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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.
Categories
Ideas Thinkpieces

Living on the edge

Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better.
In Antifragile: Things that Gain from Disorder, Nassim Nicholas Taleb, the Distinguished Professor of Risk Engineering at the New York School of Engineering, acclaimed author and essayist, philosopher, former option trader and avid Twitter user puts it forcefully that debt “fragilizes economic systems,” that is, makes them weaker. 

As our society has grown richer, we have grown more indebted. This is not unique to Kenya. The richest countries in the world are also the ones with the most government debt relative to GDP (link). Nobel-winning economist Paul Krugman has often argued that government debt is beneficial to the economy. In “Debt is Good” (link), Krugman makes the case for government debt, stating that it provides a safe asset for investors who use government securities to manage risk and hold them as a substitute for cash. By issuing debt, governments can raise the money required to pay for useful things. This line is frequently used in Kenya when the public debt is being discussed. In trying to be a good student of economics, I wholeheartedly agree. If debt is used to fund productive investments such as transport infrastructure, the direct (say a new road where once was none) and indirect benefits can be astonishing (from the increase in land prices after completion of the new road, to the farmers who spend less to transport their produce, to the transporters who spend less on maintaining their vehicles, and so on). I am not a betting man, but I would confidently wager that that the Thika Superhighway has generated exponentially more than the KES 34 billion that was spent to construct it. So what is the problem? 

I know better than to argue with Krugman, so I will not. Mine is about risk. Specifically, the economic fragility and increased exposure to risk that is caused by an increase in government debt. In truth, not all government debt is equal. If debt is denominated in the local currency, it is easily manageable. The government can issue bonds (which are basically pieces of paper or entries in a computer) and collect money from investors, promising to pay the principal and any interest back. When payments fall due, the government has at least 2 options: issue more bonds (or treasury bills) to pay for previous interest and principal payments, or print money to pay back investors. This can theoretically go on forever, a point Krugman makes (link) when he describes domestic debt as “money we owe to ourselves”. But it doesn’t go on forever. Simply, the demand and supply of money causes the price of money (interest rates) to fluctuate. Too high an interest rate and money can become too expensive for borrowers; too low an interest rate and it can make money too cheap, potentially causing the prices of goods to rise (inflation) as consumers make higher bids for a finite number of goods. For these and other reasons, governments complement local borrowing with external borrowing, in foreign markets and in foreign currencies. Because the debt is borrowed in foreign markets, the demand-and-supply effect on local interest rates is not as strong as it is when debt is issued domestically. 

However, external debt is serviced in foreign currency. If Kenya holds US$ 1 billion in debt, it must pay interest and principal in US dollars. And herein lies the worry. What happens if Kenya holds US$ 1 billion worth of debt, and the US dollar appreciates relative to the Kenya shilling? Kenya has to pay more to honour the same debt, since more Kenyan shillings will be required to make US$ 1. Just as less Kenyan shillings would be required if the US dollar lost value relative to the Kenya shilling. In good times (i.e. when the shilling is strong against foreign currencies), more foreign-denominated debt is a good thing for Kenya, since the debt portfolio loses value and it becomes cheaper to service external debts. But when things take a negative turn, it could spell doom.

debt

As of the 2017 Medium Term Debt Management Strategy Report (link) by the National Treasury, 49% of Kenya’s total public debt is external debt. In fact, the 2014 Eurobond accounts for 7.9% of Kenya’s total public debt. A sustained 2% appreciation in the US dollar would make the interest and principal payments on the US$ 2 billion Eurobond more expensive by US$ 44 million dollars. A sustained 2% appreciation in the bundle of currencies in which Kenya’s external debts are denominated would make the external debt portfolio more expensive by about US$ 340 million, or KES 34 billion. Imagine what could happen if the bundle of currencies appreciated by 5% or 10%.

If this was to happen, Kenya would probably first make use of the Central Bank reserves to try and stabilise the exchange rate prices by allowing more US dollars into the economy. As reserves dwindle the National Treasury and CBK would probably turn to the IMF for a dollar credit line with which to shore up the Kenya shilling. Remember that as this is happening, the price of imported goods would have risen sharply as the Kenyan currency depreciated. So fuel and all the other imported goods (Kenya is a net importer) and commodities would be much more expensive, with inflation rising and the cost of living shooting up. Depending on the level of interest rates, the CBK could try to arrest inflation by raising interest rates, and making the cost of money in the economy rise. With higher interest rates, access to credit by borrowers slows down and the economy cools off. However, because the inflation is mainly imported, this does not have the desired effect on inflation. With the economy growing slower, there are less jobs to go around, less money for everyone and less taxes collected by the state. This means that the government would have to reduce development spending to meet external debt obligations. This is a rather macabre vision of the future, but with the American and North Korean nuclear face-off escalating by the day, who knows what could happen to the US dollar and other reserve currencies.

Government debt is good, and can be a potent tool for fast-tracking infrastructural development. But there is a dark side to it; external government debt fragilizes the economy by increasing its exposure to foreign exchange rate movements.
There is, thankfully, a silver lining for Kenya. Tullow Oil, an oil and gas exploration company, estimates that there could be over 750 million barrels of oil (link) in the South Lokichar Basin. If Kenya could extract and export oil, it could develop some much-needed antifragility. If the oil is exported in US dollars, yes, Kenya would receive less per barrel if the US dollar depreciates relative to the Kenya shilling. But this would also make Kenya’s imports, such as oil, and the external dollar debt portfolio cheaper. If the US dollar appreciates, yes, imports would be more expensive. But the earnings from Kenya’s oil exports would increase as well, offsetting the rise in the costs of servicing external debt.

If Kenya could be able to export just 100,000 barrels of oil per day, and be able to earn a net profit of just KES 20 per litre (a barrel contains about 159 litres), the country could be earning up to KES 316 million a day (about US$ 3 million). In the medium-to-long term, if such resources could be used prudently, Kenya could theoretically pay all its current external debt (KES 1.72 trillion as of the 2017 Medium Term Debt Management Strategy Report) from the South Lokichar Basin alone. This is a huge “if” and would depend on how well Kenya -through its political class and state technocrats- uses the oil dollars, and how well it can stave off the resource curse (link), yet another source of fragility. Whatever the case, Kenya is likely to continue borrowing from domestic and external markets to fund infrastructure projects and try to close the infrastructure deficit caused by decades of underinvestment. The infrastructure that such debt pays for is an important and necessary catalyst for sustained economic growth, but the fragility that external debt introduces into the economy is a growing strategic weakness.
The gods have given us black gold, and with it an opportunity to strengthen (add some antifragility) our economy and pay for much-needed infrastructure. What will we do?

 

 
Thanks to Faith Nyawira for reading a draft of this.