Inclusive Growth and its Relevance in Kenya

Inclusive Growth and its Relevance in Kenya

On 12 December 2018, Kenya commemorated 55 years of independence from British rule, marking a big victory on social and political liberalization. Kenya is a lower middle-income economy striving to achieve a higher middle-income status. To get there requires accelerated economic growth and enhanced inclusiveness of this growth. This is the spirit of the Government’s economic blueprint, the Kenya Vision 2030 and the Big 4 Initiatives (2018-2022). In the 2018 Budget policy statement, the government commits to ensure strategic allocation of economic resources and implementation of policies that promote broad-based inclusive growth. The objective of attaining inclusive sustainable economic growth is also explicitly stated in the Third Medium Term Plan (2018-2022) of the Kenya Vision 2030. But what makes growth inclusive and how can Kenya attain it?

Inclusive growth is the idea that economic prosperity should benefit all populations. The Organization for Economic Cooperation and Development (OECD) defines inclusive growth as “economic growth that creates opportunity for all segments of the population and distributes the dividends of increased prosperity, both in monetary and non-monetary terms, fairly across the society”. Inclusive growth is a wide concept, and distinctly concerns itself with the pace and pattern of economic growth, basically the speed of economic growth and how this growth is distributed across the country. For growth to be considered inclusive, it must be rapid and lead to sustained reduction in poverty. It must be broad based across all the sectors of the economy and must include a larger proportion of the country’s labour force. Inclusivity as a concept encompasses equity, equality of opportunity and protection in markets and employment transitions.

Measuring inclusive growth is challenging. Despite this, there is some consensus on the indicators of inclusive growth; these include: poverty and inequality (income and non-income); economic growth and employment; key infrastructure endowments; access to education and health; access to basic infrastructure utilities and services; gender equality; social safety nets; fiscal policy; and, good governance and institutions. Inclusion of underutilized sections of the labour force is emphasized in literature as the key tenet of inclusive growth, particularly enhancing participation of the population in the growth process using indicators such as employment to population ratio or the share of workers in families below the poverty line.

Over the past decade, Kenya’s economic performance has been remarkable particularly in relation to its historical record and global economy. For instance, between 2005/06 and 2015/16, the country recorded an average GDP growth rate of about 5.4%, surviving economic shocks such as the 2007 post-election violence, 2008/09 global financial crisis and high oil prices following the prolonged drought in 2011 that struck the Horn of Africa. Over the same period, Sub-Saharan Africa and the world grew at an average of 4.5% and 2.8%, respectively.

Despite the relatively stable growth in GDP in the last decade, growth in total recorded employment averaged only approximately 0.6% per year. Such growth is basically flat when adjusted for the growing population. The good news is that during the same period, the population of Kenyans living below the national poverty line (i.e. consumption level equivalent to Ksh 3,252 for urban households, and Ksh 5,995 for rural households per person per month) declined from 46.8% to 36.1%, according to Kenya Integrated Household Budget Survey – KIHBS 2015/16. However, the current pace of poverty reduction, at about 1% per year poverty reduction cannot enable eradication of poverty by 2030.

Official government statistics indicate that 83% of total employment in the country is from the informal sector. With the growing population and the slow pace of employment creation, this number is likely to increase. The problem with this is that jobs in the informal economy are often insecure, with no employment contracts, and pay is often irregular and consequently workers are always trapped in low productivity. Employers usually have little incentive to develop worker productivity through training and learning of new skills as they are viewed as transitory and highly interchangeable. The workers are therefore excluded from accessing many of the resources they need to be more productive and be effectively involved in the economic growth process.

It is from the foregoing that inclusive growth becomes relevant for Kenya. At the very minimum, growth in labour force and improvements in productivity of workers results into economic growth. When a large section of the labour force is stuck in the low productivity informal sector, then growth prospects for the economy will continue to be below potential.

What then should a country such as Kenya take into consideration to make growth inclusive and benefit for all? The answer to this question lies in a combination of approaches. First and foremost, is successful implementation of the “Big Four” initiatives that focus on providing all Kenyans with basic needs including decent jobs, decent and affordable housing, food and health.

In the “Big Four” initiatives, the government is cognizant of the role of employment creation in strengthening inclusivity of growth process and, as such, sets to support value addition and raise the share of manufacturing sector to GDP to 15%. Towards this endeavor, emphasis has been placed on value addition in textile and apparels, leather products, agro-processing, manufacturing of construction materials, oil, mining and gas, iron and steel, ICT and fish processing (Blue Economy). These sub-sectors of the manufacturing sector depend heavily on locally available raw materials in their operations, and it is estimated to have a potential of increasing manufacturing sector jobs by over 800,000. Other initiatives that should be devotedly implemented to revamp the manufacturing sector, stimulate demand and consumption and enhance job creation include investments in ICT, improving ease of doing business, strictly enforcing the 40% local content for all government projects and support for the “Buy Kenya Build Kenya” initiative. The recently KIHBS 2015/16 report shows that about 72% of Kenyans are below age 35, indicating that the population is relatively young. There is need to scale up support programmes for MSMEs and improve market access for youth-led enterprises, improve employability of youths and enhance both individual and enterprise productivity. It is estimated that devoted and successful implementation of the “Big Four” initiatives is likely to generate over 1.3 million jobs annually, directly and indirectly.

Tied to the “Big Four” initiatives, the second aspect that the country should keenly focus on is support for devolution and enhance fiscal support for the counties. The role of devolution in delivering the “Big Four” initiatives cannot be over emphasized. Health and agriculture (food security), for instance, are devolved functions and are at the core of the “Big Four” initiatives. Since inception of devolution in 2013, counties have played a critical role in healthcare delivery. Health care services have been expanded across the counties as each county focused on expanding its local capacities through construction of health facilities, provision of medical equipment and support for preventive health measures. On agriculture, farmers have been provided with certified seeds and seedlings, tractors for tilling land, fertilizer, milk cooling plants, market centers for agricultural outputs, among others.

Despite the progress made so far, challenges remain, particularly inadequate financial resources to finance projects and programmes at the county level. In an endeavor to ensure inclusive growth and shared prosperity, the National Government could step up its fiscal support for the counties. Over 80% of total county revenue comes from the national government while the rest is county Own Source Revenue (OSR). Data from the National Treasury and Ministry of Planning indicate that since 2013, the proportion of county spending that is financed from OSR has been on a decline. However, it is evident that counties differ in revenue-raising capacity and spending needs (given geographic variation in socio-economic conditions such as the income of residents, value of property and the distribution of business activity).

It follows that in the absence of national government intervention, counties with low OSR capacity and/or high expenditure needs would either need higher levels of county taxation or lower levels of county public service provision. This will possibly exacerbate pre-existing socio-economic inequalities and exclusion. It is at the back of this that the Commission on Revenue Allocation could consider to either maintain the current revenue sharing formula or enhance it to ensure more equitability while at the same time rewarding counties that are efficient in their fiscal effort of OSR mobilization. Alongside the above measures, the national government could scale up capacity building and strengthen counties’ ability to optimally raise local revenue without distorting the business environment, but rather reinforcing private sector confidence in investing in the counties.

County policies are one determinant of how households and firms save, invest, spend, innovate and pay taxes. To this end, by encouraging legislation and polices that enable enterprises to thrive, counties will not only help increase the productivity of businesses and income-making potential for these enterprises, but the counties will also benefit from a wider and richer OSR collection-base to help finance programmes geared towards improving livelihoods of the citizen.

Third, infrastructure development plays a critical role in enhancing inclusive growth. Adequate infrastructure across the country will expand the capacity to grow economic activity, including by creating equal access to markets and productive opportunities. In addition, it will be a pull-factor for devolution of economic activity by enabling mobility of labour and goods across counties, increasing inter-county trade, reducing wastage resulting from long travel time due to bad roads, and improving access to overseas markets.

Fourth, human capital development is a critical component of inclusive growth. The 2015/16 KIHBS indicate that enrollment rates at all levels of education (primary 85%, secondary 42.2% and tertiary 15.2%). This follows the universal primary education policy introduced in 2003, the free day secondary education and promotion of subsidized tertiary education through Higher Education Loans Board (HELB). Kenya’s education policy should now consciously emphasize on Technical Vocational Education and Training (TVET) institutions to equip the growing labour force with industry relevant technical skills necessary to increase labour productivity.

Fifth, financial inclusion is another important avenue for achieving inclusive growth. Finance matters for inclusive growth as it shapes up whether credit – and hence opportunity – flows to those with best entrepreneurial ideas, and weather economic opportunity are restricted to those with the most accumulated wealth and strong political connections. [FM1] Presently, about 75% of adult Kenyans and 71% of women have a financial account[FM2] . This is a welcome development because when financial systems are non-inclusive, the poor must exclusively dig into their limited savings and earnings to pursue growth opportunities. This can contribute to persistent income inequality and slow the pace of economic growth. Further deepening of financial inclusion can be achieved by enhancing financial education among underserved populations (particularly women) and developing affordable financial products for the financially marginalized so that they are not locked out from the financial system due to their risk profiles.  There is need to promote establishment of private sector regional banks at the sub-county levels particularly so that finance is located near the rural and semi-rural small businesses.

Finally, inclusive growth cannot be achieved without inclusive governance and institutions. Good governance reforms that strengthen property rights, respect for rule of law, political goodwill in anti-corruption efforts and political accountability will be vital in supporting employment-generating growth.

Author: Daniel Omanyo, Policy Analyst, Macroeconomics Department

Photo: Mastercard Center for Inclusive Growth

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