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Unleashing Kenya’s potential

Wolfgang Fengler's picture

Kenya is again in the middle of an economic storm.

The combined impact of the drought in North Eastern Kenya, high food and fuel prices and a weakening currency, has led some to question the soundness of economic policies. In addition, the quality of Kenya’s institutions remains questionable and the country continues to have a poor reputation in fighting corruption. Is Kenya yet again in the middle of a fundamental crisis? I beg to differ. Despite valid concerns, Kenya’s fundamentals remain strong and have actually improved over the last years. If the government stays focused on implementing the constitution, upgrading infrastructure and intensifying the fight against corruption, there is nothing to stop this country from reaching its true potential.

Kenya already has a lot going for it: a well educated work-force, a vibrant service sector, and a good coastal location with a port in Mombasa that is a natural gateway for East Africa. If Kenya used these endowments wisely, it could easily reach 6 percent average growth and become a Middle Income Country – US$ 1,000 in annual income per capita – at the end of this decade. In the past, the country has reached this modest growth target occasionally, but has never sustained it over a longer period of time. Since the 1970s, Kenya’s economy has not seen growth above five percent for more than four consecutive years.

Kenyans have the future in their own hands. International shocks matter, but it is domestic factors which have held the country back, such as the post-election violence in 2008, the inefficiencies in the Port of Mombasa and unequal opportunities in the agriculture sector. Continuous high growth would propel Kenya to Middle Income status soon. Slow and uneven growth would result in another lost decade. If growth fails to rise above the average of the last ten years (3.7 percent) Kenyans would have to wait until 2037 to reach middle income status.

So how can Kenya turn the tide in these turbulent times?  One way to assess the performance and fundamentals of Kenya is the Country Policy and Institutional Assessment (CPIA). This little- known tool of the World Bank is actually one of the most comprehensive and thorough rating exercises of countries’ policies and institutions in the world.  Every year the World Bank rates developing countries on 16 criteria covering four broad areas that shape their development prospects: macroeconomic stability, structural policies, social and environmental policies, and governance. The resulting ratings – on a scale of 1 to 6 – largely determine the way the Bank allocates its soft loans and grants.  The latest rating exercise has just been completed for 2010 and there are three important conclusions for Kenya.

- With a rating of 3.8, Kenya is performing well. Among low-income countries in Africa, only Ghana has a higher rating at 3.9. Kenya is on par with Tanzania, Uganda and Rwanda.

- Kenya’s performance has been improving continuously since 2008. After stagnating from 2005 to 2007 and declining in 2008, Kenya has made headway in recent years improving its average rating from 3.6 to 3.8 (a substantial improvement by CPIA standards!).

- These improvements are uneven. For example, Kenya continues to be rated highly on macroeconomic policies and it has improved notably in social policies. The weakest area remains governance, even though Kenya ranks above the international average even in this category. This is mainly on account of its moderate-to-strong performance in mobilizing revenues, the quality of its public service, and public financial management. However, there has been no improvement in the rule of law, which remains Kenya’s “Achilles Heel.”

Fig. 1 Kenya’s Policy and Institutional ratings are strong in most areas (click on figure to see it larger)

 

Fig. 2 Kenya has been improving, except in Governance (click on figure to see it larger)

Today, there are reasons to hope that the judicial system - which has been made responsible for the prevailing impunity – could be significantly reformed. Through a rigorous (and public) selection process, the government has selected a new group of judges.  Without a credible justice sector, investment will remain low. However, if Kenya starts to tackle its perennial governance problems, the country, like its long-distance runners, will take off.

* This blog is also being published as part of a weekly column with Marcelo Giugale in Kenya’s Saturday Nation.

Comments

Submitted by Alice on
Great article WF, Indeed Kenya's potential lies in its own hands- we have so much going for us but until we can unlock the full potential of our key resources and capabilities, we would not achieve the desired level of economic development. Our underutilization of public resources and key infrastructure entities like the Mombasa Port lies at the forefront of our slow economic growth. And its telling that we are still flat in terms of growth when it comes to governance, not just in politics but in corporates as well- therein lies enormous risk that many investors are still wary about. We are on a good path and I believe and hope we can change for the better, and a lot faster if we out our heads to it.

Submitted by Wolfgang on
Dear Alice, Thanks for your response. As you mention the Port of Mombasa, it would probably not need a lot of resources to make it work better. Singapore's port is transacting 50 times more in volume - but it is not 50 times bigger. So you could do a lot with what you have. Better management would go a long way to unleash the potential of the port. Wolfgang

Submitted by Praveen on
This is an interesting blog that re-affirms the point first made by the World Bank report ‘Accelerating and Sustaining Inclusive Growth’ in 2008. The point was that sustained long-term growth could be in Kenya’s sights if it could keep business risk low by maintaining macroeconomic and political stability, and resolve major supply bottlenecks such as in Mombasa port. The background work done for the report established the fact that the structural break for Kenya came in the form of peaceful presidential elections in 2002 which were accompanied by perceptions of declining political risk and tangible results in the shape of favorable government debt dynamics. The improvement in policies before and after the elections was reflected in a steady increase in the Bank’s CPIA from 3.3 in 2002 to 3.7 in 2006. The violence around 2008 elections however put a brake on improvements, highlighting, again, political stability as an important ingredient of long-term growth in Kenya. A successful implementation of the new constitution and focus on reducing inequalities appear important to maintaining political stability.

I completely agree with this article. As a new PhD graduate with so much love for developing Kenya and taking it to the next level, I feel inspired and ready to be part of the team that takes Kenya to the next level. I am ready to use my intellect, work with young Kenyans and use the resources we have to make this happen. This is a great article! Inspiring! Challenging all Kenyans to stand up and together let's do it for our Country!

Submitted by Wolfgang on
Dear Esther, many thanks. Please also look out for the column "Economics for Everyone" in the Saturday Nation. Wolfgang

This argument is well-constructed and true. Our experience on the ground in Nyanza, as well as in meetings in Nairobi, gives us growing confidence in pointing to Kenya as an increasingly model African republic. You haven't understated the effect of high fuel and food prices on the society's prospects, but I think it bears mentioning here that the situation is a hard blow to the country's worst off, who in certain regions number in the hundreds of thousands. Our focus, investing in western Kenya's best health care NGOs, makes this point a fine one , sometimes dramatically, every day. With a dense population and few medical facilities, the state of individual health often utterly relies on community health workers, who need to eat and who need to get places. It's a problem. With hopes the macro policies to which you refer can eventually play a role in alleviating this situation down at the micro level, we thank you for this good piece. Regards, James Schaffer Executive Director Tiba Foundation

Submitted by Wolfgang on
Dear James, Many thank for sharing your insights. You are absolutely right and it confirms the general (economist) saying that "inflation is the worst tax for the poor". One of my next blogs will look at the inflation and how it hurts the poor, the key reason being that the poor can't save on food and this is what is driving inflation in Kenya today. Wolfgang

Submitted by Raj Raina on
If a problem is perennial (as you mention) than it means it is lasting or existing for a long or apparently infinite time; enduring. Therefore, I have no reason to hope.

Submitted by Makia on
Hello, You say the threshold for middle income countries by the World Bank is USD 1,000 could you please share the link? Secondly according to the World Bank, the GDP per capita for Kenya in 2010 is USD 1,621 (Source: List of countries by GDP (PPP) per capita, Wikipedia) which means Kenya has attained middle income status. Could you kindly clarify? Regards Makia

Submitted by Wolfgang on
Dear Makia, thanks for following up on this. The World Bank classifies Middle-income countries as having a per capita income of between around US$1,000 and US$10,000, which may qualify them to borrow from IBRD (http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:21090989~menuPK:34480~pagePK:34370~theSitePK:4607,00.html). These thresholds are defined on "market exchange rates". In addition, the World Bank and other development institutions calculate "Purchasing Power Parities" (PPP) which in poor countries is normally higher than market exchange rates because it reflects the prices on 'non-tradables' which are typically substantially cheaper. Wolfgang

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