Jacob Ng'ang'a: Industrialization in Kenya: What Went Wrong and Why?

1. L2C – Learning to Compete: Industrial
Development and Policy in Africa
24-25 June 2013 UNU-WIDER Conference
Helsinki, Finland.
June 24, 2013
Industrialization in Kenya: What Went Wrong and
Why?
Jacob Chege, Diana M. Ngui & Peter Kimuyu

2. Background and Outline
 why the issue?
 THE LEVEL OF INDUSTRIALIZATION IN KENYA IS LESSTHAN DESIRABLEYET,ASTHIS CONFERENCE NOTES,
INDUSTRY MATTERS FOR A COUNTRY’S GROWTH
 Has there been any interventions to stimulate industry in Kenya and if so
why didn’t they work?
Answer lies in examining: Policies,Structure,Productivity,Issues
 Outline
 Evolution of the Industry and Industrial policies
 Successfulness of the interventions
 The structure of the industrial sector
*Sectoral composition *Manufacturing employment
*Manufacturing exports *Size factor
 Patterns of Industrial Productivity
 The Industrial Policy Framework and Emerging Policy Issues

3. How the industrial sector has evolved
 Industrial sector- Manufacturing (9.44%) *, Mining and Quarrying (0.7%),
Building and Construction (4.1%), electricity and water (0.9 %)
 Except for manufacturing, contribution of others is small but new
developments
 Pre1963-hardly any meaningful manufacturing
 Limited local capacity- attract FDI (FI Protection Act 1964) & harness
indigenous entrepreneurship (KIE 1967, ICDC 1971)
 Textile mills such as Rivertex, Kicomi and United Cotton Mills (1st FDI)
 Food processing industries–bakery products, grain-milling products,
vegetable/animal oils and fats, dairy products, canning fruits and vegetables (FDI
and joint ventures)
 Metal industry- few of them before1963 - Kenya United Steel Company, Steel
Africa, Mabati Rolling Mills, Insteel, Kaluworks, Galsheet and Doshi (Kenyans of
Asian origin)
 Cement industries- Bamburi, EAPC, Devki and Mombasa Cement (FDI and joint
ventures)

4. Evolution of Policies for industrial development
Three major policy regimes: IS, ML & EP
Import Substitution (1960s &70’s)-Government direct support
and tariff protection of the industry
 Objectives~ rapid growth, easing BOPs pressures, local capacity,
employment creation
 IS brought mixed results:
high rate of industrial growth (8.0 %) + establishment of agro-
processing industries
Anti-export bias-Inefficiencies- low capacity utilization, no quality
premium, high operational costs & high prices
Low moment in industrial growth due to limited local demand

5. Evolution of Policies ….. cont
Market Liberalization Polices (1980s)
 SAP-removal of price controls and liberalization of imports
 Review of the industrial strategy and structure of incentives
(EMRG 1986)
 SAP led - exposure to international competition
 near- collapse of the local textile industry in the early 1990s
 No meaningful export growth
• the industrial sector continued to be inward-oriented,
excessively import-dependent, capital intensive
Private sector not keen to face international competition
Govt was slow in removing anti-export barriers

6. Evolution of Policies for industrial development…..
cont
Renewed drive for Export Promotion (1990s)
• 1991-2: introduction of Forex-Cs
• 1992-100 % retention of forex earnings from the non-
traditional exports e.g. Manufacturing + horticulture
 From 1993 -a series of export platforms
• Export Promotion Council
• Export Compensation Scheme
• Manufacturing Under Bond (MUB)
• Export Processing Zones (EPZ) [1997]
 Sessional Papers of 1994 (Recovery and Sustainable Development to the
Year 2010 ) & of 1996 (IndustrialTransformation to theYear 2020)

7. Evolution of Policies ….. cont
Export promotion and focus on overall business environment
(2002 and beyond)
 Economic Recovery Strategy forWealth and Employment Creation-
improve macro and business environment (2003)
 Kenya Vision 2030 - develop a diversified, robust and
competitive manufacturing sector (2007)
 National Industrial Policy - harmonized & coherent industrial
policy –not yet launched (2007)
 Sessional Paper No. 9 of 2012 (the National Industrialization
Policy Framework for Kenya 2012-2030)

8. Successfulness of the interventions
Period Policy regime Key policy strategies Industrial developments (successes and failures)
1960-
1970s
IS 1.Gvt direct support
2. Tariff protection
+ paper, textiles and garment manufacturing, food processing,
leather tanning and footwear
+ 8.0 percent
- Non-competitive industrial structure (high operational costs
and quality challenges)
1980s ML (sap-
driven)
1. SAP-removal of price controls
2. Liberalization of foreign
exchange market
3. Reduced direct govt invest’
+More govt focus on industrial policy eg EMRG
-near- collapse of the local industry
-still an inward-oriented, excessively import-dependent,
capital intensive
-more pressure for mkt liberalization led to second hand &
sub-standard goods
1990s EP 1 Forex-Cs & earnings retention
2. export platforms: EPC, ECS,
MUB, EPZ
3. SPs of 1994 and 1996
+ industrial establishments in EPZ particularly textile industries
-opportunistic implementation of the export schemes
-economic mismanagement depressed the whole economy
From
2002
Medium & long term Planning blueprints
ERSWC (2003-
7)
Targeted to improve macro and
business environment
*improved power supply, increased supply of agricultural
products for agro processing, tax reforms and tax incentives
*improved sector performance & exports to regional markets
*More exports under AGOA
-no major shift in manufacturing composition
-2008 political violence & global financial crisis slowed growth
NIP Create harmonized & coherent
industrial policy
-The report is yet to be launched
Kenya Vision
2030
*Flagship projects : SEZ,
Industrial parks and heavy
investment in infrastructure
*Focus on niche markets
+infrastructural development is on course e.g. Thika road &
bypasses
- Lack of funds for massive investment is a challenge
-Managing the political process
SP No.9 of
2012
*selective import substitution
*export promotion
…………………..

9. 10.1
9.9 9.7 9.7
10.9 10.5 10.3 10.4 10.8
9.9 10
9.6 9.7
1
1.6
0.1
4.5
4.7 4.7
6.3 6.3
3.5
1.3
4.5
3.3
3.8
0
2
4
6
8
10
12
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011*
2012**
Percent(%)
Year
Contribution to GDP (%) Manufacturing Sector Growth(%) GDP Growth (%)
Growth and GDP share Patterns of Manufacturing Sector

10. The Structure of the Industrial Sector
Percentage Share of Total Manufacturing Value Added by sub-Sectors
2006 2007 2008 2009 2010
Total food manufacturing 20.37 20.93 19.34 22.57 21.81
Tobacco and beverages 9.04 9.45 9.19 9.68 10.06
Textiles and Clothing 3.25 3.1 2.73 2.18 2.16
Leather and footwear 1.75 1.83 1.67 1.55 1.88
wood and furniture 1.39 1.39 1.43 1.57 1.77
paper and printing 6.51 6.5 6.4 5.15 4.75
Industrial chemicals, paint & soap 1.42 1.4 1.38 1.5 1.59
petroleum refineries : oils, Vaseline 15.38 15.32 17.4 10.61 10.62
Rubber products 1.34 1.24 1 1.12 1.05
Plastic Products 1.93 1.78 1.39 1.61 1.52
Clay and Glass products 1.46 1.51 1.76 2.07 2.04
Metal products 4.58 4.6 4.07 4.2 4.15
Non-metallic Mineral products 11.08 11.41 13.37 15.67 15.46
Transport equipment 1.76 1.61 1.53 1.61 2.02

11. Trend in Percentage Share of Employment by sector
2006 2007 2008 2009 2010
Total food manufacturing 30.68 30.36 30.62 30.62 30.62
Tobacco and beverages 3.55 3.44 3.26 3.26 3.26
Textiles and Clothing 23.48 23.32 23.43 23.43 23.14
Leather and footwear 0.94 1.10 0.99 0.99 0.99
wood and furniture 5.46 5.36 5.39 5.38 5.39
paper and printing 6.66 6.63 6.60 6.60 6.60
Industrial chemicals, paint & soap 5.80 5.77 5.72 5.72 5.72
petroleum refineries : oils, Vaseline 0.09 0.08 0.09 0.09 0.09
Rubber products 1.26 1.41 1.41 1.41 1.41
Plastic Products 3.15 3.35 3.27 3.27 3.27
Clay and Glass products 2.58 2.73 2.75 2.75 2.73
Metal products 9.46 9.42 9.52 9.52 9.52
Non-metallic Mineral products 0.90 1.17 1.19 1.19 1.19
Transport equipment 3.57 3.09 3.09 3.09 3.09
The Structure ..cont

12. Manufacturing Exports
Year 2003 2004 2005 2006 2007 2008 2009 2010
1
Sulphates
except of
Aluminum 67,283 76,940 127,545 135,108 207,543 217,044 237,029 320,974
2
Machinery &
Transport
Equipments 20,339 36,824 52,391 83,337 118,052 123,685 153,251 183,370
3
Sodium
Carbonate 28,460 64,921 80,179 57,288 86,464 170,851 107,784 91,415
4 Cement 23,517 23,736 38,915 55,462 73,582 93,991 100,797 93,105
5
Paper and Paper
Products 27,565 34,589 41,836 45,164 56,599 52,234 48,898 52,946
7
Textile Yarns
and Fabrics 21,144 36,843 41,354 45,936 51,083 38,150 39,659 58,862
6 Printed Matter 51,880 6,913 26,814 31,799 54,306 51,013 59,238 38,233
8 Soap 14,361 20,922 46,011 20,266 29,472 35,703 49,038 55,345
9 Footwear 17,337 21,692 26,573 32,836 48,336 33,920 34,584 40,444
10 Leather 12,107 13,505 21,839 28,408 48,444 42,930 29,028 52,745
Total mnf.
Exports 455,679 598,636 614,847 1,170,973 1,493,200 1,560,948 1,612,624 1,758,088
Top ten industrial products over time in terms of export contribution in US $
The Structure ..cont

13. Size factor in industrial establishmentsThe Structure ..cont:
Percentage Share in the Distribution of Formal Employment by Firm Size
Year/employees 0 – 10 11 - 50 > 50 % growth
2005 1.65 9.89 88.46 1.60
2006 1.65 9.88 88.47 2.52
2007 3.42 25.70 70.88 3.34
2008 3.28 25.22 71.50 -0.75
2009 3.29 25.01 71.70 0.44
Percentage Share in the Number of Formal Establishments by Firm Size
Year/category 0 - 10 11 – 50 > 50 % increase overall growth
2005 32.62 34.24 33.17 -
2006 32.94 34.16 32.878 0.82
2007 32.92 34.21 32.875 -0.73
2008 32.98 34.25 32.775 1.68
2009 32.96 34.25 32.782 -0.02

14. Patterns of Industrial Productivity…..
Labour andTotal Factor Productivity
Manufacturing Activity
2006 2007 2008
Manufacture of Food, Beverages and
Tobacco
54,324.3 63,338.5 42,374.1
Textile, Wearing Apparel and Leather
Industries
15,592.0 21,722.0 6,507.6
Manufacture of Wood and Wood Products,
Including Furniture
2,620.1 1,239.7 3,239.3
Manufacture of Paper and Paper Products,
Printing and Publishing
12,248.7 11,471.9 9,048.3
Manufacture of Chemicals and Chemical,
Petroleum, Coal, Rubber and Plastic Products
33,270.9 15,050.9 29,931.5
Manufacture of Non-Metallic Mineral
Products, except Products of Petroleum and
Coal
34,504.4 34,036.4 29,328.5
Basic Metal Industries 3,204.1 3,619.4 2,361.9
Manufacture of Fabricated Metal Products,
Machinery and Equipment
16,372.9 15,953.6 9,570.0
Other Manufacturing Industries 1,983.8 1,062.0 1,070.1
Value added per employee for large firms by sub sector (in constant 2000 US$)*
Using official statistics on value added and employment:

15. Labour and Total Factor Productivity…cont
Methodology (Productivity measures)
 LP
 LP =Y/W withY-value of output (proxied by total sales) andW- is the wage
bill at the firm level
 Data source: 2007World Bank data
 TFP
 we can use a parametric approach:TFPi =Yi - β̀lli - β̀2ki -β̀3mi
 the estimatedTFP is extracted through exp (TFPi)
 Or simple non-parametric
 TFPi =Yi – Σƿjxj
 WhereY is total sales, ƿj is the share of total cost contributed by input j & xj
is input of factor j
 transcendental logarithmic form
 Data source: Statistical Abstracts and Economic Surveys to generate time
series information on aggregate manufacturing output, capital and labour

16. Results of the Productivity Analysis ….cont
Labour Productivity by Sector
Sector Labour Productivity Total Factor
Productivity
Mean Median Mean Median
Food 15.08759 6.35 3.977334 2.884879
Textiles 11.0139 4.9375 4.137512 3.174387
Machinery 9.551155 5.0 4.449301 3.408503
Chemicals 11.54015 9.666667 4.571164 3.390186
Wood 7.501865 5.9709 3.903343 3.401853
Metals 11.08819 5.950501 3.87107 3.354149

17. Results of the Productivity Analysis ….cont
Labour andTotal Productivity by Firm Size
Firm Size Labour Productivity Total Factor Productivity
Mean Median Mean Median
Small 12.66 6.33 3.905787 3.071588
Medium 72.765 7.236 4.127252 3.137954
Large 16.863 8.748 3.400185 2.907599
Other 7.135 4.234 3.651921 3.21156
Labour andTotal Factor Productivity by Export Participation
Export Orientation Labour Productivity Total Factor Productivity
Mean Median Mean Median
Exporters 14.5504 8.139535 3.634471 3.074606
Non-Exporters 32.217 6.082576 3.8712 3.102629
Export to dev.
Countries
17.178 6.37 3.380612 2.977382
Does not export to
dev. Co
31.802 8.735 3.794325 3.183989

18. Pattern of changes in manufacturingTFP
1.41.61.82
ManufacturingTFPusingTransloginlogs
1960 1970 1980 1990 2000 2010
Year

19. The Industrial Policy Framework and Emerging Policy Issues
Emerging Policy Issues
 More consistent Industrial policies and diligent implementation
 The size factor and its investment implication
 Poor productivity growth
 Not gone beyond the business environment challenges
The Conduct of Industrial Policy: challenges exists in
 Coordination - creation of silos, empire building and information
asymmetry
 huge financial requirements for implementing flagship projects
 Structural shocks: election violence, tribal conflicts
 Ineffective regulations
 non-cohesiveness of Kenya society and deep-rooted suspicion

20. The End
Thanks