How Policy Initiatives Have Influenced Economic Development in Kenya since 1960 - Example

Running Head: ECONOMICS OF DEVELOPMENT How Policy Initiatives in Foreign Direct Investment and Trade have Influenced Economic Development in Kenya since 1960 Brief country background Kenya is lower middle-income country located in East Africa. The country attained independence from British colonial rule in 1963, and since then the country has gone through four government regimes. Each of the four presidents of Kenya brought different policies regarding trade and foreign direct investment (FDI). However, it is also important to acknowledge that in regard to trade, Kenya’s economic exchanges with other countries have to a great extent been mediated by regional and international agreements such as the World Trade Organisation, which Kenya is party to, as well as the Common Market for Eastern and Southern Africa (COMESA) – a regional trade body, to which Kenya is also a signatory. This paper investigates the effect of FDI and trade policies on Kenya separately. The paper therefore starts with an analysis on FDI while a discussion on trade forms the latter part of the paper. The conclusion section provides a summary of the entire paper and indicates that Kenya’s current economy is significantly improved compared to the 1960s, and as such, one can argue that both FDI and trade policies have contributed to the development. FDI Policies and their effect on Kenya’s economic development Prior to its independence in 1963, Kenya was a rich ground for FDI, mainly from the British who intended to grow the colony (Gachino, 2009, p. 140). The new government led by Jomo Kenyatta was also aware of the important role that the British played and continued to play in the country despite their oppressive colonial rule. An example of the effect of the British rule on the pre- and post-independent Kenya was the tea, coffee and sisal estates that were developed in the country. Most of the produce from these estates would be exported to other countries, hence earning foreign exchange for Kenya. Notably, the 1960s corresponded with a phase when Britain was trying to push industrial development in its colonies, and British multinational corporations (MNCs) were chosen as the right vehicles to push such development (Gachino, 2009, p. 141). As Dunning (1993, p. 32) notes, the use of MNCs to push capital across international boundaries was the ‘trendy’ thing after World War II and as such, the British were doing what was being done by other investors everywhere in the world. The FDI in Kenya in the 1960s (especially in the early 1960s) was not as a result of anything that the East African country did in particular; rather, it was a result of happenings in Britain where the country’s production had slowed down (Onyancha, 2006, p. 67). As a result, the British government adopted a policy that encouraged its MNCs to seek investment opportunities in various colonies. The British government specifically encouraged the MNCs to expand the targeted industries, mainly from extracting raw materials to setting up industries that would process the same raw materials and export value-added products (Onyancha, 2006, p. 67). At independence however, it has been noted that Kenya was faced with a disinvestment problem (Gachino, 2009, p. 145). Arguably, the disinvestment experienced at that time should not be surprising to economists because it is obvious that investors want to secure their wealth by investing in countries or destinations that they have confidence in. Following the transition that occurred when the British colonialists passed over governing power to Kenyan leaders, it is understandable why outflow of foreign capital occurred. However, Gachino (2009, p. 145) notes that the Kenyan government was intent on reverting the capital outflow and once again attracting foreign investors. Consequently, the Kenyan government enacted the Foreign Investment Protection Act (FIPA) in 1964. FIPA’s intention was to restore confidence in the investors that they could repatriate their profits from Kenya. Additionally, the Act created a vetting system that allowed only those investors that would fit into Kenya’s development agenda at the time to be granted the licenses to operate (Langdon, 1978, p. 45). In 1971, the Kenyan government set up the Capital Issues Committee whose mandate was to address capitalisation issues in firms that held foreign interests (Swainson, 1980, p. 15). As a policy action, Kenya became a signatory to the Multilateral Investor Guarantee Agency (MIGA). The MIGA membership assured investors that the country would guarantee them against non-commercial risks. Moreover, the country became a member of the Africa Trade Insurance Agency and also took membership in the International Centre for the Settlement of Investment Disputes (Gachino, 2009, p. 147). As a result of the foregoing initiatives by the government, investor confidence was restored and FDI increased from the mid-1960s to the 1980s when the East African country was hit by economic crises. As would be expected, the economic crises in the period negatively affected FDI. In response, the Kenyan government policy action led to the creation of the Investment Promotion Authority in 1986 and the Export Promotion Council in 1992 (Gachino, 2009, p. 156). Collectively, the two bodies were meant to enhance Kenya’s attractiveness as an FDI location. Arguably, while the government was trying to attract FDI, it failed in addressing critical issues that were affecting the Kenyan economy at the time. For example, the economic crises experienced in the 1980s were to a great extent caused by neglecting economic fundamentals that were responsible for the country’s growth in the 1970s. To appeal to the foreign investors once again, the Kenyan government at the time had to re-consider its macro- and micro-economic fundamentals. Arguably, such a move benefited the Kenyan economy. Changes of government in the 2000s enhanced investor confidence, and as Kinyanjui (2014, p. 150) indicates, FDI inflows increased fourteen-fold in the 2006/2007 financial year. However, Kenya still compares poorly to its East African counterparts (i.e. Uganda and Tanzania) despite the latter’s smaller economies. Some areas where the government could arguably target with policy action include the tax regime, infrastructure, insecurity and the cost of and reliable supply of electricity. Some of the policy issues that have been addressed by the Kenyan government in recent times for purposes of enhancing FDI include: freeing borrowing (by abolishing restrictions) for both foreign and domestic companies; allowing banks to offer their customers foreign currency accounts; floating the domestic currency’s exchange rate; revoking restrictions that had been placed on current accounts; revoking export duties; and reducing and rationalising tariffs that had been imposed on imports (KPMG, 2012, p. 10). In a research meant to indicate the impact that FDI had on the growth of the Kenyan economy, Nyamwange (2009, p. 11) found that FDI does induce economic growth. However, the FDI-induced growth is still sub-optimal because apparently, Kenya does not attract enough FDI to spur enhanced economic growth. One of the reasons indicated by Nyamwange (2009, p. 11) is that not enough policy sensitivity has been paid towards developing good policies that would attract more investors into the country. Trade policies and their influence on economic development in Kenya Since 1960 According to Manyara (n.d, p. 3), trade in Kenya has evolved over the years into three distinct orientations. In the 1960s to the 1980s, the Kenyan government’s trade efforts were guided by the import substitution mantra. In 1965 for example, the country adopted a sessional paper that sought to develop domestic industries and protect the home market. According to Manyara (n.d., p. 4) the country hoped to attain rapid trade growth, generate employment, and ease its balances of payment through the policy strategy. Theoretically, it has been argued that import substitution allows less developed countries to protect themselves (albeit for a limited time) from the might of the developed countries as represented by import sources from those countries (Bruton, 1989, pp.1602-1603). Arguably, such protection would lead to the growth of the home industry, but as will be seen in the discussion, Kenya soon realised that its policy had created non-competitive industries and processes. Overall however, it is safe to argue that Kenya adopted the policy, which it considered appropriate at the time, but was willing to adopt other alternatives after realising that the first trade policy did not work well. In the 1980s, Kenya’s trade policy changed to embrace the structural adjustment policies (SAPs), whose main aim was to enhance the competitive nature of the domestic market (Manyara, n.d., p. 5). Notably, the domestic market had become uncompetitive due to the protective strategies that the government had adopted earlier. According to Heidhues and Obare (2011, p. 57), SAPs were conceptualised by the Breton Woods institutions (i.e. the IMF (International Monetary Fund) and the World Bank) and were meant to provide stabilisation policies. SAPs arguably contributed a great deal to the economic development of Kenya, but some critics also argued that the policy initiatives ignored the social and institutional weaknesses in the country (Heidhues & Obare, 2011, p. 59). Klasen (2003, p. 445) for instance has stated that there was no link between SAPs and any economic development in Kenya or elsewhere in Africa where the SAPs were being championed by the World Bank and IMF for adoption. Once the SAPs phase was over, Kenya moved on to the next best policy for its economy. Although the impact of the SAPs on Kenya’s economic development remains contentious, one can argue that the policies gave the country and its economists vital lessons about what would work for its economic development in the future. In the 1990s, Kenya adopted export-oriented policies, which sought to enhance the country’s capacity to export through a combination of strategies. These strategies included the restructuring of tariffs, foreign exchange improvements, and export retention strategies (Manyara, n.d., p. 6). Arguably, Kenya was trying to follow in the footsteps of Asian economies such as Singapore and Taiwan, which had given up protecting their domestic markets and instead opted for export orientation. Theoretically, the export-oriented strategies had substantial support. For example, Gkagka-Zarotiadis (2011, p. 6) notes that an export-oriented strategy enables countries to: develop economies-of-scale production; gain competitive advantages that fuel growth; enhance specialisation; become open to import and therefore technology and knowledge transfers; and become recipients of FDI. It can be argued that Kenya benefited from some of the aforementioned factors. However, as noted by Takahashi, Ohno and Matsuoka (2007, p. 7), the export-oriented strategy faces some risks, which Kenya was prone to. For example, since Kenya was not exporting at a fast rate, opening up its market meant that the balance of trade was in many cases tipped against it. Consequently, Kenya reintroduced some trade restrictions in the 1990s (Swamy, 1996, p 194). The country also faced trade barriers from some countries because free trade is in real sense not free; some restrictions still exist. However, regardless of the hurdles, the export-orientation policies still played a role in Kenya’s economic development, especially by providing relevant lessons on trade liberalisation and the future policies to adopt going forward. From 2004 to date, Manyara (n.d., p. 7) notes that Kenya has adopted a national trade policy and a development strategy dubbed as ‘Vision 2030’. The trade policy seeks to position Kenya as a competitive trade outfit in the global economy by focussing on informal trade, retail trade, distribution and wholesale trade, international trade, e-commerce, and services trade (Manyara, n.d., pp. 12-13). There is no doubt that the national trade policy is a combination of all economic lessons that Kenya has learnt by trying out different policies in the past. While the current policy initiative underscores the importance of trade as a vehicle that will facilitate Kenya’s economic growth going forward, it also acknowledges that there are a lot of trade details that the country needs to consider and iron out if it is going to attain its economic growth objectives. One of the areas identified by Were, Sichei and Milner (2009, p. 35) is the non-incremental nature of Kenyan export and the absence of diversification in exports. The objective of the current trade policy is to turn the East African country into a competitive export-oriented economy. However, only time will tell if this objective will be attained. Conclusion Both FDI and trade policies seem to have played a critical role in Kenya’s development. To a large extent, the policies appear to be the economic manual that the country followed in order to attain some set economic objectives. Nevertheless, sub-optimal policies are likely to produce sub-optimal results as was the case of FDI policies in Kenya. Besides, one gets the impression that the policy framers need to be in constant touch (or acknowledge the realities) of the social and political environments of the beneficiary economy. Overall, it appears that the focus on trade is much more intense compared to FDI, perhaps because trade is a larger concept that involves all investors including the foreign and domestic investors. It can be seen that Kenya has gone through different policy phases both in the FDI and trade sectors in an attempt to inspire economic growth. Undoubtedly, the country’s economy is significantly improved compared to the 1960s, and as such, one can argue that the policies have contributed to the development. References Bruton, H. (1989). Import substitution. In H. Chenery & T. N. Srinivasan (Eds). Handbook of development economics volume II (pp. 1602-1644). New York: Elsevier. Dunning, J.H. 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Multinational corporations in the political economy of Kenya. London: McMillan. Nyamwange, M. (2009). Foreign direct investment in Kenya. Munich Person RePEc Archive, (34155), 1-17. Onyancha, K. (2006). Determinants of foreign direct investment in Kenya. Journal on Development Studies, 2, 67-68. Swainson, N. (1980). The development of corporate capitalism in Kenya, 1918-1977. London: Heinemann. Swamy, G. (1996). Kenya: Patchy, intermittent commitment. In I .Hussain & R. Faruque (Eds), Adjustment in Africa: Lessons from country case studies (pp. 193-236), Washington DC: World Bank. Takahashi, Y., Ohno, A., & Matsuoka, S. (2007). Alternative export-oriented industrialisation in Africa: Extension from “spatial economic advantage” in the case of Kenya. Discussion Paper Series, 2006-7, 1-29. Were, M., Sichei, M., & Milner, C. (2009). Trade policy in Kenya. Retrieved from http://www.csae.ox.ac.uk/conferences/2009-edia/papers/510-were.pdf Read More