Transcript Policy Incentives for Kenya`s Manufacturing Industry

Policy Incentives for
Kenya’s Manufacturing
Industry
John Omiti
Eliud Moyi
KIPPRA
1
Structure of Presentation
 Import-Substitution
 Export-Led
 Post
2
Phase
Growth Phase
liberalization Phase
Import-Substitution Phase

Policy Incentives
1.
2.
3.
4.
5.
6.
7.
3
Foreign exchange controls
Tariff barriers
Import licensing procedures
Quantitative restrictions
Export Licensing
Over-valued exchange rate
Subsidized credit and interest
rates
Import-Substitution Phase

Critical Constraints
1.
2.
3.
4.
5.
4
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
Import Substitution Phase

Major Outcomes
1.
2.
3.
4.
5.
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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
Import Substitution Phase

Major Outcomes
6.
7.
8.
9.
10.
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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”
Export-Led Growth Phase

Policy Incentives
1)
2)
3)
4)
5)
6)
7)
8)
Depreciation allowance
Losses Carried forward
Investment deduction allowances
Industrial building allowances
Duty remission facility
Mining deduction allowance
Manufacturing Under Bond (MUB)
Export Development Programmes:
i.
ii.
iii.
iv.
v.
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Pre-shipment Finance,
Green Channel,
Export Promotion Council,
Kenya Export Assistance Scheme,
Kenya Export Development Support
Programme
Export-Led Growth Phase

Policy Incentives
9)
10)
11)
12)
13)
14)
15)
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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
Export-Led Growth Phase

Main Constraints
1)
2)
3)
4)
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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)
Export-Led Growth Phase

Main Constraints
5)
6)
7)
8)
9)
1
0
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
Export-Led Growth Phase
 Main
Manufactured goods made up
51.3% of exports by 1990.
2) 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 1994
4) 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
1)
1
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Outcomes
Export Led Growth Phase

Main Outcomes
6)
7)
8)
9)
10)
11)
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2
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
Post-liberalization Phase

Policy Incentives
1.
2.
3.
4.
1
3
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
Post-liberalization Phase

Critical Constraints
1.
2.
3.
4.
5.
6.
7.
1
4
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
Post-liberalization Phase

Main Outcomes
1.
2.
3.
4.
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5
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
Key Observations
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
Different policies lead to
different outcomes
Examine depth and real causes
of manufacturing stagnation:
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
Provide long-term solutions
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Enabling environment
International trade policy
Competitiveness / Technology
Policy coherency and commitment
Vision 2030 (employment, Income)
Promote dual ownership?