1 Policy Incentives for Kenya’s Manufacturing Industry John Omiti Eliud Moyi KIPPRA

2 Structure of Presentation Import-Substitution Phase Export-Led Growth Phase Post liberalization Phase

3 Import-Substitution Phase Policy Incentives 1. Foreign exchange controls 2. Tariff barriers 3. Import licensing procedures 4. Quantitative restrictions 5. Export Licensing 6. Over-valued exchange rate 7. Subsidized credit and interest rates

4 Import-Substitution Phase Critical Constraints 1. Severe foreign exchange constraint (1970s -1980s) 2. Deterioration of balance of payments due to oil crisis 3. Collapse of East African Community in Overvaluation (Ksh.) taxed agricultural producers and exporters 5. Small domestic market resulted in excess capacity

5 Import Substitution Phase Major Outcomes 1. Manufacturing share of GDP - 10% (1960s -1970s) 2. Bias away from agriculture and exports 3. Overdependence on imported equipment and capital intensive technologies 4. Inappropriate technologies created few jobs in industry 5. Narrow range of commodity exports

6 Import Substitution Phase Major Outcomes 6. Few linkages with the rest of the economy 7. Upsurge of foreign investments until mid-1970s when MNC interests began to wane 8. Almost exclusively in the hands of MNCs, Kenyan Asians and parastatals 9. Most firms enjoyed monopolistic status 10. “Infant industries” failed to “mature”

7 Export-Led Growth Phase Policy Incentives 1) Depreciation allowance 2) Losses Carried forward 3) Investment deduction allowances 4) Industrial building allowances 5) Duty remission facility 6) Mining deduction allowance 7) Manufacturing Under Bond (MUB) 8) Export Development Programmes: i. Pre-shipment Finance, ii. Green Channel, iii. Export Promotion Council, iv. Kenya Export Assistance Scheme, v. Kenya Export Development Support Programme

8 Export-Led Growth Phase Policy Incentives 9) Export Promotion Zones 10) Privatization and restructuring of public enterprises 11) Extensive tax reforms 12) Promoting foreign investments 13) Establishment of Investments Promotion Council (IPC) 14) Devaluation, exchange rate liberalization and financial sector reforms 15) Lifting of quotas and administrative controls, reduction in tariff rates and narrowing of dispersion in rates

9 Export-Led Growth Phase Main Constraints 1) Aid restrictions, policy reversals and weaknesses in implementing reforms 2) Reforms in the external trade regime not reinforced by reforms in the internal trade regime. 3) Pricing and licensing controls continued to stifle manufacturing 4) Lack of transparency in the reform process generated opportunities for rent-seeking (corruption)

10 Export-Led Growth Phase Main Constraints 5) Limited sequencing of reforms and preparing for the outcomes 6) Poor weather conditions in reduced capacity for power generation and occasioned power shortages 7) Poor physical infrastructure, high cost of credit and limited access to credit. 8) Low investments in R&D 9) Unfavorable legal and regulatory environment

11 Export-Led Growth Phase Main Outcomes 1) Manufactured goods made up 51.3% of exports by ) Manufacturing share of GDP stagnant at 10% - 13% 3) Manufacturing lost its position as the 3rd most important producer of GDP in 1992 and further fell to the 4th position in ) Before 1993, Europe was largest importer. Since 1993, Africa is most important destination for exports 5) Some industries closed down e.g., textiles, garments, leather

12 Export Led Growth Phase Main Outcomes 6) Relocation of some industries to low-cost destinations 7) Manufacturing still an enclave, concentrated in Nairobi and major towns 8) Domestic market still small and excess capacity persists 9) Low foreign investments 10) Minimal diversification in the range of commodity exports 11) Limited African ownership of medium and large firms

13 Post-liberalization Phase Policy Incentives 1. Policies heavily inspired by the experiences of the Asian Tigers 2. Investment Promotion Council upgraded to the Kenya Investments Authority 3. Investment Act came into effect in Investment regulations put in place

14 Post-liberalization Phase Critical Constraints 1. Plants and equipment outdated, overvalued and inefficiently used 2. One in three firms experience crime (2004) 3. Deteriorating transport infrastructure 4. Power difficulties 5. Costly fixed telephone and Internet services 6. Capital outflows intensified 7. Training system does not encourage firms to invest in enhancing production skills

15 Post-liberalization Phase Main Outcomes 1. Share of manufactured goods in exports fell to 37.7% (2000) 2. Manufacturing share of GDP stagnant % 3. Industrial productivity growth zero or negative over past 12 years (World Bank, 2004) 4. Increased trade openness facilitated growth of few internationally competitive firms

16 Key Observations Different policies lead to different outcomes Examine depth and real causes of manufacturing stagnation: – Enabling environment – International trade policy – Competitiveness / Technology Provide long-term solutions – Policy coherency and commitment – Vision 2030 (employment, Income) – Promote dual ownership?