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January 23, 2019

Is Kenya, Africa regressing on industrialisation policies?

My brain, I think, folded in on itself and went into hibernation over Christmas. But when it resurfaced, there was still no coherent account of the Eurobond money story to be found anywhere.

More than 2 billion ( Sh204.70 billion) are a bit too much money to change the story weekly on how the money found its way to Kenya, and what happened then.

Irrespective of what actually happened with the money, wouldn’t you, as a government or finance minister, at least be concerned about not looking as if you had just somehow lost track of it somewhere?

In the absence of a coherent account of all that money, I looked around for other things to read, and found some interesting larger discussions of economic development issues – relevant for the Eurobond discussion, too, since that’s what the money had ostensibly been intended for.

In foreign policy, Rick Rowden asked whether Africa’s boom is over. He had been sceptical about the 'Africa Rising' story for a while, arguing that “Africa’s growth would not be real, lasting, or beneficial for its people until it was based on industrialisation rather than exporting raw commodities”.

He also wondered whether or not manufacturing was increasing as a percentage of GDP. “Were the goods African countries exported becoming more valuable – finished products rather than raw materials?”

He cites a 2011 UN report that found in contrast to what had happened in Asia, industrialisation in most African countries was either stagnating or, in fact, regressing, so there is little to offset the recent decline in oil and commodity prices.

He also quotes the Economist from November: “Many African countries are de-industrialising while they are still poor, raising the worrying prospect that they will miss out on the chance to grow rich by shifting workers from farms to higher-paying factory jobs.”

This is not, he said, just a matter of infrastructure, skills and institutions: it is just as much a matter of industrial policy, which appears to have almost become a dirty word. No industrialised country had managed to develop without industrial policy and government intervention – although there were, of course, more or less sensible ways of going about it.

Let’s go next door to Uganda for a moment: Louis Kasekende, the deputy governor of the Bank of Uganda, published an insightful, if not exactly reassuring, look at Uganda’s economy in the Ugandan Independent a bit earlier, in November of last year.

In it, he noted that Uganda’s external performance had deteriorated over the past decade: the current account deficit widened from under $300 million (Sh30.70 billion) in 2005/06 to $2.3 billion (Sh235.40 billion) in 2014/15, mostly driven by a rising trade deficit – the fact that Uganda imports far more than it exports.

The trade deficit had reached 12.6 per cent in the last fiscal year, and only about one third of it is covered by remittances and donor funds.

The export of goods and services has stagnated over the past year because Uganda can’t export more with the capacities it currently has. “We have reached the limit of the supply capacity in main export industries,” he argued.

To develop much stronger exports, Uganda needs structural changes, something that, he argues, the country has not been able to achieve despite a quarter of a century of solid growth.

The percentage of the population depending on agriculture has only fallen slightly, and while the number of registered companies has risen, most are still informal micro-enterprises, household enterprises, not SMEs and large firms. Only 0.7 per cent of Uganda’s population work in manufacturing, typically the driver of structural change.

Such transformation would require private investment, but in Uganda, that typically goes into building and real estate, not modern agriculture of manufacturing.

Not just because of the recent drastic commodity price decline, it would be a gamble to rely on oil exports to fill the gap – and oil, while generating export revenues, typically creates only limited employment.

Kasekende highlights the findings of the 2015/16 Global Competitiveness Report that “corruption was cited by respondents in the business community as the most problematic factor for doing business in Uganda, well ahead of access to finance, taxation and the supply of infrastructure”.

Of course these things are all connected. Entrenched corruption means that you spend way too much on way too shoddy infrastructure, for example.

And this also brings me back to Rowden’s article.

He discusses the challenges of using industrial policy under the current WTO regime, but there’s another issue: a government that isn’t quite sure where it had left more than $2 billion (Sh204.70 billion) –and that has nurtured a corrupt private sector for decades – will struggle to competently use public funds for intelligent subsidies.

So where does that structural transformation come from?


The writer is an independent country risk analyst.

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