Supporting Economic Transformation through Informal Economy

 

Last week, the Kenya Association of Manufactures (KAM) in association with the Overseas Development Institute’s (ODI) programme, Supporting Economic Transformation (SET) launched the Ten Policy Priorities for Transforming Manufacturing and Creating Jobs in Kenya. The document is a ten-point policy plan aimed at creating 300,000 jobs and doubling manufacturing in five years. According to the document, this will be achieved through two main ways;

(Source: http://www.kam.co.ke/KAM-2016/wp-content/uploads)

  1. The formulation of effective public policies and the regulation for manufacturing competitiveness by doing the following;
  • Creating a business environment that is conducive to manufacturing investment.
  • Enforcing a fiscal regime that supports manufacturing.
  • Making land ownership more affordable and accessible.
  • Securing affordable, reliable and sustainable energy.
  • Expanding access to long-term finance for all types of manufacturing firms.
  • Creating an exports push for manufactured products.
  • Developing worker skills as well as supporting innovation for increased labour productivity.

 

  1. Efficient and effective implementation through;
  • Creating a fit-for-purpose public service.
  • Developing a coordinated value chain approach.
  • Building trust and reciprocity for effective coordination and partnerships.

There is a proposed plan to inclusively target Informal industry or cottage industries. According to the document, there are several manufacturing sub-sectors such as agro-processing, metal works, furniture, and leather and shoe making. Following earlier research that has been carried out on the informal manufacturing sector in Kenya by Deloitte and The World Bank, four sub sectors have been singled out as having the greatest potential for growth and performance. The first is the arts and crafts which consists of homemade artefacts that are a popular product for tourists and residents.

The other strong informal manufacturing sub sector is that of furniture. The furniture market in Kenya stood at approximately $496 million in sales in 2013, whereby East African economies purchase $1.2 billion worth of furniture annually. Jua kali represent more than a third of sales in Kenya ($160 million). The jua kali furniture industry exhibits strong growth and manufactures world class ethnic furniture for niche markets in areas such as Lamu.

The third is the metal works informal manufacturing sector which produces a range of products such as charcoal cooking stoves, buckets, pans, kitchen utensils, wheel barrows, watering cans, gates and grills, and small tools for low-income clients. Products such as industrial sculptures and artworks target higher-income clients. Additionally, a few informal manufacturers produce a limited number of spare parts such as silencers, auto upholstery, and rubber bushings.

The last one is the leather industry under which the informal sector accounts for 10,000 of the 14,000 workers. Kenya is the third-largest livestock holder in Africa, so leather represents a potential area for economic growth and employment. In 2017, the Ministry of Industry Trade and Cooperatives (MITC) committed a KSh 130 million revolving fund for SMEs in the leather industry to build workspaces in all of the country’s 47 counties.

The ten-point plan further points out that despite this potential, there are challenges that the informal sector faces which include access to finance, limited access to land, corruption and labour productivity. With the successful implementation of this document, the informal manufacturing sector stands to immensely benefit from the catalysis of manufacturing in Kenya.

litualex@gmail.com

Informal Economy Analyst

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Analysis of Political Party Manifestos

 

With slightly over one month to the Kenyan elections, the two major political parties released their manifestos for public scrutiny. These are the documents that detail the priority areas as well as proposed plans of action for the country when they get elected into office. Despite the political rhetoric contained therein, I read through the two documents with a view of deciphering the angles that each had taken in relation to the informal economy. This article looks into two areas covered under the informal economy, picking out the most relevant proposals in both manifestos.

(Source: http://www.standardmedia.co.ke)

The ruling coalition has proposed to create and fully implement a robust Small and medium enterprises (SMEs) development and support programme which would formalise the large number of informal businesses and support their growth from micro to small to medium enterprises, and eventually into large firms. They believe that this would catalyse the creation of at least one million jobs and contribute to tax revenues. One of the major sub sectors of informal business that they are targeting is the Jua Kali. They are targeting at least 1 million entrepreneurs in the Jua Kali sector to have become established as formal small or large enterprises by the year 2022. The sector employs 11 million Kenyans, 50% of the country’s workforce.

 

Their counterpart in the opposition promises to unleash the potential of Jua Kali entrepreneurs by establishing at least one industrial park per ward for micro- and small enterprises. They also look to set up workshops where these entrepreneurs can lease machine time, a move that is aimed at giving these entrepreneurs access to machinery and equipment that they cannot individually afford. In order to help MSEs to develop globally competitive products, they plan to establish incubators that will help them break into export markets.

In as far as the agricultural sector is concerned, the opposition coalition has proposed that it will establish a Cooperative Enterprise Development Fund (CEDF) that will invest in agro-processing enterprises jointly with farmers organized as cooperatives as an equity partner. Once the agro-processing enterprise is successful, the CEDF will divest by selling shares to farmers through the cooperatives. On the other hand, the ruling coalition plans to establish a Food Acquisition Programme (FAP) to create demand and stable market prices for products from small-scale farmers who will be encouraged to form cooperatives in maize, wheat and potatoes. Under this programme, they plan to buy 50% of government food requirements from small holder farmers.

There is a myriad of other initiatives that both parties have put across in their manifestos that target micro, small and medium sized enterprises. My concern is that all of these promises look good on paper but will become a challenge when the time to implement them comes. This view is informed by the historical evidence of politicians wooing the voting class just before an election and turning their backs on them as soon as they are elected into office. All in all, the idea of investing in the informal economy is long overdue.

litualex@gmail.com

Informal Economy Analyst

 

 

 

 

 

 

 

The Role of Informality in Urbanization and Industrialization

The Economic Report on Africa 2017 was released by The United Nations Economic Commission for Africa(UNECA). This year’s report looked into ways in which the continent can harness industrialization to better structure the fast pace at which urbanization is taking place. Given that Africa is the fastest urbanization region after Asia, the report puts emphasis on the fact that only under the right policy frameworks can this momentum be leveraged so as to accelerate industrialization.

Image result for urbanization and industrialization africa

(Source: http://www.uneca.org)

Some of the proposed measures point to ways in which informal businesses can be made a part of this process. One such measure was to bank on the links between informal and formal sectors, for these are mutually beneficial and dependent. Those involved in industrial land use planning should consider the needs of informal enterprises, given their importance for job absorption and the challenges they often face in finding adequate premises for work.

One option is to try to meet industrial firms’ location-specific needs through Special Economic Zones (SEZs) and industrial zones. These will bring the most benefits if they are well connected to the urban economy, including the informal sector firms that can provide low cost inputs and use linkages as a path to growth and formalization. SEZs present opportunities for co-investment by formal firms and the public sector in infrastructure and technical and vocational education and training, which can broaden participation in economic growth and provide avenues for inclusion of critical workforce groups such as women and youth. These links to markets and skilled labour are critical.

The report further states that studies suggest that informal operators benefit from clustering through the various sectors in which they operate, and that they generally have a positive impact on their formal sector counterparts. It is with this in mind that agglomeration economies should be considered in the context of locational policies related to the informal sector and a path to formalization. Agglomeration economies can benefit the informal sector particularly through proximity to suppliers and purchasers.

Also, low-tech, labour-intensive infrastructure projects accessible to SMEs are a major opportunity for urban job creation. Lower-skilled labour-intensive technologies have high potential in some public investment sectors, including roads. A good example is that of Ethiopia whereby between 2005 and 2008 through a cobblestone roads and pavement programme, more than 90,000 jobs for young people were created. This led to the establishment of 2,000 small and medium enterprises. The project included backward linkages to domestic inputs—cobblestones—and labour-intensive skills in quarrying, chiselling, transporting and paving. The programme, implemented in 140 towns and villages, built around 350 km of road.

In terms of access to finance, Sudan has taken steps to improve this for industrial firms, including SMEs. Policy efforts in 2013 simplified the regulatory framework for financial access and new bank branches, and the central bank made preparations for mobile banking. These reforms targeted small enterprises, which make up 93 per cent of manufacturing firms, by requiring that commercial banks set aside 12 per cent of resources for microfinance. It is with this spirit that African countries must leverage the force of urbanization to drive and enable industrial development for a prosperous and equitable future.

litualex@gmail.com

Informal Economy Analyst

 

The Role of Informality in the Kenya Industrial Transformation Programme 

The Kenya Industrial Transformation Programme (KITP) is an effort by the government to create an industrial hub in the country through sector specific initiatives in agro processing, textiles and apparel, leather, fisheries, services and SMEs (small and medium enterprises). With the SMEs sector being the fastest growing business segment of the economy accounting for 83% of the total employment demographic, I will highlight some of the strategies that have been proposed to make it more productive.

Image result for Kenya industrial Transformation Plan

(Source:https://issuu.com/kamkenya/docs/kitp_short_version_20150910__1_)

Some of the challenges that the sector faces include a lack of understanding of basic business practices such as book keeping and marketing. These limit their growth when it comes to accessing finance to expand their operations for they are seen to be high risk clients by financial institutions. The recent interest rate cap has negatively affected them as fewer can access loans from banks. Their level of human capital is also low due to a lack of formal education amongst most of the workers engaged in the sector. Most SMEs also have little knowledge of other markets which puts them at a disadvantage when it comes to approaching the export market.

Proposed initiatives in KITP aimed at uplifting the sector include the setting up of a fund to provide low cost financing to SMEs. The fund is to be set up as a credit guarantee system or as an investment in private equity funds with contribution from both government and development finance institutions. It is targeted at those SMEs with promising business plans as well as those that demonstrate potential for growth. 

The strategy also plans on establishing communication and training between large companies and SMEs so as to facilitate subcontracting. This move is meant to increase the share of large corporations in the country sourcing from local SMEs to 30%, while building the capacity of SMEs to meet these needs. This will also look into ways of  improving the capacity of the large companies to identify and manage suitable SMEs.

Another intervention is that of enhancing MSE’s (Micro and Small Enterprises) competitiveness. This will be done through a competition in every county where 5 products from entrepreneurs engaged in the manufacturing and agribusiness sub sectors will be selected to have their products available on supermarket shelves. The process will involve conducting quality, packaging and branding training to get their products certified by the Kenya Bureau of Standards (KEBS). The winner of this competition will receive a prize of Kshs 1 million aimed at improving their operations.

Further, there are plans to establish a metal fabrication centre of excellence in Kariobangi, Nairobi, aimed at upgrading the existing Jua Kali metal fabricators by providing common user facilities, training programmes and incubation facilities. This will improve the quality and quantity of the products that these artisans produce, as well as equip them with technical skills which will include knowledge on how to operate modern machinery.

The KITP should not be one of those policy documents that are drafted, launched and eventually gather dust on the shelves of libraries and institutions. It is a noble initiative that needs to be fast tracked and implemented as it will translate to the improvement of the lives of the millions of Kenyans that are engaged in micro, small and medium sized economic activities.

litualex@gmail.com

Informal Economy Analyst

 

Developing value chains for micro enterprises

During this past week, the Ministry of Industrialisation and Enterprise Development organised an exhibition in Nairobi which was aimed at bolstering the sales of apparels that are manufactured at the Export Processing Zones (EPZ). Cabinet Secretary, Adan Mohamed announced that government had decided to avail up to 20% of goods and apparels manufactured by companies at the EPZ to the local market at affordable prices but for the same export quality. He added that some outlets will be opened around the country by small and medium sized enterprises where Kenyans can access the items after the exhibition.

https://i1.wp.com/www.pension-watch.net/silo/images/blogs/11805_1323355569.jpg

(Source:www.pension-watch.net/silo/images/blogs/11805_1323355569)

This is an interesting development considering that EPZs were set up with the initial intention of producing goods for export only. The government also intends to set up Special Economic Zones (SEZs) in key urban centres in the country whose main goal is to diversify manufacturing activities and create employment. Pilot programs for this project are currently ongoing in Mombasa, Lamu and Kisumu. As a means to fast track the establishment and growth of SEZs, the government exempted all supplies of goods and services to companies and developers in the zones from VAT and reduced the corporate tax rate for enterprises, developers and operators to 10 per cent for the first 10 years and 15 per cent for the next 10 years.

Considering the fact that sustained poverty coupled with subpar economic growth has continued to inhibit growth in the demand of locally manufactured goods, effective demand continues to shift more in favour of relatively cheaper imported manufactured items. In addition, the high cost of inputs informed by poor infrastructure which leads to high transport costs has led to high prices of locally manufactured products thereby limiting their competitiveness in the local and regional markets.

This is a move that if properly executed, will be an avenue for sustainable business growth and development for micro enterprises that operate in the agriculture, manufacturing and tourism sectors. This is the right time to look at value addition strategies that target the micro and small businesses that will be suppliers of products and services to the SEZs. In its strategy on decent work in the informal economy, the International Labour organization (ILO) suggests that one way to improve the sustainability of these informal enterprises may be to link them in cooperative structures where jointly owned input supply, credit and marketing services can be organized without compromising the autonomy of the individual entrepreneur.

It will be interesting to see the extent to which informal enterprises will benefit from SEZs. Deliberate thinking on how to link informal manufacturers with the SEZ initiatives is important. Strategies need to be developed to enhance the capacity of informal manufacturers to better service the formal enterprises that will be operating from the industrial parks. Such measures should include, but not limited to training, business mentoring and organizational development projects to better position the informal sector and their ability to meet orders by the established formal organisations. Doing so would improve their capacity to deliver quality products and thus better integrate them into the value chain.

litualex@gmail.com

Informal Economy Analyst

 

 

 

Informal Garages Rule Kenya

There has been a steady rise in the number of informal motor vehicle garages and repair shops over the last few years. It is no wonder that the sector currently accounts for the highest number of persons engaged in the licenced MSMEs by economic activity and establishment size. According to the Micro, Small and Medium Enterprises 2016 Survey released by the Kenya National Bureau of Statistics, those engaged in the repair of motor vehicles and motorcycles formed the majority of persons engaged in MSMEs. This demographic group represented 36.3% of the total number of small businesses in the country.

Image result for informal motor vehicle garages kenya

(source:http://www.openair.org.za/wp-content/uploads/2017/01/Truck-repairers-at-Suame-Magazine.jpg)

There are two main categories in the motor vehicle repair industry. The first one constitutes of new vehicle dealers. These offer after sales services inclusive of repairs. They are however limited to a warranty that is based on a set mileage. The second category is that of independent garages and workshops. These mainly handle a majority of the second hand imported vehicles as well as some new vehicles whose warranty with the new vehicle dealers has expired. It is in the latter category where these MSMEs are located.

It is with this in mind that the importance of ensuring professional standards in this sector are adhered to. A large number of these mechanics learn their trade through apprenticeship. This was what I found out during an interview I conducted with Barak Okoth, the Secretary of the Kisumu County MSE Association. He informed me that a majority of the artisans involved in the motor vehicle repairs industry were primary school dropouts who require to up skill their technical knowledge. Most of them can visually identify spare parts but do not know the technical terms which identify them. This poses a risk to the quality of repair work and service they offer. Any minor mismatch to this end will affect the performance of motor vehicles that undergo repairs in such garages. He also noted that the equipment that they use is outdated.

The Ministry of Industrialisation tasked the Kenya Motor Repairers Association (KEMRA) and the Kenya Bureau of Standards (KEBS) to develop a code of practice for motor vehicle garages for repairs and services. In consultation with other stakeholders in the industry, the KNWA: 2460 was drafted and formulated. It is a standardisation code of practice for this industry that dictates that motor vehicle garages adhere to the delivery of quality service during repairs of motor vehicles. One of the aims of developing this code of practice was to reduce accidents caused by faulty repairs. During the launch of the code of practice, Benard Ngoe who is the chairman of KEMRA pointed out that only 20% of informal garages follow professional standards.

In order to minimise the carnage on Kenyan roads, it is of key importance that focus be put on developing training programs that target informal motor vehicle mechanics. Key areas of implementation should include upskilling to enable the use of modern tools and equipment that are more efficient in diagnosing and servicing motor vehicles. This will ensure that informal garages will improve the quality of services that they offer. It will also give informal garage operators an avenue to upscale their operations thus improving the livelihoods of those engaged in this critical sector of our economy.

litualex@gmail.com 

Informal Economy Analyst 

Approaches to training in the Informal Sector

Image result for informal artisan training kenya

(Source: http://www.industrialization.go.ke/images/DSC_0656.JPG)

The informal sector has grown in leaps and bounds over the last decade. This growth has mainly been propelled by the shrinking availability of formal employment opportunities, with most of these businesses in the sector being micro enterprises. The quality of employment in the sector is poor as most usually work without access to medical insurance and no terminal benefits. In a bid to formalise these informal businesses to a level where they can provide quality employment, a few factors have to be considered.

The sort of training that usually takes place is traditional apprenticeship. This is whereby various skill sets are acquired via on the job training. In the Jua Kali sector for example, improved technical skills are of prime importance for enhancing their productivity as well as the quality of the goods and services they produce. These however, have to be regularly updated so that they will be at per with modern technological practices in a liberalised and globalised market.

Institutions that offer technical training still base their curricula on the needs for wage-employment, while requirements for self-employment such as basic management skills are not emphasised on as key pillars to these programs. While interviewing a majority of businesses in the informal sector, this is an aspect that has come out strongly. Basic financial literacy skills such as book keeping are side lined which leaves these businesses at a disadvantage as they do not have a platform from which they can engage with financial institutions that they approach for assistance.

The design of the current curriculum in the institutions that offer courses that are suitable for those that are engaged in the informal sector is tailored for individuals who would like to gain entry into its various sub sectors while ignoring the importance of upskilling. Those that earn a living from informal businesses often do not have the luxury of leaving their work places unattended as this is often the only way that they can afford to put food on their tables. The sort of curriculum that would work for them is one that is flexible enough to allow them to attend classes after working hours as well as properly structured short courses.

The Kenya Industrial Transformation Program (KITP) states that manufacturing is expected to increase its contribution to the national GDP by at least 10% per year. One of the focus areas that are spelled out include the strengthening of the capacity and local content of domestically manufactured goods. Some of the ways in which it plans to achieve this goal is through the development of Small and Medium Enterprise Parks as well as Industrial and Technology Parks, upgrading of products from small and medium enterprises and most importantly, the development of skills for the Technical Human Resource for the Manufacturing Sector.

It is with this in mind that the curriculum that is developed for the skills required to achieve this ambition be based on the science, technology, engineering and mathematics (STEM) approach. This will ensure that the labour force will be adequately equipped to handle the challenge of developing products that are competitive in regional and international markets and relevant to the growing needs of the country.

litualex@gmail.com

Informal Economy Analyst