The African Lions: Kenya Country Case StudyMwangi S. Kimenyi, Francis M. Mwega, and Njuguna S. NdunguAfrican Lions Authors Draft Workshop, 5 June 2015, Arusha, Tanzania

I. Introduction (1)• Following the rebasing of its economy in September 2014,

Kenya is now classified as a lower-middle income country with a 2013 GDP per capita of $1,246.

• It is the dominant economy in Eastern Africa and a major source of FDI for some of the countries in the region.

• The country is ranked the ninth largest economy in Africa.

I. Introduction (2)• This study seeks to:

– (i) analyze the drivers of economic growth in the country;

– (ii) evaluate the impact of growth on labor market outcomes and poverty; and

– (iii) review the challenges and opportunities that are likely to influence the country’s growth trajectory.

• The paper is divided into 6 sections.

II(a). Kenya’s economic performance: the background (1)• This section attempts to explain Kenya's economic growth performance in

the new millenium, updating an earlier study that covered the period from the 1960s to the 1990s (Mwega and Ndung’u 2008).

• This earlier study attempted to explain why the good economic performance in the 1960s and 1970s was not sustained in the 1980s and 1990s.

• First, we identified economic growth episodes, based on three models: Collins and Bosworth (C&B, 1996); Hoeffler (1999); and Ndulu and O’Connell (N&O, 2000).

II(a). Kenya’s economic performance: the background (2)• In the 1960s, growth averaged 5.7%, accelerating in the

1970s to 7.2%.

• It declined in the 1980s to 4.2% and in the 1990s to 2.2% (World Development Indicators).

• In the new millenium, the economy has experienced some recovery consistent with the Africa Rising narrative.

II(a). Kenya’s economic performance: the background (3)• The economy for example expanded fairly steadily from an all

time low growth rate of 0.6% in 2000 to a peak of 7.1% in 2007, the highest in over two decades.

• A new government in 2003 put in place governance and economic policy reforms that enhanced economic performance.

• The World Bank CPIA, for example, generally improved over this period, except during 2007-08 (Table 2.1).

II(a). Kenya’s economic performance: the background (4)

• However, in 2008, the growth rate declined to 1.5% as a result of the Post-election violence (PEV), drought in the country and the Global Financial Crisis (GFC).

• It increased to 2.7% in 2009 and to 5.8% in 2010 but declined to 4.4% in 2011, 4.6% in 2012, and 4.7% in 2013 and was only 5.3% in 2014.

II(a). Kenya’s economic performance: the background (4)• With an average economic growth of about 4.0% over 2000-

14, barely above the population growth rate of 2.7%, the country has continued to operate below its potential.

• We leave out how Kenya's experience is explicable in terms of growth regressions; and the role of markets; private agents; and political economy in explaining Kenya’s growth process.

II(b). The macro-growth story (1)• However, to put matters in context, Kenya remains a resource-

scarce, coastal, labour surplus economy, although there have recently (2012) been major discoveries of commercial oil deposits, gas and coal.

• At least since the 1980s, the standard advice for such an economy is that it should focus its development programme on exports of labour-intensive manufactures and services (Collier 2008).

II(b). The macro-growth story (2)• The Kenya story is therefore of missed opportunities in the

1980s and 1990s, what Collier (2008) calls “missing the boat”.

• Kenya, for example, did not increase manufactured exports much, given its coastal location, relatively cheap labour and basically market- friendly orientation.

• The share of manufactured exports in manufacturing output has remained quite low throughout the period (at about 15%).

III. Population size, growth and structure (1)

• The county’s population has increased steadily over time, from 6.1 million in 1950 to 44.4 million in 2013 and is projected to reach 66.3 million in 2030.

• Population growth also increased steadily from 2.7% in 1950 to a peak of 3.9% in the early 1980s, declining consistently to 2.7% in 2013.

• It is projected that the growth rate will continue to fall reaching 2.2% by 2030.

III. Population size, growth and structure (2)

• As well, the age structure of the population has changed substantially.

• In 1950, the population of those aged 0-14 years comprised about 3.42 % of total population. In 2013, the share of this age group had increased to 42.2% of total population (Figure 3.1).

• The population has also become more urbanized, from 5.5% in 1950 to 25.6% in 2013.

• The ICC case against Uhuru Kenyatta was however withdrawn by the ICC in December 2014.

III. Population size, growth and structure (2)

• However rural areas remains home to the vast majority of the population now and for the foreseeable future (Figure 3.2).

• Hence, there is need to continue focusing on job creation in this sector through an agriculture transformation strategy.

III. Population size, growth and structure (3)

• We then computed the demographic dividend which is the rate of change of the support ratio (Figure 3.5).

• It reveals two distinct periods:

– The first period is between 1950 and 1980 during which the demographic dividend was negative.

– Since then, the demographic dividend has been positive and is projected to remain so for the foreseeable future.

III. Population size, growth and structure (4)

• The positive and increasing demographic dividend augurs well for Kenya’s economic growth.

• However, the sizeable share of the youth population suggests that the labor market policies should particularly focus on job creation for this group if the country is to turn the population structure into a dividend instead of a curse.

IV(a). Kenya’s labour market: structure, employment and wages (1)• The data reveals that 2.26 million workers were engaged in wage

employment in 2013.

• The most important sector in terms of numbers employed were education (400,000), Agriculture, forestry and fishing (346,700) and manufacturing (280,300).

• Between 2010 and 2013, the share of public sector employment remained fairly constant at around 30 percent of total wage employment (Table 4.2).

IV(a). Kenya’s labour market: structure, employment and wages (2)• Probably the most important defining characteristic of the Kenyan

labor market is the increase in informalization.

• In 1986, informal employment accounted for about 20% of total employment. It now accounts for about 82% of total employment.

• This informalization can be attributed to the liberalization policies, government promotion of the informal sector and better data capture.

IV(a). Kenya’s labour market: structure, employment and wages (3)• There is a wide variation in earnings across sectors with workers in

Finance and Real Estate earning the highest and those in the informal sector the lowest.

• Thus, the informal sector that employs the largest share of workers also pays the least.

• Furthermore, informal sector earnings fall below the international poverty line, so that, in essence, workers in the informal sector remain poor.

IV(a). Kenya’s labour market: structure, employment and wages (4)• As well, earnings in the public sector are higher than in the

private sector, although the difference in earnings vary widely across sectors.

• Between 2000 and 2009 (Fig 4.5), growth in average earnings of employees in the formal sector has been on a downward trend.

• Since 2009, however, the average wage earnings in the formal sector has been increasing, reaching an annual rate of 12 percent in 2012.

IV(b). Labour productivity and human capital returns (1)• Agriculture GDP per worker:

• declines from PPP$400 in 1980 to $320 in 1997; but partially recovers to $350 in 2010.

• GDP per worker:

• - is fairly constant between 1992 and 2002; then adopts on an upward trend, reaching $3100 in 2012.

IV(b). Labour productivity and human capital returns (2)

• Relative to HPAEs, accumulation of human capital in Kenya is quite low (Tables 2.1 and 2.2).

• Despite a sharp increase in average educational attainment in recent years, the country still lags the upper middle income countries in human capital accumulation.

IV(b). Labour productivity and human capital returns (3)

• Private returns to education (Kimenyi et al. 2006)

Completed Primary

Completed secondary

College University

National 7.7 23.4 23.6 25.1

All Males 4.4 21.2 12.8 23.3

All females 13.2 36.3 43.5 62.5

IV(c). Growth, employment and poverty (1)

• Employment elasticities for Kenya have been generally higher than those of the world as well as SSA (Table 4.4).

• However, employment elasticities vary greatly over time.

• The highest elasticity was recorded over1996-2000 when the growth rate was low; and the lowest was over 2004-2008 when the economic growth rate was high.

IV(c). Growth, employment and poverty (2)

• There hence seems to be an inverse relationship between employment elasticities and growth .

• Our analysis shows growth of formal employment tracks GDP growth closely (Figure 4.7). However, there is no clear pattern in the relationship between GDP growth and informal sector employment.

IV(c). Growth, employment and poverty (3) Decomposition of poverty into growth and redistribution components, 1994-2006

V. Social protection (1)• Although Kenya has initiated several social protection programs,

the country experience with social protection is limited.

• Furthermore implementation of these programs has faced many challenges such as limited resources and poor targeting of intended beneficiaries.

• Some of the social protection programs in Kenya include:

– Youth Enterprise Development Fund: Introduced in 2006

V. Social protection (2)– The National Safety Net Program: for orphans and the

elderly, covering a limited number of families.

– Equalisation Fund: Mandated by the Constitution (at 0.5% of tax revenues) for marginalized areas.

– Constituency development Fund (CDF): Introduced in 2003 at 2.5% of tax revenues.

– UWEZO funds: Introduced in 2013 as a Kshs. 6 billion fund for both the youth and women.

VI. Emerging opportunities and challenges (1)Opportunities

– Regional integration

– Natural resources

– The youth

– Devolution

– New partnerships

VI. Emerging opportunities and challenges (1)Challenges

– Transformation of the economy

– Fragile democracy

– Inequality and poverty

– The youth

– Natural resources

– Security

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