Dr Dirk Willem te Velde – Director SET and Head of International Economic Development Group, ODI 28 / 4 / 2015 THE ROLE OF SERVICES IN ECONOMIC TRANSFORMATION

SETTING THE CONTEXT Supporting Economic Transformation (SET) is an ODI programme funded by UK DFID to support countries in their quest for economic transformation Economic transformation (moving resources to high-productivity activities) is essential for improving the quality of growth that is broad-based, resilient against shocks, and increased opportunities for further growth Economic transformation is an Africa-led agenda. There seems a lack of discussion on the role of services in economic transformation, yet for Kenya this seems a key area (incl. for Kenya’s Vision 2030). We have much to learn from Kenya. At the same time, Kenya can learn from other experiences (e.g. India in the area of ICT): –How can Kenya consolidate its regional status and develop into a global services hub? –How can Kenya ensure a maximum contribution from its services sectors for other sectors and employment creation –What can we learn further from Kenya in terms of the role of services in economic transformation? 3

KENYA’S EXPORTS OF SERVICES HAS INCREASED FAST: $1.9 BILLION IN 2005; $4.9 BILLION IN 2012 SOURCE: World Bank Indicators Kenya Nigeria

SOURCE: “The share of services in total trade rose from 41% in 2006 to 44% in Kenya in 2012; it is 33% for a country at a similar level of income”

MOVING OUT OF AGRICULTURE INTO CERTAIN SERVICES CAN IMPROVE LABOUR PRODUCTIVITY IN KENYA $1.9 billion in 2005; $4.9 billion in 2012 Source: Authors using the Africa Sector Database ( Labour productivity by sector in Kenya, 2010 (value added per person engaged)

SOURCE: “Labour productivity in services is more than 3 times higher than in agriculture and 1.5 times than in industry, but there is significant heterogeneity across services sectors.”

AND POTENTIAL FOR PREMATURE DEINDUSTRIALISATION? Source: World Development Indicators Note: all countries all years after 1990 included Share of services in employment (pre/post 2005 (up at low income levels) Share of services in GDP and employment (by level of income) Level of income = Kenya

KENYA’S FASTEST GROWING SERVICE SECTORS ARE LEAST EMPLOYMENT INTENSIVE Source: Statistical Abstract 2014 Note: Change in GDP share ( ), percentage point, and employment intensity (2009) as wage employment divided by value added. Changes in share in GDP ( ) Employment intensity

SERVICES IN OTHER COUNTRIES ARE CATCHING UP RAPIDLY Source: SET data analysis using EORA input-output database and World Development Indicators Share of services in value added, Contribution of the service sectors to value addition in exports (2000 and 2011)

DEBATING SERVICES AND TRANSFORMATION KEY CHALLENGES 1.Nurturing dynamic services sectors in Kenya (e.g. ICT, financial services): a.What policy frameworks are needed for Kenya to move up a level (India: services exports 30 times higher)? b.What is the private sector willing to do? c.Scope for co-ordinated actions across public/private actors and ICT/financial/transport/education services 2.Improving the wider contribution of services sectors to the rest of the Kenyan economy a.What are interactions with other sectors? E.g. lowering transport and financial intermediation costs, or improving collaborative networks. b.What effects on jobs – targeting high vs low productivity jobs 3.Embrace service heterogeneity and avoid premature deindustrialisation and agglomeration of low productive services jobs 11

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