan manufacturing. No wonder the manufacturing share in GDP has declined from a peak of about 13 per cent in 2007 to 7.7 per cent by 2018. The easiest way to help manufacturing is to abandon this “inverse import substitution strategy.”  

Unlike import substitution, it will not require any subsidies. Many Kenyan manufacturers have managed to retain their historical positions as technological leaders in East Africa. But, they have been gradually beaten down by perverse policies. So, if Kenya wants to grow its manufacturing sector, just stop killing it as the first step. It will allow competitive Kenyan manufactures to do what they do well. What can be simpler as an industrialisation strategy?

Of course, making this shift is not so easy politically, as it is simple technically. The political leaders who formulate and implement industrial policy must face down the vested interests that have pushed for the “inverse import substitution strategy.” Those rent seekers are well-funded and deeply entrenched, with allies in many high places.

It will take not just moral courage, but also tenacity and ingenuity with which to fight the corrupt practices. But, the payoff for the country will be enormous. If there ever was a proverbial “low hanging fruit,” this is it.

 

Mr Ohashi is a Senior Economic Advisor to the Presidency of Kenya. Tomorrow: Lessons from the ‘East Asia Miracle’. [email protected]