Industrialization and Global Value Chains in Kenya
Posted on : Thursday, 29th January 2015
Kenya has a range of value chains in floriculture, textiles, leather, automotive production, intermediate and final manufacturing, music industry and tourism. It is evident that the country is generally at the low end of the value chain, given that a large component of Kenya’s exports is in raw materials (e.g. coffee, tea, animal products) which have low foreign value added content. For example, though Kenya has been integrated in the global leather value chain, this has not been done in a manner that is beneficial to the country and the local industry players. There is little value addition and about 70% of the exports from Kenya are raw hides and skins. Analysis also shows an industry that has been neglected after liberalization, one that suffers from poor regulation and weak policy support. The production of processed leather has actually declined and installed capacity utilization is below 50% in all tanneries. The competitiveness of the sector is weak compared to Asian countries.
The range of barriers to GVCs in Kenya include are domestic, regional and international. Local barriers to GVC prospects include policy gaps, corruption, poor transport infrastructure, crime and insecurity, high cost of energy (esp. electricity), land tenure issues; high cost of finance; lack of economies of scale for small firms and poor financial intermediation, among others. Regional and international barriers include tariffs and quotas, technological barriers, currency fluctuations, political risks and market failures, among others. Though Kenya has surplus and fairly well trained manpower, some industries have not been able to find ready and appropriately skilled personnel due to mismatches between the training provided by Kenyan institutions and labor market requirements. However, as part of Kenya’s long-term plans contained in the Kenya Vision 2030 and occasional curriculum updating, a number of policy reviews are being made to ensure schools equip graduates with market demanded skills.
In promoting growth, trade, jobs and development, Kenya has sought to increase domestic value added from GVC participation, through such policies as import substitution, subsidies, tax holidays, export processing zoning, export promotion, export compensation, and industrial property legislation. Many of these policies have had implementation and/or outcome challenges; for example the import substitution policy failed to build international competitiveness, but instead created a scenario where Kenyans paid higher prices than they would have otherwise while the country’s ability to export diminished, leading to skyrocketing and enduring balance of payments deficits, before it was finally abandoned. The EPZs, through such programs as AGOA (where Kenyan-based firms primarily make and export apparel to the USA), have led to significant increase in exports and employment, though the expected technology and skill transfers as well as backward linkages have not been realized, which suggests a low chance of sustainability once the AGOA arrangement comes to an end. The tax holidays ended up benefiting foreign investors at the expense of Kenyans, as most of them tended to relocate at the end of their respective grace periods.
