The African Growth Miracle: Economic growth, structural transformation and growth sustainability in Kenya

The African Growth Miracle: Economic growth, structural transformation and growth sustainability in Kenya

    Back on year 2000, due to high poverty rates, lack of access to health and education, string of wars, and political instability, Africa was labeled by a cover on The Economist magazine as the “hopeless continent”. Particularly, the Sub-Saharan Africa (SSA) region faced stagnation with minimal economic growth, and living standards changing less from one generation to the other (Perkins, Radalet, Lindauer & Block, 2013: 8). Researchers like Amsden (1989), addressing Gershenkron’s (1963) backwardness theory, suggested that there could be a limit on the point of backwardness of a country that would determine if a country could successfully achieve substitution. In addition, growth theorists argue that convergence of underdeveloped countries -equalizing per capita output to that of developed countries- is dependent upon country specifics like institutions, policies, human capital and endowments. (Thorbecke & Ouyang, 2016: 239-240). Being the most underdeveloped region in the world, some thought that SSA could be too far behind to be able to recover.

    Nevertheless, during the past two decades, Africa has experienced sustained economic growth, surpassing the global average and experiencing steady rise of per capita income. (Page & Shimeles, 2015). Part of this growth was driven by an increase in commodity prices, foreign investment, better quality of governance, and the appearance of a middle class (Austin, 2016: 222; Thorbecke & Ouyang, 2016: 236). Moreover, Young (2012), determined that SSA living standards, measured through real household consumption, were growing at an annual rate of 3.4% to 3.7%, a rate that is 3.5 to 4 times the rate on international data sets. Given the nature of these unexpected results, the growth experienced in the African continent is referred to as the ‘African Growth Miracle’. Concerning this period, the following paper will investigate the regional context of SSA to then place special focus in Kenya. In particular, it will address the following research question:

 

How economic growth and structural transformation have evolved in Kenya during the ‘African Growth Miracle’ and, regarding long term perspectives, how could this growth be sustained?

 

    The economic growth in SSA has not been accompanied by the expected structural transformation trend of going from agriculture to manufacturing and then services, instead there has been a direct transition from agriculture to services (Austin, 2016). In fact, the value-added contribution of manufacturing to GDP in SSA has experienced continuous decline within years 1990 to 2013 (Austin, 2016: 208). With regards to employment share in the region, among years 2000 and 2010, there has been a 10% decrease in agriculture, a 2% increase in manufacturing, and an 8% increase in services (McMillan & Harttgen, 2014)

    Concerning Kenya, the country has achieved annual growth rates ranging from 4.56% to 8.41% between years 2010 and 2019; in 2019 economic growth averaged 5.7% making Kenya one of the fastest growing economies in SSA (World Bank, n.d.). On the same period, according to World Bank Data, the value added annual percentage growth for the service sector averaged 6.26% versus 5.87% in industry and 4.64% in agriculture. The growth of the service sector, which accounts for nearly half of the country’s GDP (see Figure 1), was mainly driven by important contributions from the telecommunications and mobile-based financial services (World Bank Group, 2018: iii).

Figure 1: GDP growth and Value-added by sector (Constant 2010 US$ - Millions).

Source: Authors’s elaboration with World Bank Data

    The employment shares by sector in Kenya followed a similar pattern to the one seen in the rest of SSA. The industrial sector experienced a general decrease going from 13.1% on 1999 to 7.3% on 2019, the service and agricultural sector employment rates almost mirror each other during the same period of time (see Figure 2); from years 2005 to 2020, the agriculture sector experienced a 7.3% decrease while the service sector increased by 6.54% (World Bank, n.d.). The mirroring curve of the agriculture and service sectors, combined with the industrial sector share decrease, are an indication that most of the labor force transitioned directly from agriculture to services.

 

Figure 2: Employment Share by Sector (%).

Source: Authors’s elaboration with World Bank Data

 

    Despite the changes on employment share and the impact of the service sector, Rodrik (2016) argues that the actual contribution of structural transformation to growth in Kenya has been minimal; correlational analysis suggests that sectoral productivity has really not been affected by change in employment, as workers have migrated from agriculture to a service sector where productivity is not much higher. (see Figure 3)

 

Figure 3: Correlation Between Sectorial Productivity and Change in Employment Shares in Kenya.

Source: Rodrik (2016: 12) An African Growth Miracle.

*Note: Size of circle represents employment share in 1990 **Note: β denotes coeff. Of independent variable in regression equation: ln (p/P) = α + β ΔEmp. Share

    In order for rapid and sustainable growth to occur in SSA, structural transformation should be accompanied with productivity increase. Unfortunately, the direct transition from agriculture to services poses some challenges. Services require relatively high skills and years of education to act as productivity escalators; in contrast, in manufacturing a farmer could increase his/her productivity with just manual dexterity and experience (Rodrik, 2016: 16). In Kenya, the direct transition of an unskilled agricultural labor force into the service sector, has not allowed the country to activate the mentioned productivity escalators. Reverting this deficiency would require a great effort to train the service sector laborers up to a point where they can take better advantage of the potential productivity gains.

    As an alternative, and despite that currently it is not an engine of growth, investment in the industrial sector could provide a faster productivity increase and the stable and formal jobs needed for growth sustainability (Thorbecke & Ouyang, 2016: 261). Nonetheless, deficiencies in infrastructure, corruption and excessive regulation, raise the costs of production making the business environment less competitive (Golub S. & Hayat F., 2014: 148). For this reason, it is critical that industrialization prospects are not only complemented with education but also with investments in infrastructure, like transportation and electricity supply (Austin, 2016: 225). Another option is to raise productivity through an agricultural revolution, but the difficulty is that many of the soils in SSA have low fertility or can be easily eroded (Austin, 2016: 211).

    In summary, SSA continuous unexpected growth during the last two decades, has been characterized by a direct structural transformation from agriculture to the service sector. Kenya’s transformation has followed the same pattern, with important contributions from telecommunications and financial services. However, the expansion of the service sector has not translated into higher productivity. The unique growth pattern of Kenya, may not need to follow the traditional convergence trend (first going from agriculture to manufacturing and then services). Nevertheless, in order to achieve sustainable growth, there should be an increase in productivity. This could be potentially achieved in different ways, by training the unskilled labor force in the service sector, investing in revitalizing the industrial sector or pursuing an agricultural revolution.

*Essay written for the "EKHM 61 – Development of Emerging Economies" course at Lund University

 

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