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A ferry crossing the Kilindini Channel at the port of Mombasa.

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Part of the city of Nairobi showing the General Post Office (centre) and the Nairobi Provincial Headquarters (right).

THE FUTURE OF INDUSTRY IN KENYA'S ECONOMY

OVERVIEW

The global trade in coffee is valued at over US$64 billion. Farmers in the coffee producing countries of Uganda, Kenya, Tanzania, Rwanda, Burundi, Sri Lanka and India get a total of $9 billion dollars, or 14% of the world total (Kiboro, 2002).

The other 86% is earned along the value chain between the coffee farm and the consumer's cup. In other words, there's more money to be made in transporting, processing, packaging and marketing of coffee than in growing it. A similar situation pertains to virtually all of Africa's exports as the industrialized countries that control global trade further widen the gap between themselves and the rest of the world.

Industry has been the engine of economic and social advancement in the developed world. While agriculture is still considered important (hence massive subsidies in the developed world), it is industry that has created jobs, made work easier, improved living standards and provided the citizens of those countries with and unprecedented high level of healthcare. Consequently, disease has been controlled if not banished altogether. People have access to technological products that have improved the quality of life. Education is accessible to all that want it. And an educated population has been able to keep government on its toes by demanding services for taxes paid.

Africa is considered as a producer of primary commodities, a role assigned to the continent during the era of colonialism. Though there exist a small industrial sector, especially in South Africa, its contribution to the local economy has been constrained by various political, cultural and globalizing circumstances.

The ownership of industry in Kenya, as a case study, is still under the same foreign forces that control global industry. Foreign investments are dominant in large and medium scale enterprises whereas a good proportion of small scale industries are owned by non indigenous Kenyans. Though ownership by foreigners may not be a contentious issue in the Kenyan economy, it has implied the absence of complimentarity and interdependence between the local industrial sector and other sectors of the economy such as agriculture.

Kenya's industrial sector is further characterized by an absence of vertical integration which should normally aim at increasing the number of operations carried out within Kenya involving the processing of basic raw materials to final products, rather than exporting them in unprocessed form. The products here include minerals, lumber, beverage crops, natural fibres, hides and skins (GoK, 1983).

There's no reason why Kenya should not industrialize and enjoy the benefits that come with industrial development. The government of Kenya has set for itself the goal of leading the country to full industrialization by the year 2020. A lot can be done in the form of programs that could spur progress toward the realization of this goal.

PRESENT REALITIES

After independence, a lot of emphasis was placed on import substitution industry. This had the objective of manufacturing goods that would otherwise have been imported and thus easing pressure on the country's foreign exchange reserves. Industries were protected from international competition which, unfortunately, allowed technical inefficiency to creep in. Most Kenyan industries are unable to compete in export markets and sell their products on the domestic market at inflated prices (GoK, 1983).

Economic liberalization of markets that occurred in the 1980's and 90's allowed traders to import and export at will. Kenyan industry was exposed to competition from larger, possibly more efficient, multinationals who could supply products at greater quantities and at lower prices. The consumer public responded enthusiastically to the wide variety of imported products ranging from clothes, motor vehicles, foodstuffs, beverages, video films, music and even religion.

Sameer Africa, formerly Firestone East Africa, is a Kenyan tyre manufacturer striving to adapt to the cut-throat business reality. The company was founded in 1969 in Nairobi's industrial area to supply motor vehicle tyres and tubes to the local market. Since liberalization, Sameer Africa has watched its share of the tyre market decline. Its revenues and profitability have likewise taken a beating. The company's half year profits for June 2006 were Kshs41 million. In 2005, the profits were Kshs105 million. Company secretary, Amina Bashir, attributes the trend to, “competition from cheaper and mainly lower quality imported tyres,” from Asia, Egypt and South Africa (Daily Nation, Aug 3, 2006 p.25).

In Kenya, as in much of Africa, industrial capacity stands idle, the victim of falling domestic incomes, poor investment choices, a failure to develop export opportunities and inadequate funds for materials and spare parts. After the impressive starts following independence made in building infrastructure, education and health services, progress is faltering. Institutions are deteriorating both in physical capacity and in their technical and financial ability to perform efficiently. People are having to do without public services as governments concentrate resources and energies on sheer economic and political survival (World Bank, 1984).

Financial services are needed to kick start new industries or to expand existing ones. In developed market economies, a financial intermediary system takes primary care of channeling savings to those who need loans and can use the funds most effectively. The intermediary system consists of banks, stocks and bond markets working under the close supervision of government. Financial services in Kenyan, as in the rest of East Africa, are inaccessible or unaffordable by the vast majority of productive sectors in the economy.

The financial sector has been stifled by an unstable macroeconomic environment that is witness to high interest rates, inflation and fiscal indiscipline on the part of national governments. The composition of the financial sector is uncompetitive, with a few large institutions calling the shots. At the same time, government policy concerning banking, insurance and the co-operative movement is uncoordinated at best. There are few measures for the promotion of savings and investment in capital markets (Mayank, 2002).

THE NECESSITIES TO INDUSTRIAL DEVELOPMENT

In order to ignite the fire of industrial growth, certain policies must be put into place. This will ensure that industrialization is homegrown, relevant to the aspirations of its people and sustainable in the long run.

The accumulation of educated and skilled workers, of infrastructure, of directly productive machinery and of institutions which encourage and reward entrepreneurship and savings is an important process towards attaining industrialization. Of course, all these may be difficult for a poor country such as Kenya to implement but it's a process that can be propelled by appropriate strategic actions.

Throughout the last one hundred hears, sustained economic growth has been associated not only with investment in physical facilities but with educational achievements, notably, widespread primary education. The spread of basic education tends to increase productivity by, for instance, making producers more responsive to economic events.

In all economies, businessmen, farmers, laborers and housewives make daily decisions on how to work and what to consume. Evidence from both industrialized as well as developing countries points to the benefits of education in quickening adjustments to change.

Improvements in literacy, health and nutrition help alleviate the worst aspects of poverty which include infant deaths, malnutrition, disease and breakdown in morality. In this way, such improvements in social welfare create the much needed momentum for growth in production and personal incomes. Studies in agricultural practice conducted in Latin America, Africa and Asia have shown that the literacy of farmers determines to a great extent the use of modern farming methods and hence the yields achieved. The same findings could be logically extrapolated to the industrial sector (World Bank, 1982).

WAY FORWARD FOR KENYAN INDUSTRY

For majority of Kenyans, agriculture is the main occupation that serves as a source of food livelihood. When other economic activities revolving around agriculture are considered, then the term of agriculture being the “backbone” of Kenya's economy becomes much deserved. Such activities include transport, agrochemicals and veterinary services.

It would therefore make sense that a plan for industrialization should include the nurturing of the country's agricultural sector. The acceleration of agricultural development means higher incomes for the people in rural areas. It also means more employment, increased earnings from exports and the generation of savings. All these are necessary for industrial development. Improved incomes guarantee a market for the goods and services provided by the non-agricultural sectors (GoK, 1983).

The role of agriculture in development can be seen throughout human history. A dynamic agriculture led and accompanied the process of industrialization in Europe, Japan, the United States and Russia. This is still the case today as observed in China and India. Conversely, a decline in agriculture results in a corresponding decline in industrialization similar to that seen in Kenya over the past decade.

The key to industrial growth among the present industrialized economies was the farmer himself. Farmers instigated a stream of cost-reducing innovations such as the cotton gin, the tractor and the combine harvester. Farmers financed and carried out the investments needed to exploit new technology, for instance, by consolidating land parcels to achieve economies of scale in production that lower costs. There were (and still exist) policy incentives in those countries that encourage farmers to improve the land. Such incentives delve into the security of land tenure, access to markets, taxation and the cooperative movement. Efficient extension services, whether supplied by government or the private sector, are useful in teaching farmers the latest techniques.

The wealthy, industrialized countries have found it prudent to cushion farmers from financial shocks by subsidizing agricultural production.  Subsidies have kept producer prices low and this has been a major cause of dispute in trade negotiations with less developed countries that cannot afford to subsidize their own agriculture.

In many ways, agriculture is no different from industry. The success or failure of agriculture owes much to factors that influence all economic activity. If it lags, as it has done in Kenya, its because of inadequate investment, lack of incentives and lack of appropriate guidelines (World Bank, 1982).

Industrial regulation by governments exists to enforce health standards, to protect the environment, ensure worker safety and to safeguard consumers. The Kenya government, like others in Africa, has been unable to enforce these rules. Instead, the government is concerned with political and economic aspects of firms' behavior. This hampers competition and makes the running of business very expensive (World Bank, 1991).

Special regulations and certain taxation policies are designed to protect state-owned enterprises and to serve the interests of powerful groups. The threat of price controls on fuel and public transport is aimed at appeasing the voting public. Confinement policies, as in the case of Telkom Kenya and the Kenya Power & Lighting Co., give specific firms the right to buy and sell certain goods in accordance with centralized priorities. Pressures from workers' unions have caused over-staffing in both private and public enterprises.

All these factors encourage unprofitable and inefficient firms that discourage new entrants. Introduction of new technology is lagging behind because obsolete plants in a protected environment can afford to stay in business. Large and expanding firms do not need government protection. The emergence of large, efficient private corporations was instrumental in the industrialization of countries such as Brazil and South Korea. Corporations like Daewoo, Hyundai, Samsung, LG and Embreaer are major conduits of technology transfer.

The market driven approach towards industrialization may not create societal equality but it does remain the surest path towards tackling hunger, disease, poverty and hopelessness. History abounds with examples of successful market driven economies. China, a nation that can feed and clothe its 1.6billion people, is the latest entrant into this rarefied league.

Among the greatest economists of the 20th Century is John Maynard Keynes, who was a powerful proponent of what is now called neo-liberalism.

Government actions in business are likely to fail for the main reason that economic goals are less of a priority than political goals. Indeed, politics can drive a government to intervene in ways that are economically harmful. Over the recent past, the government of Tanzania pressured the national electricity distribution company to keep power rates low for consumers. Low revenues meant the power company could not raise funds for investment in new capacity. Today, Tanzania is suffering its worst ever power rationing programme. The Kenya government is well on its way along the same path. In August 2006, the government told the Kenya Electricity Generating Company not to raise the cost of bulk power it sells to power distributor, the Kenya Power & Lighting Company. The power distributor had raised fears of a cash shortfall that could lead to the layoffs of workers.

The case for liberalism in trade and for clearer policies is now widely accepted. There is need for reform of ill advised regulation and licensing. Entry to and exit from activities should be easy for workers, entrepreneurs and capital.

Private firms are not necessarily good at making decisions or predicting social consequences. However, without government assistance, private firms cannot shift the costs of their mistakes to the tax payer. The knowledge that it has to pay for its own mistakes keeps the private sector in line (World Bank, 1991).

There have been calls to reintroduce import restrictions for the purpose of protecting local industry from cheap imports. China, India, Egypt and other countries produce at such low costs that, even after 100% duty at the Mombasa port, their goods can still be cheaper than Kenyan made items.

The price of sugar on the international market is far below what the Kenyan public pays for sugar from local millers. This has made the country a lucrative destination for international sugar traders.

Protectionist measures in the 21st century are likely to be self defeating. Restrictions in trade can reduce economic growth thus increasing unemployment. When unemployment is high, living conditions deteriorate and ultimately, desperate workers lose all their rights. Protectionism encourages industry to become wasteful. Only exceptional circumstances can justify restrictions on trade (Regency, 1995).

The desire of workers is to receive maximum pay for hours spent on the job. This is in direct opposition to industry owners who desire to maximize profits by spending as least as possible. Unions have played a constructive role in arriving at a compromise that ensures the interests of workers and employers are mutually realized. However, the recent spate of awarding high salaries to match those in the developed world will prove a setback for growth.

Developed countries can afford to pay huge salaries because their labor markets are much more advanced than ours. The most effective government action to improve the workings of the labor market is by promoting basic education and retraining of workers rendered irrelevant by technological change (Regency, 1995).

Institutions that secure property rights should be strengthened and sanity restored in the corridors of legal recourse. This will enable potential industrialists to manage risks, gain access to credit and obtain justice.

As government endeavors to attract both foreign and local investment, it is essential that the competition law be used to moderate the conduct of entrenched firms that may frustrate new and smaller entrants. Without this, then the Kenyan economy in general will be left to the dominance of monopolies and oligopolies (companies in collusion with one another). The costs of anti-competitive behavior are high and equally adverse to further investment (IEA, 2002).

The “beer wars” that characterized competition between East African Breweries and Castle Brewing during the 1990's are a prime example of how entrenched firms can frustrate new entrants. Castle Brewing eventually threw in the towel and left the country. Castle's plant in Thika was taken over by East African Breweries.

DEVELOPMENT STARTS FROM WITHIN THE COUNTRY

In order to start walking, a baby must have the courage to get out of the crib. The baby crawls, tries to get up, tumbles, tries again and again until the first faltering steps are made.

Turning Kenya into an active player in global industry will not happen overnight. It requires efforts on the part of the entire population, not just by the government. Business and entrepreneurship are very much stigmatized in Kenya, as though the act of making money were an evil by itself.

In terms of economics, it is an indisputable fact that we cannot enter the international market place unless we first sharpen our trading skills by trading amongst ourselves (Mengi, 2002). Then we can expand to our East African region. After that, the next stage will be the African continent. After Africa, our industry will be ready for the world.

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Bibliography

1). Kiboro, Wilfred (2002). “From Theory to Practice: Why the private sector must be a champion of change.” The EastAfrican, November 11 - 17, 2002
Special Report P. III

2). Mayank, Patel (2002). “The Poor State of Finance in Africa.” The EastAfrican, November 11 - 17, 2002 Special Report P. XV - XXII

3). Mengi, Reginald (2002) “The Time Haas Come for Radical Solutions.” The EastAfrican, November 11 - 17, 2002 Special Report P. VI

4). Government of Kenya (GoK) (1983). KENYA: Official Handbook
Nairobi. Government of Kenya

5). Daily Nation, August 3 2006

6). World Bank (1982). World Development Report 1982.
New York. Oxford University Press
ISBN: 0-19-503225-X

7). World Bank (1984). Toward Sustained Development in Sub-Saharan Africa. Washington D.C. The World Bank
ISBN: 0-8213-0423-2

8). World Bank (1991). World Development Report 1991: The Challenge of Development. New York. Oxford University Press
ISBN: 0-19-520868-4

9). Regency (1995). A Vision of Hope: Fiftieth Anniversary of the United Nations. London. The Regency Corporation
ISBN: 0-95204695-4

10). Institute of Economic Affairs (IEA) (2002). “Regulating Competition in Kenya's Beverage Industry.” The Point. Issue No. 53. P 8

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