This document provides a case study on Kenya's economic performance and growth drivers from 1960 to 2014. It summarizes that: 1) Kenya experienced strong growth in the 1960s-1970s but saw declining growth in the 1980s-1990s, with recovery in the 2000s driven by policy reforms. 2) Population growth has declined but Kenya remains youthful, presenting both challenges and opportunities for job creation. 3) The labor market has increasingly informalized, with most workers in low-paying informal jobs, though formal wages have risen recently. 4) Accumulating human capital and boosting productivity, especially in agriculture, remain important for sustaining growth and reducing poverty.

1. The African Lions: Kenya Country
Case Study
Mwangi S. Kimenyi, Francis M. Mwega, and Njuguna S. Ndungu
African Lions Authors Draft Workshop, 5 June 2015, Arusha, Tanzania

2. I. Introduction (1)
• Following the rebasing of its economy in September 2014,
Kenya is now classified as a lower-middle income country
with a 2013 GDP per capita of $1,246.
• It is the dominant economy in Eastern Africa and a major
source of FDI for some of the countries in the region.
• The country is ranked the ninth largest economy in Africa.

3. I. Introduction (2)
• This study seeks to:
– (i) analyze the drivers of economic growth in the country;
– (ii) evaluate the impact of growth on labor market outcomes
and poverty; and
– (iii) review the challenges and opportunities that are likely to
influence the country’s growth trajectory.
• The paper is divided into 6 sections.

4. II(a). Kenya’s economic performance: the
background (1)
• This section attempts to explain Kenya's economic growth performance in
the new millenium, updating an earlier study that covered the period from
the 1960s to the 1990s (Mwega and Ndung’u 2008).
• This earlier study attempted to explain why the good economic
performance in the 1960s and 1970s was not sustained in the 1980s and
1990s.
• First, we identified economic growth episodes, based on three models:
Collins and Bosworth (C&B, 1996); Hoeffler (1999); and Ndulu and
O’Connell (N&O, 2000).

5. II(a). Kenya’s economic performance: the
background (2)
• In the 1960s, growth averaged 5.7%, accelerating in the
1970s to 7.2%.
• It declined in the 1980s to 4.2% and in the 1990s to
2.2% (World Development Indicators).
• In the new millenium, the economy has experienced
some recovery consistent with the Africa Rising
narrative.

6. II(a). Kenya’s economic performance: the
background (3)
• The economy for example expanded fairly steadily from an
all time low growth rate of 0.6% in 2000 to a peak of 7.1%
in 2007, the highest in over two decades.
• A new government in 2003 put in place governance and
economic policy reforms that enhanced economic
performance.
• The World Bank CPIA, for example, generally improved over
this period, except during 2007-08 (Table 2.1).

7. II(a). Kenya’s economic performance: the
background (4)
• However, in 2008, the growth rate declined to
1.5% as a result of the Post-election violence
(PEV), drought in the country and the Global
Financial Crisis (GFC).
• It increased to 2.7% in 2009 and to 5.8% in 2010
but declined to 4.4% in 2011, 4.6% in 2012, and
4.7% in 2013 and was only 5.3% in 2014.

8. II(a). Kenya’s economic performance: the
background (4)
• With an average economic growth of about 4.0% over
2000-14, barely above the population growth rate of
2.7%, the country has continued to operate below its
potential.
• We leave out how Kenya's experience is explicable in
terms of growth regressions; and the role of markets;
private agents; and political economy in explaining
Kenya’s growth process.

9. II(b). The macro-growth story (1)
• However, to put matters in context, Kenya remains a
resource-scarce, coastal, labour surplus economy,
although there have recently (2012) been major
discoveries of commercial oil deposits, gas and coal.
• At least since the 1980s, the standard advice for such
an economy is that it should focus its development
programme on exports of labour-intensive
manufactures and services (Collier 2008).

10. II(b). The macro-growth story (2)
• The Kenya story is therefore of missed opportunities in the
1980s and 1990s, what Collier (2008) calls “missing the boat”.
• Kenya, for example, did not increase manufactured exports
much, given its coastal location, relatively cheap labour and
basically market- friendly orientation.
• The share of manufactured exports in manufacturing output has
remained quite low throughout the period (at about 15%).

11. III. Population size, growth and structure
(1)
• The county’s population has increased steadily over time,
from 6.1 million in 1950 to 44.4 million in 2013 and is
projected to reach 66.3 million in 2030.
• Population growth also increased steadily from 2.7% in
1950 to a peak of 3.9% in the early 1980s, declining
consistently to 2.7% in 2013.
• It is projected that the growth rate will continue to fall
reaching 2.2% by 2030.

12. III. Population size, growth and structure
(2)
• As well, the age structure of the population has changed
substantially.
• In 1950, the population of those aged 0-14 years comprised about
3.42 % of total population. In 2013, the share of this age group had
increased to 42.2% of total population (Figure 3.1).
• The population has also become more urbanized, from 5.5% in
1950 to 25.6% in 2013.
• The ICC case against Uhuru Kenyatta was however withdrawn by
the ICC in December 2014.

13. III. Population size, growth and structure
(2)
• However rural areas remains home to the vast
majority of the population now and for the
foreseeable future (Figure 3.2).
• Hence, there is need to continue focusing on
job creation in this sector through an
agriculture transformation strategy.

14. III. Population size, growth and structure
(3)
• We then computed the demographic dividend which is the
rate of change of the support ratio (Figure 3.5).
• It reveals two distinct periods:
– The first period is between 1950 and 1980 during which
the demographic dividend was negative.
– Since then, the demographic dividend has been positive
and is projected to remain so for the foreseeable future.

15. III. Population size, growth and structure
(4)
• The positive and increasing demographic dividend
augurs well for Kenya’s economic growth.
• However, the sizeable share of the youth population
suggests that the labor market policies should
particularly focus on job creation for this group if the
country is to turn the population structure into a
dividend instead of a curse.

16. IV(a). Kenya’s labour market: structure,
employment and wages (1)
• The data reveals that 2.26 million workers were engaged in
wage employment in 2013.
• The most important sector in terms of numbers employed
were education (400,000), Agriculture, forestry and fishing
(346,700) and manufacturing (280,300).
• Between 2010 and 2013, the share of public sector
employment remained fairly constant at around 30 percent
of total wage employment (Table 4.2).

17. IV(a). Kenya’s labour market: structure,
employment and wages (2)
• Probably the most important defining characteristic of the
Kenyan labor market is the increase in informalization.
• In 1986, informal employment accounted for about 20% of
total employment. It now accounts for about 82% of total
employment.
• This informalization can be attributed to the liberalization
policies, government promotion of the informal sector and
better data capture.

18. IV(a). Kenya’s labour market: structure,
employment and wages (3)
• There is a wide variation in earnings across sectors with
workers in Finance and Real Estate earning the highest and
those in the informal sector the lowest.
• Thus, the informal sector that employs the largest share of
workers also pays the least.
• Furthermore, informal sector earnings fall below the
international poverty line, so that, in essence, workers in
the informal sector remain poor.

19. IV(a). Kenya’s labour market: structure,
employment and wages (4)
• As well, earnings in the public sector are higher than in the
private sector, although the difference in earnings vary widely
across sectors.
• Between 2000 and 2009 (Fig 4.5), growth in average earnings
of employees in the formal sector has been on a downward
trend.
• Since 2009, however, the average wage earnings in the formal
sector has been increasing, reaching an annual rate of 12
percent in 2012.

20. IV(b). Labour productivity and human
capital returns (1)
• Agriculture GDP per worker:
• declines from PPP$400 in 1980 to $320 in 1997; but
partially recovers to $350 in 2010.
• GDP per worker:
• - is fairly constant between 1992 and 2002; then
adopts on an upward trend, reaching $3100 in 2012.

21. IV(b). Labour productivity and human
capital returns (2)
• Relative to HPAEs, accumulation of human capital
in Kenya is quite low (Tables 2.1 and 2.2).
• Despite a sharp increase in average educational
attainment in recent years, the country still lags
the upper middle income countries in human
capital accumulation.

22. IV(b). Labour productivity and human
capital returns (3)
• Private returns to education (Kimenyi et al.
2006)
Completed
Primary
Completed
secondary
College University
National 7.7 23.4 23.6 25.1
All Males 4.4 21.2 12.8 23.3
All females 13.2 36.3 43.5 62.5

23. IV(c). Growth, employment and poverty
(1)
• Employment elasticities for Kenya have been generally
higher than those of the world as well as SSA (Table 4.4).
• However, employment elasticities vary greatly over time.
• The highest elasticity was recorded over1996-2000 when
the growth rate was low; and the lowest was over 2004-
2008 when the economic growth rate was high.

24. IV(c). Growth, employment and poverty
(2)
• There hence seems to be an inverse relationship
between employment elasticities and growth .
• Our analysis shows growth of formal employment
tracks GDP growth closely (Figure 4.7). However,
there is no clear pattern in the relationship
between GDP growth and informal sector
employment.

25. IV(c). Growth, employment and poverty (3)
Decomposition of poverty into growth and redistribution
components, 1994-2006

26. V. Social protection (1)
• Although Kenya has initiated several social protection
programs, the country experience with social protection is
limited.
• Furthermore implementation of these programs has faced
many challenges such as limited resources and poor
targeting of intended beneficiaries.
• Some of the social protection programs in Kenya include:
– Youth Enterprise Development Fund: Introduced in 2006

27. V. Social protection (2)
– The National Safety Net Program: for orphans and
the elderly, covering a limited number of families.
– Equalisation Fund: Mandated by the Constitution (at
0.5% of tax revenues) for marginalized areas.
– Constituency development Fund (CDF): Introduced in
2003 at 2.5% of tax revenues.
– UWEZO funds: Introduced in 2013 as a Kshs. 6 billion
fund for both the youth and women.

28. VI. Emerging opportunities and
challenges (1)
Opportunities
– Regional integration
– Natural resources
– The youth
– Devolution
– New partnerships

29. VI. Emerging opportunities and
challenges (1)
Challenges
– Transformation of the economy
– Fragile democracy
– Inequality and poverty
– The youth
– Natural resources
– Security

30. www.wider.unu.edu
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