Kenya's Trade Policies - Coursework Example

Kenya Introduction A global economy is an integrated world economy with unrestricted movement of goods, services and labor across nations. Also known as a globality, it is characterized as a totally interconnected marketplace, unrestricted by time zones or national boundaries. Global Economics refers to the interdependent economies of the nations of the world, which are regarded as a single economic system. In order to understand the concept of a global economy, one needs to first define globalization. Globalization is the tendency or process of making technologies, businesses or philosophies spread throughout the world. In other words, it is the integration of production and consumption in all markets across the world. There have always been disputes as to whether or not the establishment of the global marketplace will be beneficial. While proponents of globalization argue that it has the potential to create greater opportunities for growth worldwide hence benefiting the developed nations, opponents argue that it will simply increase the opportunities for the developed nations to take advantage of the less-developed ones and that it could eradicate regional diversity leading to a homogenized world culture. Since a global economy provides a unified market for all goods produced across the world, it gives domestic producers an opportunity to expand and raise capacity according to global demands and domestic consumers a vast array of imported goods to choose from at rationalized prices. Tariffs and quotas reduction under World Trade Organization (WTO) restrictions has allowed goods and services to flow freely between the developed and the developing countries (Haydon, 2009). Other positive impacts of a global economy are raising world productivity, revenues, and improving people's living standards. It also enables the world's economies to fight issues such as global warming, climate change and environmental degradation collectively and effectively. However, globalization leads to unequal growth as evident in the less developed economies of China, India and Brazil where the benefits of globalization have not percolated to the lowest levels. It has also led to jobs shifting from the developed to non-developed countries since wage rates are much lower here. As a result, companies of the advanced nations grow exponentially thus widening the gap between the have and the have-not lots (Flatters, 2003). Competitive advantage We can define competitiveness as the set of institutions, policies, and factors that determine a country’s level of productivity. Competitive Advantage refers to success over competition in industry at value creation and is achievable by integrating and leveraging operations on a worldwide scale (Ascot, 2008). In general, competitive advantage is a position a firm occupies against its competitors. A country acquires a sustainable competitive advantage when other countries have not imitated its value-creating processes and position. Michael Porter defines a nation’s competitive advantage as its ability to entice local and foreign firms to use the country as a platform from which to conduct business. He introduced the diamond of national competitiveness, which has four facets: the existence of resources, a business environment that invests in innovation, a demanding local market and the presence of supporting industries. These facets determine the competitive strengths and weaknesses of countries and their major sectors. He further outlines methods that a country can use to create a sustainable competitive advantage which include cost leadership, differentiation advantage and focus/economics. Cost leadership is the country’s ability to deliver the same goods and services as its competitors but at a lower cost. Differentiation advantage results from a country’s ability to offer superior services for the same price of its competitors. A country that concentrates on a narrow exclusive competitive segment with an aim of achieving a local wide competitive advantage has a focused approach (Porter, 2009). Innovation, reputation and relationships are the primary factors of competitive advantage. Though most developing countries’ competitive advantage is resources, they should gear their efforts to improve their overall business environment as according to Michael Porter; national prosperity is created, not inherited. There is need for a country to specialize on sectors with high value-added growth potential, a strategy referred to as priority sectors shape strategy. The principal concerns for governments should be on creating competitive advantage in growth sectors and it necessitates a strong public-private partnership. Their strategies should aim at crosscutting initiatives in areas such as trade, infrastructure, finance, logistics, customs and information technology. However, the specific necessities of key growth sectors, client priorities such as small and medium-sized ventures and foreign direct investors and target markets should determine the precedence among these initiatives (Kirchbach, 2007). Kenya: Her competitive advantage Kenya, a developing country in Africa, has beautiful lands that rise northwards from the Low Plains beside the Indian Ocean past the capital Nairobi towards the Central Highlands that are Africa’s most successful agricultural production regions. The richly fertile plateau of the Great Rift Valley cuts deep into the highlands and she has blossoming plantations producing tea and coffee which are her biggest crops and among her leading exports. According to the Global Competitiveness Report 2008/09, Kenya has improved her global ranking among the most competitive economies. Among the four East African Community states, she is the best performer and is the only one who has registered an improved economic competitiveness. She has assumed a market oriented economy, which registered significant growth rates during the first two decades since independence. The country has the natural competitive advantage of being strategically located in East Africa where she has an easy reach of export markets of Middle East, COMESA and the rest of Africa, Asia, Europe and USA (Ayieko, 2008). Generally, Kenya has acquired a sustainable comparative advantage by portraying a high efficiency in wildlife and tourism, horticulture, coffee and tea production. She has installed the set of human, infrastructure, and network endowments, which enables her to deliver goods and services at a lower opportunity cost compared to other developing countries. Kenya has created a competitive advantage in growth sectors through strong public-private partnership and specializing on high value-added growth potential (Kirchbach, 2006) Resources for example low-cost labor and access to natural resources determine Kenya’s competitive advantage in the first stage of its economic development known as resource-driven stage. When Kenya was in this stage, she was characterized by very narrow export mix, limitation to low value-added products, high dependence on international business intermediaries and low margins that are susceptible to changes in prices and conditions of trade. She also assimilated technology through imitation, imports and foreign direct investment. To overcome challenges in this stage, strategy-makers devised strategies to attract capital investment and to invest the profits of economic growth into the wider determinants of national competitiveness, particularly education, infrastructure and health. Unlike many developing countries that are stuck in this stage, Kenya is one level up in the second stage of economic development, which is the investment-driven stage. In this stage, Kenya is developing her competitive advantage by improving her efficiency and developing increasingly sophisticated products. She is making improvements to her imported technologies and is also extensively venturing and investing heavily in trade-related infrastructure such as ports, roads and telecommunications. Her focus is on making improvements on the business environment through amendments in regulatory arrangements such as company law, taxation and customs. She also aims at assisting prospective exporting companies to broaden their capability within the international value chain and encouraging in-country business alliances. Kenya’s greatest vision is to attain the final stage of economic development, which is Innovation-driven stage where her competitive advantage will lie in her ability to innovate and generate products and services at the front line of global technology just like developed countries (Haydon, 2009). How Kenya has worked with large players and with smaller, developing countries. The growing demand for exports from Kenya is helping the country to gain a reputation as one of the leading business-focused nations in Africa. Kenya’s main industries include farming, textile, wildlife and tourism among others. Agriculture plays an important role in Kenya’s economy and its products such as flowers, tea, coffee, vegetables and fruits are the country’s main exports particularly to the UK, Netherlands, Pakistan and the US. Kenya is one of the world’s largest producers of black tea, which is known for its fine and unique flavor. She exports much of her tea to UK where major UK supermarket chains sell it. The country is also one of the 20 largest producers of coffee in the world, producing more than two million bags of coffee a year. She produces a high-quality Arabica variety of coffee, which has intense flavor and pleasant aroma and sells it in numerous UK supermarkets. In addition, the country produces about 38 per cent of the world’s cut flowers and exports them to the European Union. Her two main flower crops are roses and carnations. Also ninety per cent of the world’s chrysanthemums come from Kenya. Tourism is another important foreign exchange earner for Kenya. Most people revere Kenya as one of the most scenic travel destinations in the world (Ikiara, 1999). The major tourists attraction sites are the south coast beaches, game reserves, national parks and niche products such as cultural and ecotourism which bring approximately 780,000 foreign visitors to Kenya annually. Kenya has seven tourist attachés in overseas embassies with Germany and Britain being the largest sources of overseas visitors (Crawley 2000). Kenyans also make handmade safari-grade travel bag and accessories using fine Kenyan materials such as robust cotton canvas and natural cow and camel leathers, and export them to Japan, Europe UK and the US. These bags have attracted customers such as Bill Clinton, Robert Downey Junior, Prince William and Jack Nicklaus. Kenyan Kikoys, East African versions of the traditional sarong for men and women, including stunning T-shirts made of Kikoy material, scarves and pillowcases are exported to the UK in new stylish designs. Another Kenya’s leading export is Tusker Lager, a fine lager brewed using high-quality malted barley grown in the Great Rift Valley. It is East African Breweries’ main brand and is sold at Sainsbury’s and Tesco in the UK (Haydon, 2009). Kenya exports professional services like engineering, urban planning and landscape architectural services, accounting services and medical services to East Africa Region, south Africa region, Sudan and Seychelles. She also exports nursing services to Namibia, Europe and America (Abilla, 2007). Kenya imports such goods as cars, clothing, electronics, defense weapons, technology among others from these developed countries. Her major imports include capital goods such as machinery and transportation equipment and intermediate goods such as petroleum products, iron and steel. She greatly relies on them, obtains grants and aids such as foodstuffs from them. Some of these countries also give loans to Kenya with little or no interest (Winters, 2007). Apart from being a member of World Trade Organizations where she cooperates with developed countries in trade, Kenya has also formed alliances with other smaller developing countries in such organizations as Common Market for Southern and Eastern Africa (COMESA), East African Community (EAC) and Economic Community of West African States (ECOWAS) among others. She has also formed a free trade area with these trading blocs to create a stronger market for her goods and services (Wanja, 2009). Tanzania and Uganda are the second and third largest export destinations for Kenyan goods after the UK. Being the most industrialized country in the bloc, Kenya has made significant concessions with these two countries allowing them to keep their current tariffs on Kenyan goods and allowing duty-free exports from them. These countries have also agreed on a Common External Tariff of 0% for raw materials, 10% for intermediate goods and 25% on finished goods on non-EAC countries. There is also increased foreign investment in Kenya after creation of a unified investment code and elimination of customs regulations. Since Uganda is landlocked, she depends upon the government of Kenya for access to the sea. This is an unreciprocated dependence because Kenya does not depend upon the government of Uganda (Collier 2007). Kenya signed independent treaties to take part in the promotion of commercial and industrial relations with Korea and Mauritius in early 2003. She also restored strained trade relations with Egypt, a great competitor in the textile industry. Egypt removed barriers to Kenyan textile exports and collaborated in the set-up of plants in Kenya, making her benefit more from the African Growth and Opportunity Act (AGOA) trade benefits that the US offered. In addition, there has been an implementation of a bilateral trade agreement and memorandum of understanding between Kenya and South Africa. According to the Kenya’s current Development Plan (2001 to 2012), Kenya has a strategy for Danish development cooperation, which aims at reduction of poverty and creation of sustainable development through pro-poor economic growth. Kenya’s strategies for growth The government of Kenya has laid down various strategies to enhance development in different sectors. In the tourism industry, it aims to be among the top ten long-haul tourist destinations globally. To attain this, it is addressing constrains facing the tourism sector and implementing strategic projects aimed at improving the quality and breadth of Kenya’s tourist attraction zones and expanding conference tourism. It also aims at ensuring that tourists spend more per visit by creating a favorable environment. Kenya has founded Ecotourism Kenya, a civil society organization meant to provide the required support for the development of ecotourism and sustainable tourism practices in Kenya. Ecotourism is a form of tourism whose endeavor is to minimize ecological or other damage to areas visited for their natural or cultural interest. Kenya’s Vision 2030 is geared towards encouraging domestic and regional tourism to even out fluctuations brought about by the decline of visitors during the traditional low seasons. Her overall strategy is to multiply national earnings from tourism by increasing bed-night occupation at the coast, niche products and safari business. Other strategies include diversification of tourist sources, implementation of measures to improve and develop the main tourism products, development of human resource and improvement of security (Sambili, 2007). In the agricultural sector, Kenya intends to achieve an innovative, commercially oriented and modern farm and livestock sector. To do this, she has developed five key strategic thrusts. The first one is the reformation of institutions by transforming key organizations, such as regulatory bodies, research institutions and cooperatives into complementary and high-performing bodies that support growth. The second one is the provision of widely accessible inputs and services to farmers and pastoralists to boost productivity while the third one is transforming land use to ensure maximum utilization of high and medium potential lands. The fourth thrust is the development of arid and semi-arid areas for both crops and livestock. The final yet important thrust is to improve market access via value addition by processing, packaging and branding the bulk of agricultural produce, which will partly involve exporting value-added goods to regional and global markets proactively. In her goals, Kenya aims to achieve the overall growth rate by meeting targets within three key strategic thrusts. The first one is to increase productivity where she will take measures to increase core crops and livestock yields to realize the levels recommended by the country’s agricultural research institutions. She will achieve this through reduction of the cost of fertilizer, intensification and expansion of irrigation, improvement of seed and development of livestock. Next is land use transformation by putting at least 1 million additional hectares of idle land in existing farming areas into productive agricultural use. Thirdly, in developing arid and semi-arid lands, the target is putting an additional 600,000 to 1.2 million hectares under irrigation. To realize the full potential of arid and semi-arid lands, Kenya aims to put various strategies in place. These are making investments in targeted rangeland developments such as infrastructure, water provision, fodder, pasture, and veterinary services; instituting Disease-Free Zones that are located strategically to increase livestock quality and productivity and unifying the efforts of various ministries and other stakeholders such as the office of the president, the ministry of water and regional development authorities. In trade, the Kenyan government aims at streamlining the supply chain and improving the quality of goods and services coming into the Kenyan market thus motivating traders to invest in storage facilities and processing thereby eliminating price fluctuations that result from surpluses or farm shortages of goods due to seasonal factors. It will also organize wholesale trade enabling producers to establish market linkages outside their local areas. Kenya aims to realize her trade vision for 2030 by strengthening the ability of informal retail sector operators for integration into the formal sector and growth into sustainable businesses through research and development programs, security of tenure, training, credit extensions and linkages with local and international markets. Another way of realizing her trade vision is by strengthening wholesale and retail activities through provision of quality infrastructure, an improved business environment, and certification of products and by establishing a duty-free zone to create a business center for the Eastern Africa region and to take advantage of the geographical position of Kenya (Sambili, 2007). The Kenyan government through the manufacturing sector aims to enhance growth in agriculture by stimulating agro-processing activities. Its vision is encompassed in three strategic thrusts, which include developing robust, diversified and competitive manufacturing by focusing on regional market expansion, global market niche and local production. The manufacturing sector’s overall goal includes realizing a sustainable growth through strengthening local production capacity to increase domestically manufactured goods, raising Kenyan products share in the regional market and developing niche products through which Kenya can achieve a global competitive advantage. The government of Kenya has established an Export Promotion Council (EPC), which pursues its objectives through various strategies the first one being facilitating research and policy. The council organizes sector specific Panels to deliberate on key policies of the sector and operational issues and provides relevant authorities with recommendations for consideration. The second one is the development of export market where the council identifies market opportunities and formulates appropriate market approaches. This is done via techniques such as contact promotion programs, trade fairs and exhibitions, buyer-seller meetings, market surveys and investigations and trade missions. The third strategy is product development and adaptation to suit specific market requirements. This involves firm level assistance to provide exporting companies with technical assistance for product development and giving attention to issues such as quality and packaging. The final yet important strategy is trade information delivery services where activities revolve around the multimillion-shilling Centre for Business Information in Kenya located at the export promotion council (Abilla, 2007). Kenya’s trade policies The Kenyan government has explicitly defined trade policies whose objectives are progressing to a more open trade regime, strengthening and increasing overseas market access for Kenyan products and further integration into the world economy. The Ministry of Tourism, Trade and Industry mainly implement Kenya’s trade policies. One of the trade policies that Kenya has adapted is the policy of zero tolerance of any corruption, as outlined in Kenya Interim Poverty Reduction Strategy Paper 2000–2003 prepared by the government of Kenya. Kenya will achieve Zero tolerance of any corruption through good governance, an elemental building block of a just and economically prosperous nation. The government, the Kenyan Anti-Corruption Authority (KACA) and the police are responsible for carrying out a sustained drive against corruption in all parts and levels of the public sector. The government has also established a Parliamentary Select Committee on corruption, which in consultation with KACA has drafted a comprehensive Anti-Corruption and Economic Crimes Bill. The Kenyan government has also adopted policies of trade liberalization and structural reforms with an aim of consolidating the re-orientation of its economy and completing its transition to an outward-oriented economy. These procedures have facilitated the efficient allocation of resources thus reflecting Kenya's comparative advantages. Tariffs are Kenya's main trade policy instrument and she has dismantled most non-tariff restrictions, except for moral, health, security, and environmental reasons, or under international conventions to which she is a signatory (Kiringai 2000). To facilitate growth in the market, the government has improved infrastructure and reduced the cost of doing business in the country by reducing the cost of issuance of licenses. In an effort to protect her wildlife, Kenya, a member of the united nations (UN) has successfully persuaded the UN Convention on International Trade in Endangered Species (CITES) to stop the plans of allowing the governments of South Africa, Namibia, Botswana, Zambia and Zimbabwe to sell their stockpiles of raw ivory. She has also campaigned against the issuing of quotas for a limited legal trade to these countries. Kenya has adopted trade policies and trading patterns through pursuing preferential trade agreements to increase her trade flows. She has also engaged herself in reforms that have resulted in a certain macroeconomic stability and improved trade. Kenya also has bilateral trade agreements with various countries, which include Zambia, Zimbabwe, Nigeria, Thailand, Pakistan, Poland, India, China, and Argentine among others. In addition, confidence and credibility in the irreversibility of Kenya’s reforms have been created by improvement of the low level of its multilateral commitments, transparency, predictability of existing legislation and its enforcement. In this way, Kenya’s ability to attract foreign investment has improved. Trade liberalization in Kenya has major long-term dynamic benefits. She has brought domestic prices closer in line with world costs and prices thus ensuring a more productive and efficient use of her domestic resources. This lays a strong foundation for Kenya’s long-term development. In addition, she has led to increased competition in domestic markets therefore providing strong incentives to improve domestic output. Kenya has also maximized access of her domestic producers to global supply networks of raw materials, capital goods and intermediate inputs for maintenance of cost competitiveness and increased production. She has also taken part in multilateral trade agreements thus securing preferential access to the partners’ markets. She has ventured into regional preferential agreements thus integrating it with the global economy more effectively. Through multilateralism and regionalism, Kenya is pursuing one of her important goal of increasing the degree and effectiveness of participation in the global economy (Flatters, 2003). The Kenyan government has rationalized trade regime with an aim of rendering it more predictable, transparent and less distortive. As far as custom tariffs are concerned, domestic production has been supported by reducing duty rates on raw materials in order to bring them in line with the equivalent tariffs of major regional partners. She has also applied tighter supervision to COMESA trade ensuring that rules are followed and that her exports fairly access COMESA markets. She has also enforced anti- dumping legislation ensuring fair competition for her products. Duty exemptions have been minimized and areas of discretion reduced to avoid revenue loss, reduce opportunities for corruption and address bureaucratic delays. Influence of politics and culture on Kenya’s competitive advantage The Kenyan government plays a major role in decision making of Kenya’s trade. The culture of the monopoly of political power and the colonial legacy has generally shaped the nature of economic, trade policies and industrial policies in Kenya. In the past leadership characterized by poor performance of the economy especially in the 1980s and the 1990s, government actors dominated the policy formulation process leaving little room for other stakeholders. Some local manufacturing firms became bankrupt due to officially instigated measurers such as denial of import licensing, liquidity pressures from government owned banks, credit facilities and other licensing measures. This greatly slowed down the indigenization of key sectors like banking, manufacturing and distribution and largely influenced the country’s competitive advantage. However, the emergence of multilateral and bilateral donor institutions during president Moi’s regime was crucial to the country’s economic policy formulation (Kiringai 2000). The current Kenyan government has brought improvements in trade and Kenya is now a key player and is the third largest in sub-Saharan Africa after South Africa and Nigeria. Kenya’s strong and vibrant NGO-community has played a vital role in development and promotion of good governance and respect for human rights. The government has encouraged NGOs, confirmed their role in the civic and international societies, and expressed its commitment to facilitate their participation in these societies. The new government has also moved Kenya towards a more active involvement in the New Partnership for African Development (NEPAD) including the peer review mechanism. Kenya’s rich culture has improved her competitive advantage in that various ethnic groups have different cultures such as musical and dance traditions among the Maasai, farming, weaving among others. All these are the country’s source of competitive advantage and promote textile, tourism, trade and other industries. However, Kenyan government faces challenges like corruption, mismanagement of funds, infrastructure deficiencies, and poor accountability in public resource management among others. Corruption is a major problem in Kenya and the current government, which strongly pledged to combat it when taking office has since confirmed this commitment. One way is by elaborating an anti-corruption action plan with specific targets, actions and indicators for preventing corruption in the future. Computerization and streamlining are ways through which the government is addressing petty corruption among lower civil servants. However, this government has been slow in producing specific follow-up on high profile cases and continued lack of transparency. Kenya therefore is still a country with persistent rampant corruption. Conclusion As Peter Cornelius of the World Economic Forum pointed out at the Executive Forum 2002, the transition through the different stages of economic development of a nation is not necessarily linear or gradual; nor does it happen automatically. The world society should focus on making Africa a no-conflict zone as conflicts from political turmoil has acted as a great hindrance of development in many African developing countries (Corey 2008). References Abilla, J. (2007). Participation of developing countries in new and dynamic sectors of world trade: the south–south dimension. Retrieved March 10, 2009, from http://www.unctad.org/templates/Download.asp?docid=9231&lang=1&intItemID=4375 - Aderinokun, K. (2009). Africa: Global economy to recover in 2010, Says IMF. Retrieved March 8, 2009, from http://allafrica.com/stories/200902230253.html Ascot, E. (2008). Competitive advantage. Retrieved March 8, 2009, from http://www.authorstream.com/presentation/AscotEdu-20578-keegan01-Final-Introduction-Global-Marketing-Reasons-Invented-Elsewhere-Vs-Differences-as-Entertainment-ppt-powerpoint/ Ayieko, F. (2008). Kenya ranked most competitive economy in E. Africa region. Retrieved March 10, 2009, from http://www.theeastafrican.co.ke/news/-/2558/479528/-/view/printVersion/-/iro26sz/-/index.html Collier, P. (2007). Growth strategies for Africa. Retrieved March 10, 2009, from http://www.growthcommission.org/storage/cgdev/documents/ThemesPapers/Paper%20Collier.pdf Corey, C.W. (2008). Africa Is New Frontier of Global Economy. Retrieved March 7, 2009, from http://www.america.gov/st/econ-english/2008/October/20081010111004WCyeroC0.1286432.html Crawley, M. (2000). Investigating the Impact of Tourism in Kenya. Retrieved March 10, 2009, from http://www.idrc.ca/en/ev-5332-201-1-DO_TOPIC.html Flatters, F. (2003). Africa and the Global Economy. Retrieved March 8, 2009, from http://qed.econ.queensu.ca/faculty/flatters/writings/ff_regionalism_eca.pdf Haydon, G. (2009). Kenya's products are gaining a global reputation. Retrieved March 8, 2009, from http://www.telegraph.co.uk/sponsored/travel/kenyasafari/4246547/Kenyas-products-are-gaining-a-global-reputation.html Ikiara, G.K. et al. (1999). Formulation and implementation of strategic trade and industrial policies. Retrieved March 11, 2009, from http://www.idrc.ca/en/ev-71256-201-1-DO_TOPIC.html Kibaara, B. (2008). The impact of the financial crisis on developing countries: Kenya. Retrieved March 7, 2009, from http://www.intracen.org/btp/wtn/newsletters/2007/3_2/3_2_y22.htm Kirchbach, F. (2003). A Country’s Competitive Advantage. Retrieved March 8, 2009, from http://www.tradeforum.org/news/fullstory.php/aid/536/A_Country_92s_Competitive_Advantage.html Kiringai, J. (2000). Trade Policy and Transport Costs in Kenya. Retrieved March 9, 2009, from http://www.nottingham.ac.uk/economics/credit/research/papers/CP0611.pdf Kosgey, H.K. (2008). Regional workshop on eco-labelling. Retrieved March 10, 2009, from http://www.tradeandindustry.go.ke/speech.asp?ID=84 Mboweni, T. (2009). South Africa’s integration into the global economy. Retrieved March 9, 2009, from http://www.bis.org/review/r001030b.pdf Nyong’o, P.A (2005). Kenya’s strategic position and enabling environment. Retrieved March 10, 2009, from http://www.ncapd-ke.org/UserFiles/File/anyang1.pdf Porter, M. (2009). Competitive advantage. Retrieved March 11, 2009, from http://www.12manage.com/methods_porter_competitive_advantage.html Sambili, E. (2007). Kenya Vision 2030. Retrieved March 9, 2009, from http://www.investmentkenya.com/Documents/Publications/Vision_2030_BROCHURE%20_July_2007.pdf Wanja, C. (2009). Kenya-South Africa to enhance trade relations. Retrieved March 9, 2009, from http://www.bilaterals.org/article.php3?id_article=14388 Winters, A. (2007). An empirical intertemporal model of developing countries’ imports. Retrieved March 8, 2009, from http://www.springerlink.com/content/u60g781t758qk285/ Read More