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Ideas Thinkpieces

Making “Made in Kenya”

It’s because everybody is going to India these days. Not that I know any particular hospital there. But I am told that their hospitals typically have all the machines that could be required for any tests, and because there are so many hospitals, their prices are quite reasonable. But Nairobi! How many hospitals have equipment beyond the basics? OK, maybe Nairobi Hospital, Aga Khan, Kenyatta, Karen and one or two others, but how much will they charge you for a full set of tests?

I got this response just yesterday afternoon from a friend as we discussed healthcare, and why India in particular has become the go-to destination for Kenyans needing medical attention. “The car in front is always a Toyota”; it used to be loudly proclaimed by the SUV tire covers that Toyota Kenya used to issue their customers. I don’t know about that, but I think one would not be remiss in saying that “the car in front is usually Japanese.” But why is that? Why is it that India has become so popular for medical tourism? Why is it that a disproportionate number of the best footballers in history are from South America, specifically Brazil and Argentina? Why is it that most worldwide blockbuster films come from Hollywood? Why is it that most tech unicorns have their origins in Silicon Valley? How come most middle and long-distance champion runners are from Kenya, or that nearly everything is made in China?

Location. Location. Location.

Location matters. It seems that your odds of becoming a champion marathoner are much higher if you are born Kipsang in Keiyo than Kipling in Kensington. We can all bear witness that you are probably much better placed to have sung the song that takes the continent by storm if you live in Lagos than if you live in Lang’ata. This phenomenon where people and things with similar qualities or characteristics seem to concentrate in a certain area is called clustering. The Institute for Strategy & Competitiveness at Harvard Business School defines a cluster as a “geographic concentration of related companies, organizations, and institutions in a particular field that can be present in a region, state, or nation” (Institute for Strategy & Competitiveness, 2017). The renowned business thinker and strategist Michael Porter puts it that “a cluster is a critical mass of companies in a particular field in a particular location, whether it is a country, a state or region, or even a city” (Porter, 1998, p. 10). I have expanded Porter’s definition slightly to include footballers, athletes, and musicians, and I’m sure it can be expanded further. This is not random. Coffee and tea in Kenya are mainly grown in what were the “White Highlands” where the cool and wet climate offered ideal conditions for these cash crops to flourish. Post-independence, many of these farms were maintained by the elite who  acquired them, while the ordinary citizens who worked on the white farms went on to till their own plots. And so we have grown coffee and tea in the Mt. Kenya region for decades since. This is an example of a geographical cluster which grew out of natural factor endowments: cool and wet climate, hilly topography of the land and deep red volcanic soils. If you’re a trader in Nairobi, it is very likely that the goods you sell were manufactured in China. With a workforce of over half a billion people and heavy state investment in infrastructure over several decades, the country has built the capacity to produce nearly any industrial product. With thousands of factories on standby ready to produce your order of nuts or bolts or cars or cranes, the country has become a global leader with immense competitive advantages in low-cost manufacturing of nearly anything. In a similar way, Ethiopia has raced ahead of us to join Bangladesh and Vietnam as a low-cost manufacturer of textiles. For anyone in IT or software development, or if you are looking to outsource business processes such as customer service, you probably have a company based in India high on your list or possible service providers. The country enjoys competitive advantages in these knowledge services owing to the their vast pool of labour, good telcoms infrastructure in their major cities and the low cost base to teach these skills. Is there a region in Africa that produces more and better wine than the winelands of Cape Town? The Western Cape province of South Africa enjoys factor endowments such as warm climate and gently sloping lands surrounded by mountains that are great for growing grapes. A historic know-how-based cluster of expertise and the concentration of complementary industries in the Western Cape has made it possible for the region to process the quality and quantity that makes South Africa a leading exporter of wine. As we can see, clusters develop for all sorts of reasons: from natural factor endowments (such as coffee and tea in Central Kenya) to historic know-how (watchmaking in Switzerland), to low costs of production (China for nearly anything to do with industry or manufacturing).

So what, for Kenya?

I think Kenya can benefit greatly from implementing a well-thought-out deliberate plan that clusters our economic activities. With a blueprint that is

  • conscious of the cultures of various communities and their historical economic activities,
  • adaptive to the present spatial structure of our country,
  • mindful of weather, climate, topography, and other natural factor endowments,
  • aligned with Vision 2030 and other long-term national plans, and
  • mobilizes the political will required to implement it,

I am convinced Kenya can make huge leaps in a decade or two. The kind of leaps needed to achieve the economic goals of Vision 2030.

For example, most of the maize we consume comes from the Trans Nzoia region. With such a plan in place, infrastructure in the county can be deliberately built to facilitate growing and processing maize and the crops it is rotated with. County water dams should be built to sustain the population that lives and works there and to irrigate maize farms all year round. Universities in the county should be leaders in the region on agricultural science and research, with specializations on maize. Storage silos should be constructed in the county, or as close as possible to reduce transportation costs for harvests. Maize millers should be incentivised to have their processing mills in Trans Nzoia or the surrounding counties. Supporting industries such as seed grain producers, fertilizer manufacturers, farming equipment companies and others should be supported to ensure that they have a heavy presence in Trans Nzoia and surrounding counties. Now, this is not to say that farmers in the county should plant only maize, nor to say that economic activity in Trans Nzoia should be restricted to maize. No. Only to say that because the region enjoys natural factor endowments such as weather and climate that support maize growing, and that the communities in the area have a long history of growing the crop, it is only makes sense that the conditions for profitably and reliably growing the crop are improved as much as possible. The county is predisposed to being a major producer of maize for the country, we should do all we can to support it. The same applies to the other 46 counties, and constituencies within the counties. With such a development blueprint, physical infrastructure would be built in a way that catalyses the development of specific economic activities in clusters where economies of scale can be enjoyed. That a Kenyan looking to start a business in the supply chain of coffee should be heading to Kiambu or Nyeri, and another one interested in milling maize should be heading to Trans Nzoia. Again, this is not to say that a region or county should be engaged in one economic activity only. Just that the focus or specialization inherent in each region or county should be enhanced. To my mind, if such a development plan was strictly implemented, the economic clusters that would emerge would stimulate technological specialization and improved productivity in the area of focus. Economic opportunities would flourish at local levels as core activities and their complementary industries receive the attention and support they need for them to grow quickly. Value-adding processing industries are more likely to sprout in such clusters, attracted by the targeted supporting infrastructure that would reduce costs of production. The accumulation of specialized labour at the local level would cause a pool of specialist skills to swell, attracting even more value-adding processors and increasing the overall economic yield from a core economic activity.

Doing it

A national dialogue forum that sets the strategic agenda for the country in the next decade can be called and conducted at the national level within a year. County governments can thereafter engage at the local level to surface the deeper aspirations of the people, understand the factor endowments they enjoy, and map the competences at their disposal. Within a year of the national dialogue forum, each of the counties can have their unique county development plans in hand. And by the year 2020 we can begin to seriously implement the 47 county development plans with the aim of achieving Vision 2030.

There is value in watch brands that carry the reference, Swiss Made. There is value in being German or Japanese if you are a manufacturer in the automobile industry. There is value in being Danish if you are a maker of pastries, or Belgian if you are a chocolatier. Or being Kenyan if you are a long-distance runner. Kenya could be known for a lot more, “Made in Kenya” could mean refinement, excellence, heritage, attention to detail and prestige. Each of the 47 counties should be a hotbed for a specific thing, and Kenya can become a major exporter of that thing. Maize, handcrafts, coffee, retail, miraa, avocados, professional business services like audit, beef, beer, tech, the Safari rally, fish, films, tourism, microfinance, music, healthcare, chocolate, hospitality, fashion, dairy products, university education, potatoes, flowers, leather, sports, herbs and spices, or anything else we can imagine. Are we willing to make “Made in Kenya”?

 

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References

Institute for Strategy & Competitiveness. (2017). What Are Clusters? Retrieved September 25, 2017, from http://www.isc.hbs.edu/competitiveness-economic-development/frameworks-and-key-concepts/Pages/clusters.aspx

Porter, M. E. (1998). The Adam Smith Address: Location, Clusters, and the “New” Microeconomics of Competition. Business Economics, 33(1), 7–13.

 

Categories
Ideas Thinkpieces

Acres of diamond: The untapped potential of Kenya’s creative economy

Kenya needs jobs. Millions of jobs. Data from the World Bank shows that Kenya’s economy (measured by GDP) grew from US$ 13.1 billion in 2002 to US$ 63.4 billion at the end of 2015, doubling in size twice in the the 15-year period. Unfortunately, this economic growth has not translated into as many jobs as one would hope. Of the total labour force aged between 15 and 24 (the younger half of the youth demographic) that is available for and actively seeking work, 22% (about 1 in 5) is unemployed. The economy has grown by 380% in 15 years, and rather than the unemployment rate reducing, it has increased by 25% among this demographic; from 18.1% to 22.7% in the period. Overall, the proportion of the country’s population that is employed has remained about the same, 60.1% in 2002 and 59.84% in 2016. Because the employment to population ratio is about the same, it means that there are more Kenyans looking for jobs in 2017 than there were in 2002, since there are more Kenyans in 2017 than there were in 2002. Granted, this increase is not only among the job-seekers; we have more school-going children and more senior citizens in retirement. And if the ratio of the employed has remained roughly the same but the output produced by those who are employed has grown by 380%, it means that the 2017 formal working class owns much more of the economic pie than the 2002 working class.

This is not a bad thing in itself. It means that more is being produced by fewer people, which is the essence of technological progress. You want more stuff to be produced by fewer people in single unit, and more units of production. It can be argued that the informal economy is the primary economic engine in Kenya, given it employs 83% of the country’s labour force according to KIPPRA (Kenya Institute for Public Policy Research and Analysis, 2017, p. 80). The latest economic survey by the Kenya National Bureau of Statistics puts the number of formal employed persons at 2.69 million as of the end of 2016 (self-employed people and contributing family workers account for just 5% of this number) with total wages standing at KES 1.65 trillion (Kenya National Bureau of Statistics, 2017, p. 2). The National Treasury estimates to collect about KES 659 billion in the 2016/17 year (Government of the Republic of Kenya, 2017). Assuming that about 25% of the total wages earned by the formal sector will be remitted as income tax, about KES 412 billion of the target KES 659 billion (that is, 62%) from income taxes will be collected from just 2.7 million (16.8%) of Kenya’s 16-million-person labour force.

In a nutshell:

  • I think we may be straining our formal sector – 16.8% of Kenya’s working population contributes 62% of Kenya’s income tax revenue.
  • We are not creating enough jobs – The proportion of the population that is employed has remained about the same, meaning that we have not made significant strides in cutting down our overall unemployment rates, while youth unemployment has increased by 25%.
  • Life is generally harder – Inflation, measured by consumer prices, has averaged 9.75% over the 15 years from 2002. A bundle of goods that cost KES 100 at the beginning of 2002 cost KES 396 at the end of 2016.

This makes for a very sticky situation, politically and economically. How can we quickly create the jobs we need that our youth can earn a decent living and enjoy opportunities for upward social mobility? How can we reduce the tax burden on the formal sector while increasing the overall tax collections by KRA? How can we ensure that the jobs we create are resilient enough to withstand the structural economic changes that robotics and automation, artificial intelligence and other technologies, and globalisation will continue to stimulate? I do not know. But I think that there is low hanging fruit ready for picking.

The ability of global value chains to create jobs as the result of new activities constitutes a formidable opportunity, resulting in new trade patterns for African countries. Such new activities, commonly referred to as ‘creative industries’, comprise emerging sectors such as the music, film, fashion, design and food industries. These industries use African culture and creativity as their unique selling point, both within and outside the continent, and are particularly attractive to large numbers of young people – skilled and unskilled” (African Development Bank Group, 2016, p. 1). By nurturing its creative industries, Kenya can tap into vast reserves of intellectual resources. And unlike oil or other minerals, these resources cannot be depleted. As of 2007, “the entire copyright-based industries contributed KSHs 114,231.6 million out of the total national output of KSHs 3,041,382 million, which represented 3.76% of the national economic output” (Nyariki et al., 2009, p. 54). If those numbers were correct, the economic potential of the creative economy was largely untouched in 2007, contributing just about 4% of GDP, and I submit that we have made little progress since. In their 2009 seminal work on the creative industries in Kenya, Nyariki and company found that “the productivity index of the core copyright-based industries, calculated as a fraction of added value per employee, was even better, coming second best among 13 major sectors contributing to the national economy. The national economy exhibited a huge foreign trade deficit compared to the copyright industries, implying that, comparatively, the copyright industries are doing better than the overall national economy” (p. 92). Because creativity is “intricately tied to notions of originality, imagination, inspiration, and ingenuity” (Njogu, 2015, p. 3), creative goods and services are inherently unique. This means that unlike many manufactured goods, creative goods and services bear the special characteristic of being difficult to imitate. Consequently, creative entrepreneurs need not worry about “cheap imports from China” as much as manufacturers or other traders, and creative products could potentially be an important export for the country. Nyariki and company (2009) showed that jobs in the creative sector are resilient, their findings demonstrating that “the contribution of the copyright-based industries to the national economy on the basis of GDP was higher than that of the agricultural sector, healthcare and education, and fisheries, and compared favourably with the contributions of the other main sectors of the Kenyan economy, such as manufacturing, mining-and-quarrying, and construction” (p. 92). This is a fundamental insight, one that can help shape labour policy since the country should be looking to create jobs that can withstand or benefit from technological innovation. Not only that, but the creative sector was said to have one of the highest productivity (value added per employee) levels of the major sectoral contributors to the economy. The creative industries seem to tick every box:

  • They are labour intensive, and hence could be a significant employer for jobless youth. Think of all the jobs created and incomes earned in the production of a film: actors, actresses and film crew, production teams, transport and logistics, marketing machinery to promote the film, investors financing the film, to the pundits commenting on the film in newspapers and magazines;
  • Their products are innately unique since they are derived from human creativity, and hence can be traded and exported without much risk of imitation. Even if somebody can photocopy your painting, they cannot photocopy the creativity and skill you used in painting;
  • They are resilient or even antifragile to technological change. It is not likely that robots and computers will replace the comedians we watch on TV or the fashion designs that we like. Furthermore, the creative industries tend to organise themselves into small production units (rather than big, 1,000-person manufacturing operations), increasing the number of micro and small enterprises, which are generally more adaptable to economic shocks.

And this is no secret. The Government of Kenya’s Second Medium Term Plan (2013-2017) identified the potential of the creative economy and set out to build capacity within the creative sector, including the creation of a “Center of Excellence” and incubation infrastructure for creative entrepreneurs (Government of the Republic of Kenya, 2013). The problems plaguing the creative economy are well documented, from a lack of startup financing, to lack of infrastructure and supporting institutions. I believe that the problems holding back the creative economy in Kenya can be surmounted cheaper and using less effort than more complex challenges being faced in other sectors, yet could yield a much higher return for the country in the short-and-long term. For perspective, we want to spend KES 500 billion on a nuclear power plant (link), hot on the heels of the Lamu coal power plant that could cost up to KES 200 billion (link), and quickly following the nearly-complete KES 70 billion Lake Turkana wind power plant that we may be paying up to KES 700 million a day for because a transmission line from Marsabit to Suswa is yet to be completed (link). Cheaper and more reliable energy is essential for our country going forward. But spending KES 700 billion on energy technologies (nuclear and coal) that the rest of the world is quickly leaving behind, instead of focusing on the renewables we have (wind, solar and geothermal) is wasteful and imprudent. On the other hand, we can spend a tenth of this money on improving the conditions for the creative industries in Kenya, and reap the benefits of our investment multiple times over. Below the soles of our feet lie acres of diamond. Will we do the work required to extract those precious stones?

 

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References

  1. African Development Bank Group. (2016). Investing in the Creative Industries: Fashionomics. Abidjan.
  2. Government of the Republic of Kenya. (2013). Second Medium Term Plan, 2013-2017: Transforming Kenya (Pathway to Devolution, Socio-economic Development, Equity and National Unity). Nairobi.
  3. Government of the Republic of Kenya. (2017). Statistical Annex to the Budget Speech for the Fiscal Year 2017/2018. Nairobi.
  4. Kenya Institute for Public Policy Research and Analysis. (2017). Kenya Economic Report 2017 (Sustaining Kenya’s Economic Development by Deepening and Expanding Economic Integration in the Region). Nairobi.
  5. Kenya National Bureau of Statistics. (2017). Economic Survey 2017. Nairobi.
  6. Njogu, K. (2015). Creative Industries and their Role in the Transformation of Society. In M. Lundi & S. Macharia (Eds.), Reflections on the Creative Economy in Kenya (Vol. 2, pp. 1–72). Nairobi: Twaweza Communications.
  7. Nyariki, D., Wasonga, O., Otieno, C., Ogadho, E., Ikutwa, C., & Kithinji, J. (2009). The Economic Contribution of Copyright-Based Industries in Kenya. Nairobi.