Missteps and missed opportunities: Kenya’s industrialisation saga

Nairobi’s industrial district is well laid out – or at least looks that way on a map. The district’s main thoroughfare, Enterprise Road, starts just outside the city’s CBD and runs for almost 15km. Alphabetically named roads branch off at regular intervals. Each of these ends in a broad cul-de-sac designed to allow trucks to turn easily. The main railway has branch lines terminating at every warehouse to expedite the off-loading of goods.

Off the map and on the ground, a very different picture emerges. The roads are choked with traffic, the sidewalks covered in litter. The railway tracks are overgrown with weeds, and car mechanics and metal forgers have taken over the cul-de-sacs.

This wide gap – between the efficiency imagined on the map and the cluttered chaos on the ground – is analogous to the gap that separates Kenya’s manufacturing plans from its actual progress towards becoming an industrialised country.

With a two-year hiccup provoked by election violence in 2008 and the global financial crisis, Kenya’s GDP has grown on average 5% annually since 2004, according to the World Bank. Industrial production, however, still languishes at 15% of GDP, with agriculture accounting for 24% and services for 61%, according to the Kenyan National Bureau of Statistics (KNBS).

A historical perspective helps to understand why industry lags. When Kenya gained independence from Britain in 1963 it inherited an industrial policy that aimed at substituting imports for locally manufactured products. Continuing this policy, the newly independent government under Jomo Kenyatta invited foreign manufacturers of locally-consumed products to set up in the country and to make these goods using locally-sourced raw materials.

The government protected these infant industries from competition through quantitative restrictions, import licensing, foreign exchange controls, high tariffs on competing imports and overvalued exchange rates that made imports uncompetitive. The East African Community (EAC), an intergovernmental body Kenya set up with Uganda and Tanzania to create a common market, customs tariffs and other shared public services, also attracted foreign investors.

This policy of import-substitution worked, for the most part. In the five years following independence, manufacturing value added increased 44%, led by the textiles, food, beverages and tobacco sectors. Annual growth in manufacturing peaked between 1971 and 1973 at over 25%, according to the World Bank.

The downside, however, was that the protective policies were so effective that established foreign companies – such as chemical manufacturer Union Carbide and rubber producer Firestone – enjoyed near monopolies; and parastatals took over traditional spheres such as utilities but also many aspects of manufacturing and distribution.

These private and government-owned monopolies did not permit the development of a competitive business model and contributed to massive inefficiencies in domestic industries. By 1980 this import-substitution strategy had run its course. Imports of consumer goods had declined and new industries could not be established to produce local substitutes. In addition, the collapse of the EAC in 1977 reduced the regional market for Kenyan manufacturers.

Kenya did not participate actively in export, focusing instead on supplying domestic and regional markets, which traded in relatively weak local currencies. The country ran into repeated foreign exchange shortages and found it increasingly difficult to pay for crucial imports, such as petroleum.

Shifting import restrictions

Faced with these constraints, in 1980 Kenya became the second country – after Turkey – to sign a structural adjustment agreement with the World Bank. A US$55m loan from the bank was conditional on the Kenyan government adopting more liberal trade and interest rate regimes, as well as a more outward-oriented industrial policy.

From 1982 into the 1990s, under pressure from donors, particularly the World Bank, Kenya began shifting import restrictions from quotas to tariffs, and decreasing tariff levels. In 1987, 40% of all importable items had quantitative quotas, but by July 1991, import licences were only used for health or security reasons. In addition to opening up imports, Kenya introduced several programmes through the 1980s and 1990s designed to promote exports, such as the manufacturing-under-bond scheme in 1988, which allowed manufacturers producing for export to import equipment duty-free, as well as the creation in 1990 of manufacturer-friendly export processing zones. Kenyan industry experienced a major shake-up during the structural adjustment period, particularly as a result of competition from cheaper imports. Many companies collapsed, including Kisumu Cotton Mills, the Pan Paper Mills, and other state-owned firms that had previously operated as monopolies.