Tackling inequality key to Kenya's transition to Upper Middle-Income status

Today's launch of the Kenya-World Bank Group (WBG) Country Partnership Framework offers an opportunity to revisit Kenya's long-term development trends. It is also an important opportunity to take stock of the country's longstanding engagement with the WBG since it became a republic in 1964.

The last 59 years have seen Kenya attain some key achievements including the highest Human Capital Index in continental sub-Saharan Africa, a dynamic and diversified private sector, leadership in digital innovation and critical improvements in infrastructure development. The last two decades have seen robust economic growth, and today Kenya is rebounding from the Covid-19 pandemic and is on the right path to becoming an upper middle-income country (UMIC). However, three challenges remain along this path: Productivity, equity and resilience.

In recent years, Kenya's growth has been driven by public investment and private consumption, with national savings and private investment falling behind. Consequently, Kenya has not achieved the productivity levels that helped other middle-income countries maintain a steady rise in incomes. However, if the country puts its resources such as an increasingly better-educated and healthier labour force, rich natural capital and its financing from national savings, public revenues, global capital markets and development partners to better use, it can achieve those incomes. In addition, the heavy public investment in infrastructure will complement private investment and so drive economic vibrancy in the near future.

Raising national productivity will require re-invigorating private investment by shifting the balance between the public and private sectors, improving the business climate and levelling the playing fields between large and small firms, male and female-owned businesses and between enterprises in the capital and those in the counties. It will also require the strengthening of institutions mandated to secure the benefits for free trade and fair competition.

Additionally, Kenyan producers have big opportunities to capture a larger share of regional and international markets by taking advantage of the shifts in the global economy and new African and regional trading arrangements. This will require a strengthening of incentives for businesses to look outward into regional and global value chains that can position Kenya as the gateway to Africa.

Kenya continues to face a high level of inequality. Over the past decade, clear evidence has emerged that inequality retards long-term growth and when persistent, constrains worse-off segment of the population to lower welfare and productivity, which in turn limits their contribution to economic development. Furthermore, inequality perpetuates itself across generations by reducing the impact of poverty reduction measures. Addressing inequality early and swiftly, will increase Kenya's chances of sustained and broadly shared growth. The current research output from the African Economic Research Consortium (AERC) shows that a positive growth stimulus will significantly reduce poverty but if it is supplemented by targeted social protection programmes, this will flatten inequality over time. So the AERC work advocates for pro-growth poverty reduction strategy.

To address inequalities and avoid the MIC trap, Kenya can complement its progress in delivering good social services, by focusing on improving outcomes for groups and regions that continue to lag in areas such as universal access to basic services like electricity, water, sanitation, transport and digital broadband. These should go hand-in-hand with stimulating job creation by the private sector, that will in turn translate this improved welfare into productive and well remunerated economic activity.

Kenya will need to strengthen its resilience to economic and climate shocks. Repeated economic shocks can trap Kenyan households in cycles of vulnerability, and slow the country's ascent into upper middle-income status. Increasing mobilisation of domestic resources, carefully managing public debt and building risk financing buffers can help dampen fiscal impact of such shocks.

Similarly, increasing the coverage of well-managed insurance schemes and safety nets for health, social, crop, livestock and other shocks for households and producers can prevent their repeated slipping back into poverty. On the climate front, stemming land degradation and forest loss, investing in water supply and shifting to climate-resilient and greener production, can help mitigate against climate and weather shocks.

To support Kenya in facing these challenges, the Country Partnership Framework will make use of the financing and knowledge that the World Bank Group can bring toward these three high level outcomes. The first is faster and more equitable growth in labour productivity and incomes by focusing on fiscal sustainability, the quality of public expenditures, and small firm and small producer performance.

The second is greater equity in service delivery outcomes by shrinking disparities in health and learning outcomes and bringing sustainable infrastructure services to all Kenyans. The third is greater resilience and sustainability of Kenya's natural capital by helping to stem its degradation and by working to enhance water security.

Prof Ndung'u is Cabinet Secretary, The National Treasury and Economic Planning. Dr Hansen is Country Director for Kenya, World Bank.