Kenya's 1992 Economic Reforms: Successes and Limitations

Introduction

The need for reform in Kenya has been clearly demonstrated. But the question remains: has this reform been successful? The slogan of Harambee — meaning "all pull together" — fueled the passions of the Kenyan people and drove them to strive as one nation to lift themselves up from poverty and oppression. It has been ten years since the last reform, and it is now time to look back and assess what has been accomplished.

To measure the success of the reforms, several economic indicators will be considered both before and after reform to see how they changed. These factors will then be evaluated as a whole to develop a fuller picture. The areas examined include education, the performance of the industrial sector, the trade and tourism sector, the finance sector, inflation, employment and wages, the agricultural sector, construction, and social services, along with observations on the general conditions of the average person in Kenya today.

It is conventional wisdom to stress the importance of education — a measure of human capital accumulation — in determining economic growth. After independence, Kenya experienced a major educational expansion but also an economic slowdown in the 1960s, followed by stagnation in the 1970s and decline after 1980 (Appleton, 1999). Like sub-Saharan Africa as a whole, Kenya has experienced educational expansion alongside poor economic performance. At present, Kenya's educational achievements are above the regional average, with an illiteracy rate of 22% in 1995 compared to 44% for the subcontinent as a whole.

Education and Human Capital

Kenya's income, however, is below the regional average. In 1997 its GNP per capita was $1,110, compared to $1,470 for the subcontinent (World Bank, 1998). One common critique of conventional rates of return to education is that they are based on urban wage employees. This may be appropriate for males in industrialized countries, but is questionable in developing countries where most of the population depends on self-employment. For the years for which data are available, rates of return to education within self-employment are comparable to those for wage employment. Education has strong effects on the probability of both employment and self-employment — an effect missed by conventional analyses that focus only on returns within one type of activity. However, earnings differences between the two types of activity are not sufficiently large to make this a major consideration for men. For women, low rates of labor market participation imply that education may have a much stronger effect on earned income than conventional estimates suggest (Appleton, 1999).

With higher literacy rates than much of the African continent, one might expect Kenya's GDP per capita to be higher as well. But this is not the case, and it appears that education is not the only factor in determining economic growth.

Kenya's industrial sector grew substantially over the reform period, with its contribution to Gross Domestic Product (GDP) rising from about 8% in 1990 to 14% in 1994. There are more than 700 medium- and large-scale enterprises, of which approximately 200 are foreign multinationals, mostly from the United Kingdom, the United States, Germany, and the Far East. The major industrial exports include refined petroleum products and cement (Kenyaweb.com, 2001). This sector's growth represents a significant positive development, as industry is a major source of employment, and expansion here would be expected to have positive effects on other sectors of the economy as well.

Another sector that has gained increased importance in the Kenyan economy since 1963 is trade, restaurants, and hotels, including tourism. At the time of independence, the contribution of this sector to the national economy was minimal. By the mid-1990s, the sector had become the third most important in the economy, accounting for nearly 12% of total annual national output. By 1996, earnings from tourism had risen from 1,250 million Kenya Pounds in 1995 to 1,280 million Kenya Pounds (Kenyaweb.com, 2001).

With the general growth of the economy, other services such as banking, insurance, and business also expanded. Real estate services grew substantially over the period, largely reflecting the rapid expansion of Kenya's urban population. Altogether, the contribution of these services to GDP, which stood at 16%, had almost quadrupled by the end of 1990 (Kenyaweb.com, 2001).

Agriculture accounts for 24.5% of GDP and expanded by 0.7% in the year to July 2000, compared to 1.2% in 1999. The agricultural sector has recorded a continued decline in performance, attributed mainly to prolonged drought, tribal clashes that affected some parts of the country, power rationing, low commodity prices, and high input costs (Kenyaweb.com, 2001).

By the end of 1994, the agricultural sector began to recover after four years of decline. Production of maize, wheat, sugarcane, potatoes, beans, and rice recorded significant increases. The sector's contribution to GDP grew by 2.8% compared to a 4% decline registered in 1993 (Kenyaweb.com, 2001).

Economic Sectors: Industry, Trade, Finance, and Agriculture

In 1996, the agricultural sector recorded 4.5% growth despite adverse weather conditions. The production of food crops such as maize, potatoes, and beans declined, but horticultural product exports increased by 18% compared to the previous year. During the same year, tea and coffee exports rose by 7.7% and 5.2% respectively, making Kenya for the first time the world's leading tea exporter (Kenyaweb.com, 2001).

In 2000, Kenya's economic growth rate was at its lowest since independence, registering only a 0.4% increase. Inflation rose to 27.5%. Political reforms that led to the reintroduction of a multi-party political system created economic uncertainty ahead of the general election. This, coupled with ethnic clashes in some parts of the country, disrupted the economy and caused a fall in output in the affected areas. Poor weather further reduced agricultural production. Consequently, GDP declined. A 1992 National Household Welfare Monitoring and Evaluation survey found that most households spent the majority of their income on food. The same survey showed that about 74% of households used mud or wood in the construction of walls, 67% used the same materials for flooring, and 36% used grass-thatched roofs (Kenyaweb.com, 2001).

By 1994, the Kenyan economy had improved considerably compared to the preceding four years (1990–1993). This improvement was largely due to the implementation of appropriate economic reforms, including tight monetary control, liberalization of foreign exchange, and a return to political stability, as well as favorable weather. Real GDP expanded by 3.0% compared to 0.2% in the previous year. The inflation rate, which had risen to 46% in 1993, declined to 28%. The agricultural sector registered growth of 2.8%, while the manufacturing sector, hit by competition from imported goods, grew by only 1.9% (Kenyaweb.com, 2001).

By 1992, an estimated 2.1 million people were employed outside rural small-scale agriculture, and a total of 91,000 jobs had been created. Growth in employed persons had declined during 1990 to 1992. Total employed persons by 1992 stood at 1,462,600. As the government sought to reduce wages and achieve budgetary savings, employment in the public sector declined by 1%. The informal sector, on the other hand, created 68,800 additional jobs, representing 27.2% of total persons employed in 1992 (Kenyaweb.com, 2001).

Overall nominal wages rose from K£2,649 million in 1991 to K£3,013 million in 1992, a 13.7% increase. Average earnings per person increased from K£1,837.4 per annum in 1991 to K£2,059.7 per annum in 1992. However, as the inflation rate rose from 19.6% in 1991 to 27.5% in 1992, consumer prices rose rapidly, eroding real purchasing power (Kenyaweb.com, 2001).

By 1994, total employment outside rural small-scale agriculture had grown to an estimated 3.4 million persons. Employment in the informal sector had overtaken the public sector, representing 53.4% of total employed persons, with 1,792,400 people working in that sector. Overall nominal wages increased by 20.5%, from K£3,496.6 million in 1993 to K£4,213.8 million in 1994. Inflation declined by 17.2 percentage points, from 46% in 1993 to 28% in 1994 (Kenyaweb.com, 2001).

In 1996, total employment outside rural activities stood at 4.3 million persons. The informal sector employed 2,643,800 people, accounting for 61% of total employment. Those employed in the modern sector totaled 1,670,000. Overall wages increased from K£5,303.7 million in 1995 to K£6,669.8 million in 1996. The inflation rate was contained within single digits but rose from 1.6% in 1995 to 9% in 1996 (Kenyaweb.com, 2001).

Employment, Wages, and Inflation

The Kenyan economy generated 384,800 additional jobs in 1997, bringing total employment outside rural small-scale agriculture to 5.1 million persons by 1998. Overall nominal wages increased by 23.3%, rising from K$8,247.7 million in 1997 to K$10,170.3 million in 1998. Average earnings per person expanded by 25%, from K$5,004.6 per annum in 1997 to K$6,258.3 per annum in 1998. Overall inflation, as estimated by the Nairobi consumer price index, declined by 4.6 percentage points from 11.2% in 1997 to 6.6% in 1998 (Kenyaweb.com, 2001).

Government expenditure on social services in 1992 was approximately K£981 million. Much of this went to the education sub-sector, which accounted for 76% of recurrent expenditure and 59% of development expenditure. Enrollment across all four public universities in 1992/93 was 10,189. Primary and secondary school teachers numbered 176,359 and 36,560, respectively (Kenyaweb.com, 2001).

By 1994, government expenditure on social services had risen to K£1,925.74 million from K£1,319.17 million in 1993, with 78% spent on education. By 1996, the number of primary and secondary schools in the country had increased to 16,255 and 3,004, respectively. Enrollment at those two levels stood at 560,000 pupils and 658,000 students. The number of health institutions during the same period was 3,993 (Kenyaweb.com, 2001).

The number of primary and secondary schools increased by 2%, reaching 17,356 and 3,081 respectively by 1998. Enrollment in primary and secondary schools rose by 4.3% and 1.9%, reaching 5.9 million and 700,538 respectively. The number of primary school teachers rose from 186,590 in 1997 to 192,306 in 1998 — a 3.1% increase — while the number of secondary school teachers dropped by 1.5% to 43,694. Teacher-to-pupil ratios were 30.8:1 in primary schools and 16:1 in secondary schools (Kenyaweb.com, 2001).

Adverse economic conditions hampered growth in the construction sector in 1992. This trend of slow growth continued in 1994 due to a lack of adequate funds for public projects, although employment in the sector rose from 21,000 in 1993 to 26,000 in 1994. A slowdown in domestic economic activity and insufficient public funding continued to affect the sector in 1995 and 1996, resulting in persistently slow growth. High interest rates — approximately 30% on commercial bank and building society loans — further constrained the sector. Cement consumption in 1996 was 1,160 thousand tonnes, compared to 1,065 thousand tonnes in 1995, though employment growth in the sector declined (Kenyaweb.com, 2001).

The outcome of reform programs can be predicted quite well by information on recipient-country characteristics available before reform begins. For example, the success rate is far higher for new governments than for governments that have been in power for a long time, and higher still for democratically elected governments (Utenriksdepartemnetet). Countries that failed to implement the necessary structural adjustments to make stabilization effective experienced further destabilization even after reform policies generated initial success (Center for International Private Enterprise, 2002).

Throughout North Africa and the Middle East, the end of the oil boom in the 1980s resulted in sharply reduced rates of industrial growth and a deteriorating employment situation (World Employment, 1996). Given Kenya's abundance of natural resources, creating a sustainable path for economic growth must begin first and foremost with greater financial accountability and transparency. In so doing, Kenya can achieve rates of economic growth that assure rising levels of per capita income (Makau, 1995).

An export platform provides an enclave in which problems of poor trade policy, weak infrastructure, and inconsistent rule of law are at least partially eliminated, enabling firms to become more competitive and more fully integrated into the global economy. Export platforms give exporters access to duty-free imports of capital and intermediate goods and usually provide special administrative procedures, particularly to expedite customs clearance (Radelet, Discussion Paper No. 43).

In the first ten to fifteen years after Kenya's independence in 1963, planners were occupied with the settlement of Africans on high-potential land that had been alienated from them in the early years of the colonial period. This program covered 1.25 million acres and absorbed a large proportion of the staff and money available for agricultural development. Of particular importance was the "one million acre scheme," which involved 34,000 families in 135 new settlements on land formerly occupied by white settlers. Additional finance for this program came from the United Kingdom and other donors (Adams, 1995). Export opportunities and land reform remain keys to stabilizing the Kenyan economy.

Kenya's economic performance has been generally favorable since the early 1990s, in part because of the government's liberalization policies. However, rising poverty and rapid population growth temper Kenya's economic success, and the country has more recently faced increasingly difficult economic and political challenges (Bureau for Africa, U.S. Agency for International Development, 2002).

Conclusion

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