Rebalance Kenyan economy

Rebalance Kenyan economy. FILE PHOTO | SHUTTERSTOCK

By FREDRICK OGOLA More by this Author

In the hotly contested August 2022 election, both the leading coalitions of Kenya Kwanza that eventually took over the leadership and that of Azimio la Umoja One Kenya Alliance proposed a raft of measures to turn around the Kenyan economy.

In the polls, the economy took centre stage given the disruptions of the Covid-19 pandemic and the Russia-Ukraine war.

One of the leading measures was that the Kenyan economy needed to be rebalanced by moving into manufacturing since Kenya was heavily reliant on the agricultural sector since it employs more than 40 percent of the total population and 70 percent of the rural population but agricultural productivity had stagnated in recent years.

While they were right by analysis, they were both so wrong by synthesis, which means, by only looking at the agricultural sector vis-a-vis manufacturing, their conclusion could be right but by synthesis of the whole economy, both of their economic advisers were misleading.

This is because they didn’t tell Kenyans that the largest part of the gross domestic product (GDP) comes from the services sector, which contributes 54.41 percent.

Read: Global banks see Kenya's growth dropping below 5

The urge to rebalance the economy arose in Europe, the UK and the US after the 2008 financial crisis, which revealed the fragility of the large banking sector that brought the economy to its knees.

As a response to this, President Barrack Obama invested in advanced, hi-tech manufacturing and his successor Donald Trump explicitly extolled companies to bring back factories to America. It was not only America but Germany and UK, among other Western nations.

Unfortunately, none of the above succeeded in making their countries increase the contribution of manufacturing to GDP.

In that regard, it is possible to rebalance the Kenyan economy in which 54.41 percent of the GDP comes from the services sector, the agricultural sector 22.43 percent while manufacturing only contributes 16.99 percent since the pattern is similar in Britain and the US where the services sector makes up more than three-quarters of national output.

To respond effectively to this question, let us understand how economies transition. The first form of economy was that of hunters and gathering.

The next form is the Agrarian economy, where farming is the mainstay of the economy. Given the current drought in Kenya, some Kenyans were seen gathering fruits and roots for food so Kenya has not fully transitioned from hunters and gatherers to an Agrarian economy.

From the Agrarian economy, the next stage is industrialisation. This is whereby as countries grow, they tend to industrialise, so they move out of agriculture and into manufacturing, which has higher productivity or output per worker and generates higher wages.

Industrialisation is how countries become middle class and prosper. This is where Vision 2030 was to take Kenya but given the constant unga (flour) on the headlines and discussions of fertiliser by the President, it shows we are at best Agrarian if we are following the continuum strictly.

Deindustrialisation then follows. This is whereby after being a developed country, Kenya would be an advanced economy where manufacturing starts to become less important as a share of output once Kenya becomes richer and services in the business, retail, and finance sectors start to dominate the economy while employment shifts from factories to offices or stores.

After deindustrialisation, we move into the phase called reindustrialisation. In summary, in the current economic architecture, the economic continuum is that of moving from hunters and gatherers to Agrarian, then industrialisation followed by deindustrialisation then reindustrialisation.

Given that Kenya is between hunters and gatherers according to that continuum, our leaders not just in Kenya but Africa as a whole are still focusing on growing their economy that way.

As a Solomonic economist, I would advise Africa to go for a leapfrogging model, not follow the path the Western nations have followed.

Read: Why bulk of Kenyans did not feel the 7.5 percent GDP growth

Kenya is already the home to M-Pesa whereby we have banks on our hands before building the brick-and-mortar bank.

The services sector already contributes 54.41 percent of the national output, which means we have reached deindustrialisation prematurely.

At this stage, the issue of rebalancing the Kenyan economy won’t be Solomonic but retrogressive. Kenya can set up its service industries and become the African finance centre, and logistics due to the port, and financial sector given the fact that it has made some of the leading banks in the region, become the tech hub.

Even a pharmaceutical hub since Africa has a greater potential for developing precision medicine because Africa is the epicentre of genetic variation and the fact that Kenya is in East Africa, the cradle of mankind, a source of global healthcare solutions in East Africa, in Kenya in Rusinga island.

Reversing the process of deindustrialisation that has already taken place in Kenya prematurely is challenging in a globalised world and the economists who build this continuum like Adams Smith didn’t live in the era of globalisation and this option will be a Solomonic economic choice for Kenya.

Dr Ogola is the Academic Director of the MBA programme and the Director of the Institute of Strategy and Competitiveness at Strathmore University Business School.