Policy Incentives for Kenya’s Manufacturing Industry

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 • Foreign exchange controls • Tariff barriers • Import licensing procedures • Quantitative restrictions • Export Licensing • Over-valued exchange rate • Subsidized credit and interest rates

4. Import-Substitution Phase • Critical Constraints • Severe foreign exchange constraint (1970s -1980s) • Deterioration of balance of payments due to oil crisis • Collapse of East African Community in 1977 • Overvaluation (Ksh.) taxed agricultural producers and exporters • Small domestic market resulted in excess capacity

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

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

7. Export-Led Growth Phase • Policy Incentives • Depreciation allowance • Losses Carried forward • Investment deduction allowances • Industrial building allowances • Duty remission facility • Mining deduction allowance • Manufacturing Under Bond (MUB) • Export Development Programmes: • Pre-shipment Finance, • Green Channel, • Export Promotion Council, • Kenya Export Assistance Scheme, • Kenya Export Development Support Programme

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

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

10. Export-Led Growth Phase • Main Constraints • Limited sequencing of reforms and preparing for the outcomes • Poor weather conditions in 1991-1993 reduced capacity for power generation and occasioned power shortages • Poor physical infrastructure, high cost of credit and limited access to credit. • Low investments in R&D • Unfavorable legal and regulatory environment

11. Export-Led Growth Phase • Main Outcomes • Manufactured goods made up 51.3% of exports by 1990. • Manufacturing share of GDP stagnant at 10% - 13% • Manufacturing lost its position as the 3rd most important producer of GDP in 1992 and further fell to the 4th position in 1994 • Before 1993, Europe was largest importer. Since 1993, Africa is most important destination for exports • Some industries closed down e.g., textiles, garments, leather

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

13. Post-liberalization Phase • Policy Incentives • Policies heavily inspired by the experiences of the Asian Tigers • Investment Promotion Council upgraded to the Kenya Investments Authority • Investment Act came into effect in 2004 • Investment regulations put in place

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

15. Post-liberalization Phase • Main Outcomes • Share of manufactured goods in exports fell to 37.7% (2000) • Manufacturing share of GDP stagnant 10-13 % • Industrial productivity growth zero or negative over past 12 years (World Bank, 2004) • 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?