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Notes from Africa 2: Kenya

Written by Joe Studwell

Image credit:Nina R Image license:CC BY 2.0

Kenya’s development potential

Logistically speaking, Kenya is the most important country in East Africa. British colonial investment in the port of Mombasa and the ambitious rail line which now stretches to Kampala means Kenya has unrivalled trade access to Uganda, Rwanda, Burundi and the eastern portion of the Democratic Republic of Congo (DRC).

“This logistical significance, the possibility that Kenya could become a manufacturing centre for the region, and the existence of fertile land along the coast, in the Western Highlands to the north-west of Nairobi, and around Lake Victoria, have long engendered optimism about development prospects.”

Indeed Kenya has achieved impressive economic growth since independence. It bounced back from failed structural adjustment programmes in 1980, and with nominal GDP per capita of US$2,075 in 2020, Kenyans are today the most prosperous citizens among major East African economies.

One particularly significant area of progress over the past 50 years has been in education. In 1967 Kenyans had an average of just 1.7 years of education, but today the figure is 10.7 years. It’s worth noting though that data suggests much of this is of low quality.

Déjà vu colonialism all over again

So what factors have influenced Kenya’s economic standing over this period?

Firstly, it’s striking how little the Kenyan government changed the economic structure inherited from the colonial era. The post-independence government of Jomo Kenyatta persisted with the British government funded ‘Million Acre Settlement Scheme’, established in 1962:

“This purchased white settler farms and generally favoured redistributing them to better-off black farmers, with typically less fertile areas allocated for ‘high-density’ settlement by poorer and landless farmers."
"The redistribution of land to a black elite, limited redistribution to ordinary Kenyans, and the growth of black cash-crop farming was enough to stabilise the rural situation after independence. Tea did particularly well and continues to account for one quarter of Kenya’s export earnings.”

Agriculture’s unfulfilled potential

Despite this potential, today agriculture doesn’t contribute much to overall economic growth in Kenya. Agricultural policy has been passive, and developments in agricultural markets have instead been driven by elite political interests.

Brookside Dairy is a case in point. This Kenyatta family business became Kenya’s dominant milk processor under current president Uhuru Kenyatta. As Joe writes, it bought up competitors and acquired a market share of around 45%:

“In 2020, the Kenyan government banned the importation of cheap Ugandan milk, apparently in breach of East African Community (EAC) trade agreements. According to Kenyan economist David Ndii, under the Kenyatta government since 2013, milk processing margins quadrupled, the cost of processed milk to the consumer doubled and the price paid to farmers, at its nadir, halved, although it since increased following protests.”

Plans that were not. And now China

There has been a catalogue of policy plans announced in Kenya that have failed to deliver on their promise. Take ‘Konza Technopolis’, a sprawling 2,000-hectare dustbowl near Nairobi. A master plan for this high-tech production centre was approved in 2013, but today there is no real evidence of progress.

Uhuru Kenyatta’s pledge to create up to one million new manufacturing jobs in the country has also failed. World Bank data suggests the manufacturing share of Kenya’s GDP in fact fell from 10.7% in 2013, Kenyatta’s first year of office, to 7.5% in 2019, a record low in the independence era.

These failures may have encouraged the Kenyan government to turn to Chinese firms to outsource infrastructure projects. Several Chinese road projects are now under way at strategic points across the country, such as the Dongu Kundu southern bypass (Mombassa), Nairobi Expressway and Waiyaki Way in the capital.

The Kenyan government also awarded China Communication Construction Company (CCCC) a $480 million contract to start building a new port near Lamu, 300 kilometres north of Mombasa. And in April this year, another contract was signed with CCCC for 453km of highway construction, costing $166 million.

The Standard Gauge Railway

The biggest and most controversial Chinese project in Kenya is the new Standard Gauge Railway (SGR), which has cost more than $5 billion.

This was intended to reduce freight costs and accelerate freight times along a key route through Kenya to Uganda and the rest of central Africa, but so far this hasn’t happened and the future of the project is uncertain.

“… The line has posted substantial losses – $200 million (KSh21.7 billion) from inception to May 2020 according to the Ministry of Transport. In 2019, China decided not to provide the further $4.9 billion loans required to complete the connection to Uganda.”

Debts up, revenues down

According to the China Africa Research Initiative (CARI), Kenya is one of the top five African countries contributing to revenues of Chinese engineering and construction companies:

“CARI identified 43 Chinese loans to Kenya, totalling $9.2 billion, by the end of 2020; at $6.1 billion, loans for transportation projects are second only to Angola. From the Kenyan perspective, the Chinese projects saw public debt as a share of GDP rise from 39% in 2013 to 66% in 2020, with an increasing share from more expensive commercial sources."
"According to David Ndii, half of debt is now domestic, at rates of interest over 10%, accounting for three-quarters of interest payments. Meanwhile, government revenue as a portion of GDP fell from 18.1% in 2013-14 to 16.1% in 2018-19. The IMF this year described Kenya as ‘at high risk of debt distress’.”

This has placed immense pressure on Kenya’s private sector to carry the economy forward. Entrepreneurial innovation in the country is impressive, as reflected in the number of agile start-ups emerging every year. Take Twiga Foods, for example, which is boosting regional trade by linking farmers with small-scale retailers. As its founder Peter Njonjo says, ‘the lack of government involvement has led the ecosystem to evolve in a very informal way,’ and it is the private sector’s job to find a way through this.

But as Joe stresses, this isn’t such an easy task:

“There are still over 300 state sector firms operating in Kenya, despite decades of World Bank and IMF-led ‘reform’ programmes, and the space available to the private sector in Kenya is less than the government’s rhetoric suggests."
"As a World Bank report observes: ‘Prominent government officials often have large private sector interests and influence public procurement and government priorities through the use of proxy companies.’"

To recognise its economic potential, Kenya needs more competition and more export-focused private sector activity. But this is challenging in the current political climate, where a ruling elite have consistently failed to deliver economic development pledges and policies.

So, what is Joe’s outlook on Kenya’s prospects going forward?

“The more likely trajectory for Kenya is towards another debt crisis and a new round of World Bank and IMF interventions. Before that, there will be the next Kenyan election, in 2022, and the possibility of renewed ethnic violence on which Kenyan politics all too often feeds.”