Enhancing Spillovers from Foreign Direct Investment

Dirk Willem te Velde, March 2019

Public policy plays a crucial role in enhancing the spillovers from foreign direct investment (FDI). The role of FDI in driving economic growth and development has been contested at least since the 1960s. There have always been views in favour of FDI and against it. Some have argued that FDI leads to economic growth and productivity increases in the economy as a whole, and hence contributes to differences in economic growth and development performance across countries. Others have stressed the risk that FDI will destroy local capabilities, extract natural resources without adequately compensation, or introduce inappropriate technologies.

Dirk Willem te Velde, March 2019

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Public policy plays a crucial role in enhancing the spillovers from foreign direct investment (FDI). The role of FDI in driving economic growth and development has been contested at least since the 1960s. There have always been views in favour of FDI and against it. Some have argued that FDI leads to economic growth and productivity increases in the economy as a whole, and hence contributes to differences in economic growth and development performance across countries. Others have stressed the risk that FDI will destroy local capabilities, extract natural resources without adequately compensation, or introduce inappropriate technologies.

A more nuanced view on FDI and development is emerging in the research community but this has yet to be embraced fully by the policy community. The impact of FDI on economic growth is not only positive or only negative, but depends on the type of FDI, firm characteristics, economic conditions, policies and institutions. Moreover, the effect of FDI is not static, but involves a dynamic process that includes knowledge ‘spillovers’ from FDI to the local economy over time. And, crucially, policies and institutions can affect the impact of FDI, including the extent and impact of spillovers.

This paper aims to provide insights for policy-makers concerned with FDI spillovers by reviewing the empirical literature in a policy relevant way.

Photo: Instructors checking a newly made shirt at the Savar Export Processing Zone in Dhaka, Bangladesh, 2016. Dominic Chavez/ World Bank. CC BY-NC-ND 2.0

26 February 2019 | Prospects for Economic Transformation in Cambodia: Scoping New Activities

Tuesday 26 February 2019
Phnom Penh, Cambodia

The Cambodia Development Resource Institute (CDRI), in partnership with the SET programme at the Overseas Development Institute (ODI) and supported by Australia’s Department of Foreign Affairs and Trade, host a workshop on prospects for Cambodia’s economic transformation in Phnom Penh on 26 February 2019.Cambodia has achieved 7% per annum growth over the last decade, which has spurred job creation in garments, tourism and agriculture. However, the economy faces challenges of diversification and further economic transformation, especially in the face of major challenges in sectors such as garments.

Tuesday 26 February 2019
Phnom Penh, Cambodia

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The Cambodia Development Resource Institute (CDRI), in partnership with the SET programme at the Overseas Development Institute (ODI) and supported by Australia’s Department of Foreign Affairs and Trade, host a workshop on prospects for Cambodia’s economic transformation in Phnom Penh on 26 February 2019.

Cambodia has achieved 7% per annum growth over the last decade, which has spurred job creation in garments, tourism and agriculture. However, the economy faces challenges of diversification and further economic transformation, especially in the face of major challenges in sectors such as garments.

This half-day event explores these issues and discusses: (i) what are the constraints preventing progress towards economic transformation and job creation; (ii) what are the most promising sectors for policy-makers to focus on; and (iii) which sectors and/or constraints are most worthy of further analysis by the SET programme during 2019?

Agenda

08.30 – 09.00: Arrival and registration

09.00 – 09.20: Welcome and introduction to the SET programme
Dr Chhem Rethy, Executive Director, CDRI
Dr Dirk Willem te Velde, SET Director and Head of IEDG, ODI

09.20 – 9.50: Keynote: Economic transformation in Cambodia: prospects and challenges
HE Dr Phan Phalla, Under-Secretary of State, Ministry of Economics and Finance, Royal Government of Cambodia

9.50 – 10.10: Economic transformation in Cambodia: key issues and possible approaches
Presentation by the ODI/SET team

10.10 – 10.30: Cambodia’s economy and constraints to economic transformation
Dr Ouch Chandarany, Head of Economics Unit, CDRI

10.30 – 10.45: Coffee break

10.45 – 12.00: Discussion on next steps and best areas of focus for new analysis
Moderator: Dr Chhem Rethy, Executive Director, CDRI

12.00 – 14.00: Lunch

Event photographs by CDRI available here 


Photo: A motorcycle ‘taxi’ driver transports a trader and dry goods to the Phnom Penh market. World Bank. License: CC BY-NC-ND 2.0.

28 November 2018 | Digital Transformation in Kenyan Manufacturing and Job Creation

Amidst the many opportunities associated with the use of digital technologies in Kenya manufacturing, one concern expressed commonly is the impact technological change might have on labour. Since manufacturing forms part of Kenya’s Big Four agenda, the implications of growing digitalisation, both within Kenya and globally, brings into question the very role of manufacturing as a development pathway and a generator of employment.

This event, hosted in partnership with the Kenya Association of Manufacturers (KAM), explores how digital technologies are affecting labour in Kenyan manufacturing and the discussion will identify policy priorities for digitally transforming Kenyan’s manufacturing sector and creating more productive jobs.

Wednesday 28 November 2018
Intercontinental Hotel, Nairobi

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While Kenya has emerged as leader of digitalisation in the African context, there is still a significant digital divide within Kenya in terms of access to and use of technology. Kenya therefore needs to engage with the digital economy actively by developing a well-informed digital industrial policy that aims at improving efficiencies of firms but also boosts employment opportunities and inclusive development. For this to occur, the digital industrial policy needs to be embedded within the wider industrial policy so that all segments of society can gain.

Amidst the many opportunities associated with the use of digital technologies in Kenya manufacturing, one concern expressed commonly is the impact technological change might have on labour. Since manufacturing forms part of Kenya’s Big Four agenda, the implications of growing digitalisation, both within Kenya and globally, brings into question the very role of manufacturing as a development pathway and a generator of employment.

This event, hosted in partnership with the Kenya Association of Manufacturers (KAM), explores how digital technologies are affecting labour in Kenyan manufacturing and the discussion will identify policy priorities for digitally transforming Kenyan’s manufacturing sector and creating more productive jobs.

Photo: Real-time monitoring of the production line, through digitalisation, at New Wide Garments factory in Kenya’s Athi River EPZ, July 2018. Karishma Banga, all rights reserved.

10 September 2018 | Kick-Starting Economic Transformation in Rwanda: Main Takeaways

Rwanda has committed itself to economic transformation as a pillar of its seven-year government programme, the National Strategy for Transformation (NST, 2017-24). The strategy has at its core the goal of generating 214,000 new jobs per year for the next seven years.
On 10 September 2018, the Rwandan Ministry of Trade and Industry (MINICOM) and the Supporting Economic Transformation (SET) team hosted a high-level roundtable: ‘Kick-starting Rwanda’s economic transformation: what needs to be done, when and by whom?’.

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Rwanda has committed itself to economic transformation as a pillar of its seven-year government programme, the National Strategy for Transformation (NST, 2017-24). The strategy has at its core the goal of generating 214,000 new jobs per year for the next seven years.

On 10 September 2018, the Rwandan Ministry of Trade and Industry (MINICOM) and the Supporting Economic Transformation (SET) team hosted a high-level roundtable: ‘Kick-starting Rwanda’s economic transformation: what needs to be done, when and by whom?’.

The objective of the roundtable was to stimulate discussion of the practical questions raised by the SET research programme, as set out in the briefing paper: Kick-starting economic transformation in Rwanda: four policy lessons and their implications.

Photo: Kigali factory, 2010. George Barya/Commonwealth Secretariat via Flickr. CC BY-NC 2.0.

Karishma Banga (ODI) | Making Firms Work Series | Using digital technology to become globally competitive: Funkidz

Karishma Banga, ODI
18 December 2018
Funkidz, a one-of-a-kind Kenyan small or medium enterprise (SME), has successfully managed to leverage digital technologies to increase its global competitiveness. Founded by a female entrepreneur, Wanjiru Waweru-Waithaka, Funkidz manufactures furniture for children locally. It has successfully embraced digital technology to innovate, diversify and survive in a challenging market place.

Karishma Banga (Senior Research Officer, ODI)

18 December 2018

This blog is part of our ‘Making Firms Work’ series. Read other blogs in the series: on Tanzanian textile manufacturer A to ZNepali ICT firm CloudFactory, Kenyan garment firm Hela and Midal in Mozambique. 

Funkidz, a one-of-a-kind Kenyan small or medium enterprise (SME), has successfully managed to leverage digital technologies to increase its global competitiveness. Founded by a female entrepreneur, Wanjiru Waweru-Waithaka, Funkidz manufactures furniture for children locally. It has successfully embraced digital technology to innovate, diversify and survive in a challenging market place.

Information and communication technology (ICT) is already regarded as a key development pillar in Kenya, and efforts are currently being focused on leveraging the digital economy to expand manufacturing, as one of the ‘pillars’ of the Kenyan government’s Big Four agenda. However, there is still a significant digital divide in access to digital technologies in Kenya compared with other developing economies, as well as a digital divide in use of such technologies within the country’s manufacturing sector. While digitalisation brings with it certain challenges, it also presents new opportunities for economic growth and employment creation. It is crucial for African countries to identify these opportunities and to capitalise on them in order to not be left behind.

The window of opportunity in Kenya’s furniture manufacturing industry

Given the relatively low levels of digitalisation in Kenya, compared with developing countries in Asia, there may still be a window of opportunity for the nation to move into sectors less affected by technology and global changes. But how long will this window of opportunity remain open? With regard to the furniture sector in Kenya, operating a robot becomes cheaper than Kenyan (formal) labour in 2034. Moreover, operating a robot in the US furniture industry becomes cheaper than Kenyan labour in 2033. This indicates that the window of opportunity in the Kenyan furniture sector is around 15–16 years, following which there may be increased automation within the sector, or possible re-shoring of furniture manufacturing to developed economies. This will affect both growth and employment in the sector.

It is also worth noting that the furniture sector is a relatively low-skilled, labour-intensive tradable sector with relatively high robot density. In other sectors with higher robot density, such as automobiles and electronics, the window of opportunity is likely to be shorter; in other sectors, such as garments, it is likely to be longer, given issues related to economic and technological feasibility.

Funkidz: Harnessing digital technologies to become globally competitive

What makes Funkidz different from other furniture SMEs in Kenya is that it has invested heavily in technology, particularly in Computer Numerical Control, or CNC, machinery – that is, the automation of machine tools by means of computers. In modern CNC systems, there are two technologies at play: first, the mechanical dimensions of the furniture parts are defined using computer-aided design (CAD) software; and second, they are translated into manufacturing instructions using computer-aided manufacturing (CAM).

The CNC technology Funkidz has installed, along with large digital printers, enables the multiplication of furniture designs, with exact specifications and high quality. As a result, the beds, desks, cots, etc. manufactured have similar characteristics to what you would find at Ikea – those of good-quality furniture that is flat and packable. The firm’s new range of furniture is in fact completely packable, easier to transport and multifunctional. The company also offers flexibility in price via different customisation options. For example, a bed can be purchased either unpainted or painted, with choices of different prints depending on the customer’s preferences.

Funkidz has also recently launched an augmented reality app – one of the very few in Kenya – that will allow customers to log in from their phone, browse the firm’s e-catalogue for furniture and use 3D modelling and scanning to virtually place it in their house. It is also possible to change the colour of the furniture and its position for a better user experience.

Leveraging digital technologies has allowed Funkidz to increase its global competitiveness by lowering the cost of furniture manufacturing and enabling exact specification mass production that has generated economies of scale. In a span of about five years, the firm has expanded beyond the domestic market of Kenya and is now exporting to Rwanda and Uganda, and since more recently, to the UK.

Finding innovative solutions to manufacturing challenges

One of the biggest constraints the firm faces is lack of relevant skills in the workforce to operate the machinery fitted with digital technologies such as CNC systems. There is a dearth in Kenya, and in Africa in general, of the technicians needed to operate computer-controlled machines, making it necessary to hire expensive engineers to do the job. There is thus a need to retrain workers in new skills and to upgrade education. A subsidiary of Funkidz, known as Funkidz Tech, has partnered with Safaricom to design its own curriculum that provides training on how to make furniture with different specifications and dimensions, and also provides training in CNC numerical cutters.

‘Urban mining’ in furniture production.

While power supply is not the biggest constraint for the firm (the factory receives 3-phase power at rural electrification rates for light industries), rising timber prices, as well as financial and market access, present important challenges to its operations. There is a ban on logging in operation in Kenya at present, which has increased the price of wood drastically; a wooden plank now costs 96 shillings a foot compared with 42 shillings before. To address this problem, the firm has embraced innovative thinking and research and development, and is now making use of ‘urban mining’ – that is, recycling and reusing waste from cities. It has started acquiring pallet wood, one of the easiest and cheapest types of wood waste to recycle, which then undergoes nail removal, finishing and sanding within the firm. Electronic waste such as batteries, electrical circuits, computer hardware, etc. is being used as design components in table tops, showpieces and lamps. Imported second hand clothing, known in Swahili as “Mitumba”, is being used as cushion covers for furniture.

The way forward

To ensure the Kenyan manufacturing sector is able to leverage digital technologies to boost manufacturing and job creation, both the public and the private sector will need to make continuous joint efforts. Targeted policies and effective public–private collaborations are needed to:

  1. reduce the cost of raw materials
  2. increase access to and affordability of internet and ICT hardware such as routers, sensors, computers, etc. for manufacturing firms
  3. retrain the workforce to increase its employability but also to ensure retention of labour once trained
  4. increase absorptive capacity of the workforce to understand, adopt and adapt digital technologies to meet local challenges and needs and
  5. promote advancements in firm-level capabilities and innovation.

Photo: Use of CNC machinery to cut wood, FunKidz factory, Kenya, 2018. Karishma Banga, all rights reserved. 

How to Grow Manufacturing and Create Jobs in a Digital Economy: 10 Policy Priorities for Kenya

Karishma Banga and Dirk Willem te Velde, November 2018

The global manufacturing landscape is changing rapidly with the increasing use of digital technologies such as robotics and artificial intelligence, presenting both important opportunities and challenges for manufacturing and job creation. While Kenya has emerged as the leader of digitalisation in the African context, there is still a significant digital divide within the country, when compared with developed countries and Asian economies, in terms of access to and use of available technologies. At the same time, there are growing fears that rapid digitalisation might hamper job creation efforts, particularly in the manufacturing sector.

Karishma Banga and Dirk Willem te Velde, November 2018

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The global manufacturing landscape is changing rapidly with the increasing use of digital technologies such as robotics and artificial intelligence, presenting both important opportunities and challenges for manufacturing and job creation. While Kenya has emerged as the leader of digitalisation in the African context there is still a significant digital divide within the country, when compared with developed countries and Asian economies, in terms of access to and use of technology. At the same time, there are growing fears that rapid digitalisation might hamper job creation efforts, particularly in the manufacturing sector.

This report, produced in partnership with the Kenya Association of Manufacturers (KAM), develops a framework of 10 policy priorities to support the successful digital transformation of Kenyan manufacturing, by building digital capabilities, fostering competitiveness and managing inclusive digital change.

This report was launched at a workshop in Nairobi on 28 November 2018. For more detail, click here.

Media coverage

‘Kenya’s manufacturers urged to embrace robotics, artificial intelligence’, The Exchange, 26 November

‘New report roots for robotics and artificial intelligence’, Capital FM Business, 29 November

‘Kenyan manufacturing at risk if government and firms fail to embrace digitalization future – report’, Soko Directory, 29 November

‘Kenyan gov’t, firms urged to embrace innovation to spur manufacturing’, Xinhua, 29 November

‘More Kenyans tipped to lose jobs to machines’, Standard Digital, 30 November

‘Low digitisation to stunt Kenya’s competitiveness’, The Star, 1 December

‘SGR doing more harm than good, says KAM’, The Star, 1 December

 

Photo: Use of computer-aided design software/computer-aided manufacturing for t-shirt production at New Wide Garments, Kenya (2018). Karishma Banga/SET programme. All rights reserved.

 

 

 

Monitoring Policies to Support Industrialisation in Tanzania

Josaphat Kweka, December 2018

Industrialisation has been recognised as the overarching policy priority guiding the design and implementation of all policies and strategies within and around Tanzania’s Five-Year Development Plan 2016/17–2021/22 (FYDP II). The Government of Tanzania has taken tangible steps to spur implementation of the industrialisation objective, including by preparing a national strategy, identifying priority projects, strengthening the institutional framework to address coordination challenges and developing supportive infrastructure projects.

Josaphat Kweka (Talanta International), December 2018

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Industrialisation has been recognised as the overarching policy priority guiding the design and implementation of all policies and strategies within and around Tanzania’s Five-Year Development Plan 2016/17–2021/22 (FYDP II). The Government of Tanzania has taken tangible steps to spur implementation of the industrialisation objective, including by preparing a national strategy, identifying priority projects, strengthening the institutional framework to address coordination challenges and developing supportive infrastructure projects.

The key elements for developing a competitive manufacturing sector appear to exist in Tanzania but a number of constraints prevent it from being realised. Some constraints affect the implementation capacity of the government, while others affect the competitiveness of firms.

‘Monitoring policies to support industrialisation’ explores recent progress made against the FYDP II and offers policy suggestions for overcoming some of the constraints that have emerged, while ‘Harnessing SEZs’ provides illustrative examples of industrial developments in SEZs, regulatory reforms that could support their development and effectiveness, and again offers policy reforms that could drive further progress.

Photo: Dar es Salaam port, Tanzania, 2014. Photo: Rob Beechey / World Bank. 

Using Data to Assess the Contribution of Development Finance Institutions to Economic Transformation

Alberto Lemma, October 2018

Recent studies have analysed the investment activities of development finance institutions (DFIs), attempting to understand if these are, or could be, contributing to economic transformation. DFIs frequently report their portfolio activities, including the sectoral composition, and employment and gross value added (GVA) data can be used to compute sectoral productivity level at sector level and over time. When combined, such data help us understand if DFI investments are targeting sectors that have higher productivity or activities to increase productivity levels within a sector.

Alberto Lemma, October 2018

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Recent studies have analysed the investment activities of development finance institutions (DFIs), attempting to understand if these are, or could be, contributing to economic transformation. DFIs frequently report their portfolio activities, including the sectoral composition, and employment and gross value added (GVA) data can be used to compute sectoral productivity level at sector level and over time. When combined, such data help us understand if DFI investments are targeting sectors that have higher productivity or activities to increase productivity levels within a sector.

The data used for this analysis can be found here (link to PDF) on the SET data portal. 

Photo: Ethiopia, 2008. Antony Robbins. License: CC BY-NC 2.0.

Large and Mega-Projects in Mozambique: Negotiations Management for Creating Linkages and Jobs in Manufacturing

Peter E. Coughlin, October 2018

Since the Lusaka Peace Accords of 1992, Mozambique has relied heavily on large and mega-investments by multinational corporations to spur economic transformation in manufacturing. To understand what has been done well or badly in the negotiations for these and what can be learnt to improve the country’s negotiation capabilities and the consequent benefits, this study examines six negotiations for large and mega-projects. Though the document files for these cases are far from complete, their analysis reveals major structural, technical and legal deficiencies affecting the ability of Mozambique’s negotiators to shape agreements for large and mega-projects to best promote jobs, upstream and downstream linkages and economic and social development.

Peter E. Coughlin, October 2018

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Since the Peace Accords of 1992, Mozambique has relied heavily on large and mega-investments by multinational corporations to spur economic transformation in manufacturing. This has entailed negotiations that have often been from an ill-prepared and professionally and competitively disadvantaged position.

To understand what has been done well or badly and what can be learnt to improve the country’s negotiation capabilities and the consequent benefits, this study examines six negotiations for large and mega-projects with investors in sectors outside of coal and gas mining—namely aluminium, aluminium rods and cables, steel, petroleum refining, transport vehicles and beverages. Though the document files for these cases are far from complete, their analysis revealed major structural, technical and legal deficiencies affecting the ability of Mozambique’s negotiators to shape agreements for large and mega-projects to best promote jobs, upstream and downstream linkages and economic and social development.

Photo: Maputo, Mozambique. Via Pexels. 

Financing Special Economic Zones: Different Models of Financing and Public Policy Support

Judith E. Tyson, September 2018

An SEZ is a piece of serviced land, typically industrial, that provides infrastructure and connectivity for private firms investing within it. Such zones can support economic transformation in developing countries by helping to overcome some of the typical constraints to private firms’ growth, such as the high-cost of energy and poor-quality infrastructure.

This paper focuses on one aspect of SEZ execution – their financing. It includes case studies on existing SEZ financing and examines in detail the possibilities for private financing of SEZs.

Judith E. Tyson, September 2018

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A special economic zone (SEZ) is a piece of serviced land, typically industrial, that provides infrastructure and connectivity for private firms investing within it. Such zones can support economic transformation in developing countries by helping to overcome some of the typical constraints to private firms’ growth, such as the high-cost of energy and poor-quality infrastructure.

However, SEZs have a mixed history of success. Risks associated with their implementation are greater in developing countries where the institutional environment is weaker, including in relation to government capacity, legal and regulatory frameworks and construction capabilities.

This paper focuses on one aspect of SEZ execution – their financing. The purpose is to provide guidance on financing options and their advantages and disadvantages. The paper includes case studies on existing SEZ financing and examines in detail the possibilities for private financing of SEZs.

Photo: A woman irons fabric at a garments factory at the Sihanoukville special economic zone, Cambodia, 2013. Chhor Sokunthea / World Bank. CC BY-NC-ND 2.0.

Measuring the Potential Contribution of Development Finance Institutions to Economic Transformation

Alberto Lemma, September 2018

With the UK Department for International Development (DFID) channelling increasing amounts of UK Aid through development finance institutions (DFIs) as part of the department’s core goal of reducing poverty, it is important to evaluate the extent to which the investments made by DFIs are contributing to economic transformation.

Alberto Lemma, September 2018

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Economic transformation is defined as the continuous process of moving labour and other resources from low- to high-productivity sectors (structural change) and raising within-sector productivity growth. Evidence suggests the economic transformation of developing countries drives job creation and improves livelihoods by increasing per capita incomes.

With the UK Department for International Development (DFID) channelling increasing amounts of UK Aid through development finance institutions (DFIs) as part of the department’s core goal of reducing poverty, it is important to evaluate the extent to which the investments made by DFIs are contributing to economic transformation.

This report provides an overview of the economic transformation potential of DFIs (focusing on DFID’s strategic priority DFIs – the CDC Group UK and the International Finance Corporation) based on publicly available portfolio data. It finds some exposure and capacity to channel investments towards economic transformation sectors. Finally, the report proposes 13 indicators that DFIs could use to assess the transformational potential of their investments. Such indicators can be used both ex-ante for investment decision-making and ex-post for impact monitoring and evaluation.

Photo: The port at Tema, Ghana. Jonathan Ernst / World Bank, 2006.
Licence: CC BY-NC-ND 2.0.

Kenya-UK Trade and Investment Relations: Taking Stock and Promoting Exports to the UK

Aarti Krishnan, Dirk Willem te Velde and Anzetse Were, July 2018

The UK and Kenya have historically close trade and investment ties; however, both the value of Kenyan exports to the UK and Kenya’s share of the UK’s imports have been declining for a decade, with regional competitors such as Rwanda and Ethiopia capturing Kenya’s market share in key export products like tea, coffee, fresh vegetables and cut flowers. This paper explores the state of UK-Kenya trade and sets out recommendations to support Kenya to regain competitiveness and increase its share of UK imports.

Aarti Krishnan, Dirk Willem te Velde and Anzetse Were, July 2018

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The UK and Kenya have historically close trade and investment ties; however, both the value of Kenyan exports to the UK and Kenya’s share of the UK’s imports have been declining for a decade, with regional competitors such as Rwanda and Ethiopia capturing Kenya’s market share in key export products like tea, coffee, fresh vegetables and cut flowers.

This research, produced in partnership with the Kenyan Export Promotion Council to inform its new export strategy, explores the current state of trade patterns and investment flows between the two countries and proposes a prioritisation tool to help policymakers identify promising products and sectors for export. The report posits that unless Kenya diversifies its export offer and improves the quality and marketing of its existing core export products, it will continue to lose out to its trading competitors.

Media coverage

‘High costs taking shine off tea, coffee exports to UK’, Daily Nation, 17 May (also published by Business Daily Africa)

‘High production costs could lose Kenya its competitive edge in coffee, tea and flower exports to the UK’, Brits in Kenya, 30 May

‘Government urges exporters to rebrand products’, KBC Channel, 20 July

‘Kenya’s share of UK market shrinks by 13.2 per cent’, Mediamax Network, 20 July

‘Kenya’s UK export slack opens door to regional rivals’, Citizen Digital, 20 July

‘Rwanda, Ethiopia edge out Kenya in UK trade’, The Star (Kenya), 21 July

‘Kenya loses market share to Rwanda, Dar’, Rwanda Today, 23 July (also printed in Business Daily Africa)

‘Kenya losing her UK-market to neighbouring countries’, Soko Directory, 23 July

‘Kenya’s export value to UK declining’, Kenyan Citizen TV (via YouTube)

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‘Brexit offers Kenya an opportunity to negotiate beneficial trade deals’, Business Daily Africa (via YouTube)

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‘Kenya-UK trade activities suffer glitches due to new policies’, Standard Media, 25 July

 

Photo credit: Pete Lewis/Department for International Development via Flickr

Kick-Starting Economic Transformation in Rwanda: Four Policy Lessons and their Implications

David Booth, Linda Calabrese and Frederick Golooba-Mutebi, June 2018

Rwanda has committed itself to economic transformation as a pillar of the current seven-year government programme, the National Strategy for Transformation (NSTP1, 2017-24). Whether the country succeeds in this endeavour will depend in good part on whether it learns a small set of key policy lessons from international experience in economic transformation. This briefing sets out four such lessons, drawing on the most distinguished global thinking on the subject, as well as past research on Rwanda by the SET programme.

David Booth, Linda Calabrese and Frederick Golooba-Mutebi, June 2018

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Rwanda has committed itself to economic transformation as a pillar of the current seven-year government programme, the National Strategy for Transformation (NSTP1, 2017-24). Whether the country succeeds in this endeavour will depend in good part on whether it learns a small set of key policy lessons from international experience in economic transformation.

This briefing sets out four such lessons, drawing on the most distinguished global thinking on the subject, as well as past research on Rwanda by the SET programme:

(i) Specialising wisely

(ii) Clustering and concentrating

(iii) Coordinating foreign and domestic capabilities

(iv) Organising for steering and learning.

 

Photo credit: Sarah Farhat/World Bank. Licence: CC BY-NC-ND 2.0.

Five Policy Priorities to Facilitate East African Trade and Investment

With 3.9 million people predicted to join the labour market each year from now until 2030, there is a huge jobs challenge facing the East African Community (EAC): the creation of 7,000 jobs per day.
SET has worked with the East African Business Council (EABC) to develop a five-point plan for EAC governments to increase investment and intra-EAC trade and in doing so, help tackle the jobs crisis. The plan launches at the EABC’s 22nd anniversary celebrations in Nairobi. 

With 3.9 million people predicted to join the labour market each year from now until 2030, there is a huge jobs challenge facing the East African Community (EAC): the creation of 7,000 jobs per day.

SET has worked with the East African Business Council (EABC) to develop a five-point plan for EAC governments to increase investment and intra-EAC trade and in doing so, help tackle the jobs crisis:

  1. Eliminate non-tariff barriers to trade
  2. Reform the EAC Common External Tariff
  3. Improve regional infrastructure
  4. Fast track liberation of intra-EAC services trade
  5. Promote local sourcing

Further reading:

Balchin, N., Hoekman, B., Martin, H., Mendez-Parra, M. , Papadavid, P., Primack, D. and te Velde, D.W. (2016) Trade in services and economic transformation. SET Report. London: Overseas Development Institute (ODI) (https://set.odi.org/wp-content/uploads/2016/11/SET-Trade-in-Services-and-Economic-Transformation_Final-Nov2016.pdf).

Eberhard-Ruiz, A. and Calabrese, L. (2017) Trade facilitation, transport costs and the price of trucking services in East Africa. ODI Working Paper. London:  ODI (https://www.odi.org/publications/10868-trade-facilitation-transport-costs-and-price-trucking-services-east-africa).

Gasiorek, M., Mendez-Parra, M. and Willenbockel, D. (2017) ‘The costs of logistical and transport barriers to trade in East Africa’. ODI Briefing Paper. London: ODI (https://www.odi.org/publications/10816-costs-logistical-and-transport-barriers-trade-east-africa).

te Velde, D. W. (2017) ‘Supporting Kenya’s industrialisation: Mombasa port, SEZs and targeted development cooperation’. Supporting Economic Transformation (SET) Blog. London: ODI (https://set.odi.org/supporting-kenyas-industrialisation-mombasa-sezs-development/).

UNDESA Population Division (2017) World population prospects: the 2017 revision. DVD Edition.

The East African (2017) ‘Disputes are eroding intra-EAC trade gains’. 11 December (http://www.theeastafrican.co.ke/business/Disputes-are-eroding-intra-EAC-trade-gains-/2560-4223074-nr3bvd/index.html).

 

Photo credit: Salahaldeen Nadir / World Bank. License: CC BY-NC-ND 2.0.

Max Mendez-Parra (ODI) | The African Continental Free Trade Area and economic transformation

Max Mendez-Parra  (Senior Research Fellow, ODI)

22 March 2018

African leaders gathered this week in Kigali to sign the African Continental Free Trade Area (AfCFTA). This is a key step in African efforts to eliminate barriers to trade among countries of the continent and will provide the foundations for smarter and deeper continental integration and implementation of the AU 2063 agenda.

Africa has followed a long road in its endeavours to promote regional integration, with mixed success. For example, the East African Community now constitutes the most successful model of integration on the continent, but other regional economic communities (RECs) have experienced more nuanced outcomes – and the EAC also had its challenges in the 1960s and 1970s. In addition, economic partnership agreements (EPAs) between African groups of countries and the EU have been a challenge to the African regional integration process, as EPAs cut across Africa and African regions.

The road to full implementation of the AfCTFA will be very long. Stage 1 of the negotiations seeks to establish a free trade area within Africa by liberalising nearly 90% of the goods within the continent. For some countries (e.g. Nigeria), reaching such a level of liberalisation constitutes a major effort. The agreement includes a services chapter, aimed at liberalising continental trade in services. This stage of the agreement will enter into force once 15 countries ratify it. It is unclear how long this process may take.

The second stage of the negotiations will aim to address deep integration issues such as investment and competition policies. Later on, there will be the possibility of forming a customs union, but at the moment a decision on this is not possible.

The AfCFTA is set within the aim of the AU and its member states to transform the economic structure of African countries and increase intra-African trade. Economic transformation and the creation of jobs is the most important economic development need in Africa today. Trade and trade facilitation is a key component of economic transformation strategies. Within economic transformation, the development and improvement of the manufacturing sector remains key, and trade can contribute to it. The AfCFTA could contribute to this goal by promoting regional value chains making use of expanded market access in the region.

The AfCFTA should be the basis for a wider and more comprehensive integration strategy. The AfCFTA is likely to be expanded to include additional trade and other cooperation provisions. In particular, the AfCFTA should be used to boost investment in the region to promote infrastructure development and, more importantly, the development of private sector capabilities. Such investment (as in the case of trade) should not be limited to intra-African opportunities; there should also be an effort to bring in capitals and capabilities from the rest of the world.

The AfCFTA on its own is not sufficient to guarantee the transformation process; two complementary factors are also crucial. First, African countries need to improve physical and digital connections among themselves. Without soft and hard infrastructure connecting African countries physically (and virtually), the AfCFTA will not be enough to generate needed trade.

Second, it is unlikely that the AfCFTA at this stage will generate substantial and effective market liberalisation immediately, as much of this has already been achieved through the multiple RECs. It may bring down existing high tariffs between countries that, given distance and lack of connectivity, will not trade even under low tariffs.

Third, Africa needs a substantive boost of investment in its productive capacities that the AfCFTA per se is not expected to bring. African countries need to develop their productive capacities to meet demand from other African countries.

Meanwhile, industrial strategies need to be developed at the national, regional and continental levels. There is a major risk that the AfCFTA will eliminate intra-continental barriers while raising trade barriers with third countries. This strategy, followed by Latin America in the 1960s, has proven extremely costly and inefficient in generating the needed economic transformation. This may harm consumers’ welfare as well as affecting the productivity and competitiveness of African firms. Trade liberalisation is welcomed even at a regional level; however, it needs to be harnessed within a wider and deeper strategy of integration of Africa into the world economy.

In this sense, we should not overestimate the benefits of the AfCFTA and we should not underplay the challenges. The AfCFTA should be a first step in a wider integration and industrialisation strategy. Trade must be considered a tool rather than as an end in itself. The end is to increase trade (regardless of the partner) and to transform African economies to create jobs and raise living standards sustainably. The AfCFTA is not the single most important of the policies that African countries will need to deploy to transform their economies – but it is an extremely welcome one.

In addition, the agreement should aim to promote economic transformation as well as African trade. In this sense, the aim to increase intra-African trade may be misleading, as what African needs is more trade regardless of the partner. Aiming to increase intra-African trade may lead to distortions that will make many sectors inefficient and not competitive.

All this calls to raise awareness of the work that is needed to make a success of the AfCFTA and avoid certain undesirable outcomes. The agreement requires not only more elements of deep integration but also addressing of many of the multiple barriers that affect trade and economic transformation (beyond trade policies at the border). The AfCFTA must thus be welcomed and celebrated as long as the continent is ready to take the necessary steps to make of it a tool to put Africa into the world economy.

Maximiliano Mendez-Parra is a Senior Research Fellow at ODI.

Photo credit: Jonathan Ernst/Reuters 

Digitalisation and the Future of Manufacturing in Africa

Karishma Banga and Dirk Willem te Velde, March 2018

The growing digitalisation of economies and the associated rapid spread of advanced technologies like 3D printers, robots and cloud computing, is having a significant impact on manufacturing production globally. While the digital divide between developed and developing countries (particularly those in sub-Saharan Africa) is still significant, this does not mean developing countries will not be affected in the coming decades. With wages rising even in low-income countries, automation may become an increasingly attractive option to domestic firms, and furthermore, creeping automation of manufacturing in developed countries will have a knock-on effect globally.

Karishma Banga and Dirk Willem te Velde, March 2018

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The growing digitalisation of economies and the associated rapid spread of advanced technologies like 3D printers, robots and cloud computing, is having a significant impact on manufacturing production globally. While the digital divide between developed and developing countries (particularly those in sub-Saharan Africa) is still significant, this does not mean developing countries will not be affected in the coming decades. With wages rising even in low-income countries, automation may become an increasingly attractive option to domestic firms, and furthermore, creeping automation of manufacturing in developed countries will have a knock-on effect globally.

With investment and growth in manufacturing traditionally seen as one of the most promising pathways to industrialisation and economic transformation for developing economies, the question of how governments can prepare for this inevitable change is a crucial one for Africa’s long-term growth trajectory.

This paper presents new empirical analysis of the potential impact of growing digitalisation in manufacturing on Africa, and discusses what policymakers can do to exploit their current window of opportunity, address constraints in traditional manufacturing and prepare for the ‘digital wave’, which will bring with it a whole host of new opportunities and challenges.

Selected media and other coverage

‘US robots set to become cheaper than wages in Kenya’, East Africa Business Week, 16 March

‘Robots and automation: how Africa is at risk’, BBC Africa, 19 March

World Business Report, BBC World Service, 19 March (at 19.30)

Focus on Africa, BBC World Services, 19 March (at 4.18)

‘Selon l’Overseas Development Institute : Les robots seront moins chers que la main d’œuvre africaine à partir de 2034’, L’eral.net, 20 March (in French)

‘Will US robots take over African people’s jobs?‘ Software Testing News, 20 March

‘US robots ‘set to take’ African jobs’, Business Ghana, 20 March

‘US robots set to take African jobs’, Modern Ghana, 20 March

‘I robot e l’automazione dei processi, le nuove minacce per l’economia africana’, La Stampa Economia, 20 March (in Italian)

‘África se encuentra en riesgo en lo que respecta al servicio de automatización’, Blasting News, 20 March (in Spanish)

Infographics

Graphics: SET Programme. All rights reserved.

Photo: Factory workers producing shirts at Sleek Garment Export, in Accra, Ghana on October 13, 2015. © Dominic Chavez/World Bank.
License: CC BY-NC-ND 2.0.

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