Kenya Transformation Profile
A Silicon Savannah?
Kenya shows an uneven growth pattern, with periods of promising growth overshadowed by a combination of adverse external shocks, weak internal economic management, and political unrest in 2007. As a result per capita economic growth has been lackluster, and output and employment are not shifting from low-productivity areas to high-productivity areas. Per capita income in 2010 was essentially the same as in 1981, with only a modest 7.8% cumulative increase over three decades.
Despite the diminishing contribution of agricultural output, agricultural employment remains high, and there are few signs that workers are migrating into higher productivity areas. Agricultural output is now about a quarter of GDP, down from a third in 1980, yet agricultural employment is about 70% of total employment. Manufacturing output has stagnated at about 10% of GDP for decades and remains largely agro-based. The services sector, now the biggest contributor to GDP, remains highly informal and—except for the few large firms in finance, telecommunication, and ICTs—is dominated by a large number of low-productivity small firms.
Formal sector employment has grown at between 0.1% and 0.4% a year since the 1980s. The informal sector constitutes about 80% of employment. Between 2000 and 2001 the prospects of new graduates getting formal sector employment averaged about 1% and improved to 10% in 2008 and 14% in 2009. Youth unemployment is high—at around 24%.
According to the 2011–12 Global Competitiveness Index, Kenya’s strength lies in the more complex areas of innovation and sophistication in business. It ranked 73rd of 142 countries thanks to its maturing private sector, the degree of business sophistication, and innovative capacity. Kenya receives good assessments for its labor market efficiency (37th) and for its relatively well developed financial markets (26th).
The constraints that have slowed Kenya’s transformation include institutional weaknesses, infrastructure gaps, and inadequate financing coupled with limited fiscal space in the government budget and low productivity of the public and private sectors. Overcoming these constraints is essential to providing a platform for economic transformation.
The 2010 Kenya Constitution and the Kenya Vision 2030 are two important documents that contain critical measures for sustaining the economic transformation agenda. Implementation of the constitutional reforms and the Kenya Vision 2030 plan is thus imperative for transformation.
Traditional high export earners include tea, coffee, and horticulture and resource-based products such as butter and ghee, pyrethrum extract, wattle extract, meat products, canned pineapples, and cement and petroleum products. Low-technology products include textiles, leather, footwear, and articles of plastics. Medium-technology products include metal containers, wire products, insecticides and fungicides, and screws and nuts. In the high-technology category there is potential to scale up the manufacture of medicinal and pharmaceutical products.
In transport Kenya can exploit its geographical position to serve the large hinterland. The financial sector, rated 26th of 142 countries on the 2011–12 Global Competitiveness Index, can make Kenya the financial hub for the region. The strong growth in the ICT sector (epitomized by the successful mobile telephone M‑Pesa financial services platform), the development of the largest techno city in Africa (the Konza technolopolis), and the relatively high levels of education position Kenya as a competitive ICT innovation and business process outsourcing hub providing high-value services such as software development, call centers, and medical transcription. Indeed, the country’s ambition is to leverage these potential assets to make Kenya the “Silicon Savannah.”
Regional integration arrangements offer further opportunities for economic transformation. Kenya is party to the East African Community and the Common Market for Eastern and Southern Africa regional integration agreements. The East African Community is now Kenya’s leading destination for exports, accounting for about 26% of exports. The prospects for even faster growth of Kenya’s exports to the East African Community are considerable because of the expected growth in Tanzania and Uganda from exploiting oil and other natural resources.
The Common Market for Eastern and Southern Africa region presents an opportunity to increase exports of manufactured goods. Most Kenyan exports to this region are manufactured rather than primary products, thus enhancing the diversification of Kenya’s manufacturing base.
Kenya’s growth with depth
- Transformation—6th of 21. Kenya improved its transformation rank from 8th in 2000 (1999–2001) to 6th in 2010 (2009–11), largely on the strength of its diversification, export competitiveness, and technological innovation, offset by weakness in productivity in manufacturing and agriculture.
- Growth. Kenya’s rapid growth in the 1970s, averaging 5.7% a year from 1971 to 1980, dipped to 3.6% in 1981–90, collapsed to 1.7% in 1991–2000, and revived to 3.7% in 2001–10. Corresponding GDP per capita growth rates were 2.4%, 0.3%, –0.8% and 1.3%. GDP growth turned negative (–1.0%) in 2008 in the wake of the post-election violence at the end of 2007, but has since recovered, rising to an average of around 5.1% in 2010–12, and expected to average 6.0% in 2013–14.
- Diversification—6th. Manufacturing’s share of GDP was 11.7% in 2000 and 11.8% in 2010 (down from an average of 14% in 1971–80). The share of the top five export products fell from 59% in 2000 to 46% in 2010 (an improvement), while the share of manufacturing and services in exports of goods and services also rose from 47% to 51%. These developments moved Kenya up one step in the diversification rank from 7th in 2000 to 6th in 2010.
- Export competitiveness—4th. The relative export intensity of production (the share of exports in GDP relative to the share for the world) fell from 0.96 in 2000 to 0.92 in 2010. But Kenya improved in rank from 9th to 4th due to greater falls in the ratio for some of the other countries.
- Productivity—18th. Kenya dropped from 15th in 2000 to 18th in 2010 on productivity. Manufacturing value added per worker rose from $7,826 (in 2005 US$) to $9,512 over the period, while cereal yields stagnated around 1,480 kilograms per hectare.
- Technology—7th. The share of medium and high technology in production fell from 21% in 2000 to 14.4% in 2010, while the share in exports rose from 6.4% to 12.4% resulting in Kenya’s rank on technology falling from 6th to 7th.
- Human well-being—5th. Real GDP per capita (PPP 2005 US$) in 2010 was $1,479, up from $1,297 in 2000. Youth unemployment, at around 24%, is a serious challenge.