24 January 2016

Kenya: Yes, There Is Growth, but Look Around and You'll Realise You're Doing Badly

opinion

Despite the difficult global economic context and the negative impact of terrorism on tourism, Kenya continues to grow.

Even though corruption remains a serious concern, the International Monetary Fund says it expects the economy to expand by around 6.8 per cent this year. No doubt supporters of the Jubilee Alliance will jump on this news as evidence that the government is doing a good job of managing the economy.

If they do, they will only be partially right. So far, President Uhuru Kenyatta has talked a very good game, but Kenya's growth is slower than that of its neighbours - as a result, the overall value of its economy will soon be surpassed by that of Tanzania.

Although 6.8 per cent growth is high compared to the economies stagnant performance in the late 1980s, it is important to ask whether this is actually the best that Kenya can hope to do.

Looking across East Africa, it seems somewhat disappointing. A glance north to Ethiopia reveals a country that has experienced double-digit growth, while Rwanda is expected to grow at 7.5 per cent this year. Very significantly, the IMF's growth forecast for Kenya has been revised downwards from 7.2 per cent, a fall of 0.4 per cent that the Fund says is due to the "prevailing harsh economic conditions".

PUPULATION GROWTH

A deeper look at the state of the economy raises other concerns. Some economists argue that it is highly misleading to look at GDP growth figures without also looking at the rate of population growth.

How else can one tell whether the economy is growing fast enough to accommodate all of those looking for work? On this basis, the economy is not in such great shape: According to the Economist Intelligence Unit, Kenya has one of the fastest growing populations in the world. Unfortunately, this means that the workforce is expected to triple in size from 18 million to 48 million by 2050. Local efforts to slow the birth rate, particularly in rural areas, have so far proved to be unsuccessful.

Demographic dividends have been much lauded in some sectors. No doubt optimists will point to the fact that this new workforce can be thought of as potential employees, who will contribute to national output and pay taxes, thus raising government revenue.

Of course, there is some truth to this. The reality, however, is that Kenya's economy is not growing fast enough to absorb the ranks of young people seeking to enter the workforce every year, and so unemployment, and all the negative trends associated with it, is likely to rise.

How Kenya's growth has been achieved is also a cause for concern. Although precise figures are hard to come by, it seems likely that a large part of the growth rate is due to high levels of government expenditure on infrastructure projects.

Various other drivers of growth can also be identified, most notably the expansion of financial services and, depending on the year, agriculture and manufacturing, but the contribution of these is limited compared to the boom economies that have been created around Vision 2030 priorities.

Every new shilling of government money that is spent by the devolved governments on the construction of offices and buildings has also contributed to the growth figures, however indirectly.

ECONOMIC TRAJECTORY

Because such growth is state-led, there are serious questions about the sustainability of current economic trajectory. Even if current construction projects help to house government officials and generate short-term employment, they will not contribute to long-term growth unless they are completed to a good standard and facilitate further economic activity.

Every delay and corruption scandal makes this less likely, as does the falling price of oil, which calls into question the wisdom of placing such a great emphasis on the Lamu Port Southern Sudan-Ethiopia Transport (LAPPSET).

Never before has the fate of the Kenyan economy rested so heavily on part of the country, or the price of a natural resource, over which the government can exert such little control.

As things stand, one of the main casualties of rising corruption has been the government's much vaunted programme of infrastructural development. Currently, many of the Jubilee Alliance's flagship projects have been delayed by poor planning and procurement scandals.

Kenyans have high hopes of many of these projects, so what are the prospects for their completion? Every day that we get closer the 2017 elections, President Kenyatta has a greater incentive to intervene to ensure that his legacy programmes show signs of progress.

Despite this, one of the government's main election promises, the "one laptop" programme has effectively petered out. Far more attention will therefore now be placed on the most high profile of the remaining infrastructure projects: the standard-gauge railway between Mombasa and Nairobi and LAPSSET.

Of these, the standard-gauge railway at least appears to be on track, with the Chinese envoy to Kenya, Dr Liu Xianfa, stating in August that the construction is ahead of schedule, with more than 50 per cent of the work on bridges, culverts and sub-grades completed.

AMBITIOUS VENTURES

Reviews of the progress on the LAPSSET corridor have been somewhat more mixed. Significantly, this represents one of the most ambitious ventures to ever be attempted in Kenya, and many key parts of the project are still at the planning stage.

Predictably, insecurity and the high cost of land have emerged as a major barrier to the new infrastructure development that the corridor was designed to generate.

Ever on the look out to spot an opportunity to make a fast buck, land speculators have forced up the cost of operating along the corridor, deterring both domestic and international investors from becoming involved.

As a number of commentators have noted, it is also unclear when the benefits of state investment in these areas will be felt. Kenyans are naturally impressed by the scope and cost of these major projects.

Interestingly, though, some estimates suggest that the standard-gauge railway linking Nairobi and Mombasa will have a negligible impact on growth. Now that the oil price has fallen as low as $28 dollars a barrel, it may also be time to reassess whether it is viable to construct an oil pipeline across such inhospitable terrain - especially as Uganda recently signed a deal to explore the possibility of exporting its oil through Tanzania. Growth may therefore not be as responsive to infrastructure investment as many are hoping.

How can Kenya grow quicker?

If the Kenyan economy needs to expand quicker in order to limit unemployment, how can this be achieved?

Since the 1980s, one area in which Kenya has consistently underperformed has been in attracting Foreign Direct Investment. Many news reports over the last 12 months have suggested that this is starting to change.

In August 2015, for example, this very newspaper reported that FDI was rapidly expanding and might even double over the course of the year. No doubt this is good news, but it is worth interrogating these figures a little more closely.

MEDIA COVERAGE

Despite the upbeat tone of the media coverage, a large part of this growth occurred because the country had suffered a particularly poor year in 2014, as investor confidence collapsed in the wake of the Westgate attacks.

New figures from the United Nations Conference on Trade and Development (UNCTAD) suggest that Tanzania has around $13.5 billion in FDI stock, more than twice as much as Kenya.

Of course, this raises the question of why Kenya's performance on FDI has been so poor for so long.

Two significant factors are the strength of the domestic capitalist class and the political instability that the country suffered in the 1990s and around 2007/8. Yet there is a third factor that clearly outweighs the other two - corruption.

European business leaders report that they lack confidence in their capacity to identify a safe investment in Kenya, and that they fear paying the bribes that they are often asked for fear of domestic prosecution.

The additional costs that the requirement to pay bribes places on economic activity is another deterrent. Unfortunately, it seems unlikely that 2016 will see positive change in this regard because, as I wrote in my last column, there are major structural barriers to the effective management of corruption within the Jubilee Alliance.

How Kenya needs a leader such as President John Magufuli of Tanzania, who is prepared to lead by example in the fight against corruption.

COLLAPSE IN TOURISM

Reviewing Kenya's economic prospects without explaining the way in which they have been damaged by the threat of terrorism would be unfair.

Under the Jubilee Alliance, the frequency of attacks has resulted in a collapse in tourism that may have reduced the rate of economic growth by up to 1 per cent.

No doubt the country's growth and unemployment figures would look better if it was not unlucky enough to be located next to one of the world's most unstable states.

Inconsistent and often incompetent anti-terror activities have also played their part in the rise of insecurity, however. Counter-terror operations have become more effective over the past six months, but they will need to improve further if the country is to secure the level of economic growth that its potential makes possible, and its population growth demands.

Dr Cheeseman teaches African politics at Oxford University in the UK; Twitter: @fromagehomme

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