Mat Van Den Art's Blog

Global capitalism – Kenya case study

Posted in "M" Master Project Ideation by matvandenart on February 15, 2010

The neo-liberal belief that ”poor countries could grow and catch up to the developed world only through liberal market forces,”1 has initiated a long term run of competition for economic prosperity in many countries longing for help. It is evident that developing countries such as India, China or Brazil have achieved admirable economic growth while it is also evident that not one African nation has managed in matching that growth.2

This shocking fact is the reason why I have chosen to analyse Kenya, one of the most significant African nations that had opened to international trade and yet did not achieve striking prosperity. In this essay I am going to determine if participation in international trade facilitated or impeded Kenya’s development, what other factors determine it and what sectors of economy have prospered or suffered.

In my analyses I will first look briefly at historical context of Kenya’s economy and importance of political environment while putting my deepest focus at structure of global economic system. I will also bring interesting facts based on development reports which will show great impact on my final analyses.

In the next part of my essay, I will introduce 2 main scholar approaches to this issue (Neo-liberal and Critical approach) I will use these frameworks to access my position and explain my arguments.

Based on my research I will finally define what sectors of economy have prospered and what suffered and if participation in international trade facilitated Kenya’s development or not.

The fact that Kenya neither represents a fully recognized economic shark nor a flourishing state with stable future has its complex answer.

Kenya’s history of colonialism, economic facts and political disturbance is a good starting point.

The organic way of life of peoples of Kenya has long been replaced with colonialist rulers imposing alien concepts such as private ownership and borders. Because of the social disruptions raised by this, Kenya was declared to be a state of emergency. Racial discrimination, lack of political progress and most significantly the alienations of land caused the outbreak of the Mau Mau rebellion which last for 7 years (from 1952 to 1959). The state of emergency even more intensified struggle for independence which main goal was to force colonial governance to introduce constitutional proposals. Kenya managed to gain independence with Britain in 1963. However the independence did not automatically mean improvement of people’s conditions. By contrast, pressing political and economic problems were waiting to be resolved by the first independent government of Kenya. The priorities such as redistribution of incomes or acceleration of growth have been difficult to achieve in country that was not politically stable.3

However, Kenya’s effort to promote rapid economic growth through encouragement of stimulation for private, foreign industrial investment, smallholder agricultural production and public investment did show considerable growth. During the period from1963 to 1973, Kenya’s GDP grew by 6.6% while the agricultural production by 4.7%. But the rapid negative change has been notable from 1980s onwards. This was exactly the time when world economic organizations such as WTO and IMF started to implement their structural adjustment programs. For example, between 1997 and 2002, the annual average of Kenya’s economic growth was only 1.5% (even below the population growth approx. 2.5% per year). Moreover, since independence, Kenya experienced its worse economic situation during the period from 1991 to 1993 with stagnation of GDP and in August 1993, inflation reaching record of 100%. As a result, multilateral as well as bilateral donors suspended aid programs to Kenya in 1991. Kenya clearly needed economic reforms which would restore sustainable growth. If Kenya wanted to prosper it must have implemented even more neo-liberal practice. This meant removal of most administrative controls for example on imports and retail prices, privatization, reduction of civil servants and the introduction of conservative monetary and fiscal policies. The fact is that after these neo-liberal economic reforms the economic growth of Kenya raised from 2.8% in 2002 to 7.0% in 2007. However stagnation of economy occurred in January 2008, when the general election of December 2007 caused social disruption and violence.

Although Kenya’s economy has been put on track after the reconciliation agreement made on 28 February 2008; there has been measurable damage to investment, financial, agricultural and other sectors.4

Through analyses of economic and political history of Kenya, I realize that whether or not Kenya’s participation on international trade has facilitated its development, not only depends on policies that impose IEOs, but on country’s background as well. (Events such as oppression, colonialism and corruption shape mentality of common people as well as politicians. This then determines political environment of country which either attracts foreign investors or puts them off.)

Based on this I argue that degree of Kenya’s development and success/failure of certain sectors highly depends on to what extend the political environment of Kenya intervene into economic policies designated by the structure of International trade.

Here is supportive example:

The IMF and World Bank had to suspend their programs in 2001, because the Anti-Corruption Authority established in 1999 (which was supposed to reduce the payroll of government and improve its transparency) has been abandoned and declared unconstitutional by the Kenya government in December 2000. Interestingly this happened after in July 2000, the World Bank pursued a $ 157 million credit of Economic and Public Sector Reform following the IMF contract of $ 150 million Poverty Reduction and Growth Facility program.5


If political environment is not trustful and government does not behave responsibly, it leads to infertile economy which logically results in bad development of country.

I consider this point very important because it allows me to determine my question with greater complexity.

To deepen this complexity, I am going to explore structural features of International Trade.

The global economic system functions on the well known ‘one size fits all’ neo-liberal blueprint. The same ‘golden rules’ of deregulation, privatization and liberalization are applied to those countries that wish to trade internationally and get help from World Bank and IMF. If Kenya wanted help it must have applied the same principles as developed nations did. Even though Kenya was not prepared socially, economically or politically it must have learned how to be flexible.6

Other important feature of the structure of International trade is based on my previous analyses. My central argument here is that because of the structure the global economy functions on, in order to achieve positive development in a country longing for help, there is a need of good political and economical mycelium. In other words, the structure of global economy is such that it best functions for countries that have already had stable and good political and economical conditions. My upper mentioned analyses show that this has not been the case of Kenya.

As Dani Rodrik pointed out, ‘‘Since Vietnam had had a reasonable and functional polity and economy, its development has been much more successful and evident then for example Kenya’s one’’7

I therefore argue that the ‘one size fits all’ programs can actually hurt country’s development in the way that country such as Kenya was not economically, politically and socially prepared to compete on international market with other sharks.

The term, ‘we will help you if…’ became normal in capitalist society and it has its consequences too.

Between others, security of creditor’s profit is the main one. This security represents the basket of structural adjustment programs which secures developed nations at least some degree of stable environment for their investments.

When World Bank gives loans to Kenya for specific cause, they must insure that their money is not used for anything else. Structural adjustment programs affect Kenya development because it often leaves money out of reach and result in rather management of poverty rather the actual elevation of it.8

Thereby SAPs in Kenya represent important target of my mission.

All these structural features have deep impact on Kenya’s development and my mission is to explore them.

From countries of African continent, Kenya has one of the most diversified industrial sectors.  But from 1986, when Kenya initiated implementation of SAPs, these sectors experienced a number of setbacks.

Kenya faced the most significant reform- liberalization. Because the main components of SAPs are: devaluation, reduction in government spending and slowdown in money grow, Kenya’s government had to reduce various measures that protect domestic manufacturing and agricultural sectors and tariffs. It followed with deregulation of other sectors such as financial sectors with direct cut-down on educational and heath spending. In terms of short success development, this all had great negative impact on the good speed of industrial sector.

This was even reinforced in 1990s with World Bank’s great support for creation of EP zones and with opening to foreign investment in 1993. This included removal of domestic borrowing for international investors and of all limitations on current accounts, and also liberalization of foreign exchange. Since 1994, Kenya heightened its liberalization process as it became part of WTO’s founding members.9

This allowed Kenya to participate on International Trade even more. ‘The liberalization menu’ caused that Kenya could become a member of COMESA and the East African Community. This negotiated Kenya a Common External Tariff in 2005 while establishing free trade agreement among members of COMESA. But the main part of this menu was the privatization agenda that attracted foreign investments. Before that, Kenya has joined three great Bilateral Investment Treaties. In 1970 Kenya opened to Netherlands, in 1996 to Germany and in 1999 to UK. More then 30 other Bilateral Trade Agreements were made to improve trade and investment in Kenya. For example, thanks to African Growth and Opportunity Act Kenya gained preferential access to US markets allowing Kenya to manufacture products such as rubber, iron, textile, horticulture, steel and leather. Moreover, until 2007 Kenya also benefited from preferential access to markets of the EU through the Agreement of Cotonou.10

To me, the reforms and agreements that Kenya undertook aimed to promote its products on developed international markets.

Based on this research, I could certainly argue that liberalization, deregulation and privatization types of neo-liberal reforms have definitely opened doors for Kenya’s development. However, I must critically ask, if these ‘Western-type developments’ brought Kenya the actual improvement in the daily livelihood of its citizens…

Theoretically, through participation on upper mentioned trade agreements, Kenya was supposed to attract capital investment which would ensure employment of people and develop itself through profit from export oriented economy. But do these neo-liberal theoretical guidelines provide real improvement in countries development?

Because the prosperity of people mirrors prosperity of country, my next step is to analyze The Human Development Report which provides the exact data I need.

‘The HDI measures 3 dimensions of human development.

1.)Measure of life expectancy (How many people live a healthy and long life)

2.)Measure of enrolment in education and adult literacy

3.)Measure of decent standard living ( Measured by income and PPP)11

Table: Figure 1

Even though the table reminds us how far Kenya is to reach developed world, the most important thing The Human Development Index shows is that since 1980s Kenya’s development has been considerably improving. Moreover, data show that since approximately 2004, the increase has been even more intensified.

To me, the index suggests that Kenya’s participation on international trade has facilitated its development.

I wanted to back up this by looking also at other statistical sources.

The Organization for Economic Co-operation and Development offers good macroeconomic indicators that show the most recent and estimated future economic development of Kenya. I will provide a table of two important macroeconomic indicators: Real GDP Growth and CPI inflation.

Table: Figure 2

Indicator/Real GDP Growth/CPI Inflation

2008/1.7/18.5

2009/2.5/9.3

2010/3.6/7.3

2011/4.2/6.4

From this source we can see considerable improvement of GDP growth between 2008 and 2009 as well as massive decrease of inflation.

This would be exactly the stressing points of Neo-liberal economic approach.

Neo-liberals would argue that International Trade definitely facilitated Kenya’s development. They would argue that in order to improve Kenya’s development even more it is important to continue with de-regulation of business, addressing investments in new infrastructure, reducing chronic insecurity which is caused by crime, improving delivery of government services and generally economic governance.14

Looking at this perspective and considering neo-liberal school of thought, I think that generous advantages that are made for developing countries should be considered too.

I bring this example: IMF approved redemption of $200 million in May 2009. This was possible under the Exogenous Shock Facility designed to provide financial assistance and policy support to countries that face external but temporary shocks. The resources of ESF aim to help Kenya’s recovery from the impacts of higher costs (food, fuel), and external demand deceleration caused by global financial crisis. This fact shows considerable reason to think that International Trade facilitates Kenya’s growth.

If we look at other facts of development from neo-liberal perspective, I should not avoid mentioning the EP zones that employ about 40,000 people that work within export garment industry. This was only possible through World Bank founding which provided 80% of required capital. Neo-liberals would argue that EPZ programs create employment, attract investments, increase exchange earnings, diversify the export base and provide that skills and technology are transferred to Kenya.15

However, I argue that Neo-liberals forgot to mention that incentive trade system provides exporting firms (which are mostly owned by foreigners) with a ten years tax holidays. Moreover, there is a freedom of repatriation of unlimited earnings and unrestricted foreign employment and ownership.

To me, this really suggests that developed states assure their self-success and profit through the process of helping.

With my argument suggesting criticism of the structure of International Trade, I am moving towards Critical approach.

Critical view would support my claim by looking not only at economical statistics and numbers but also looking at deeper structural and social consequences. To put the exact point, I will continue using example of EP zones.

Critics would argue that the fact that EPZ Act does not restrict the repatriation of profit naturally causes foreign owners to repatriate as much profit as possible to the parent countries while leaving Kenya as a net loser. Critical approach stresses that because majority of all the EPZ’s earnings profit foreigners, government has to subsidize businesses at no gain to the taxpayers of Kenya. As a consequence, Kenya cannot benefit from tax revenues because vast majority of garment firms are freed from value added tax, withholding tax and corporation tax. Tailors and Textile Workers Union as well as the Central Organization of Trade Unions have equally expressed similar opinion giving credibility to my critical argument that structure of the international trade secures that International Trade is benefiting more the external firms then Kenya as such. Critics say that the problem of tax revenue in Kenya will be even worse in the future. Moreover critics argue that quota liberalization in the garment market will cause firms to leave Kenya. Thereby EPZ Authority lobby the government to prolong the tax privilege for additional 5 years. If this bid is successful, majority of garment companies will be freed from taxes until 2015. In practice, this means that apparel industry will not be able to generate any mere amount of revenue for the government of Kenya. The main critical point here is that this revenue could be implemented in programs that would improve heath services and education in Kenya for example. Moreover, this causes that Kenyan EPZs attract textile enterprises interested in quick profits grounded on as much low cost of labor as possible.16

To me, these critical points suggest that International Trade actually impedes Kenya’s development. Moreover it suggests and explains that manufacturing sector suffers hugely.

Making this critical point I continue with this approach by analyzing other aspects of International Trade.

Other critical targets have been raised too. Laura McCosker talked about the consequences of unrestricted global trade. She suggested that international trade strongly favors competitively strong economies. She stressed that in a free-trade system, there is no guarantee that Kenya and other developing countries could develop technology quite rapidly in order to first become and then remain competitive.17

This argument suggests already upper mentioned argument that ‘One size fits all’ has negative consequences on Kenya’s development.

I will expand why.

In the case of Kenya, the economical mycelium has not been the fertile one. The environment has been unstable, the wages and prices are not flexible. Both, the structure of International Trade and the unstable environment of country cause that imposed limits to government spending produce the short run recession. Devaluation caused by import of intermediate goods automatically generates stagflation. In practice, this means that the prices will rise while the added value will be squeezed. These components lead to the profit depression. Moreover this prize increase of imported capital goods will evoke raise of the cost of capital. All these effects ultimately reduce investment and future development of Kenya.18

This critique analyzes how the structure of International Trade can act in that way it minimizes the effect on investment and so the economic development of Kenya too.

To conclude my essay, I will first sum up my points and arguments which will determine what sectors of economy have prospered and what suffered and then I will explain my final position.

In my research of historical context, I find out that industrial sector was at its best peak at 1960s, and 70s but from 1980s initiation of structural adjustment programs, industrial sector has experienced setbacks attributed to economic liberalization.

The most significant negative impact of International trade has been noticed in the manufacturing sector. I discussed the impacts of EPZ Act that does not allow restriction of repatriating the profit. I analyzed other structural problems such as the tax revenue problem in Kenya and explained how the ultimate benefit from manufacturing sector is actually in hands of foreigners of developed countries and how this impoverishes Kenya’s development as such.

However, I have noted the supposed good side of Kenya’s participation on International Trade too.

Because of the pro-export structural programs Kenya had to undergo, the success has been achieved in exchange rate devaluation, trade liberalization and to some extend to export development.19

Positive impacts of these have been shown in Human Development Index. The data suggest real improvement of Kenya’s economic development since participating on International Trade. The Report however shows how far Kenya actually is from becoming a high-income economy.

In my essay, I also discussed what factors contribute to Kenya’s development. I made important point based on my historical research of Kenya’s economy, arguing that structure of global economy is such that to become a high income developed country, good political, social and economic mycelium is needed. When the country is not stable and prepared to ‘one size fits all’ rules, development is restricted, slowed down and even harmful. In other words, I argued that prosperity of Kenya depends on historical context which in conjunction with structural rules determine the degree of Kenya’s development.

I also looked at neo-liberal as well as critical approaches which helped me to determine this final position:

I think that yes, Kenya’s participation on International Trade has facilitated its development to that extend that in recent years their GDP has grown and CPI inflation has decreased, but I think that the data cannot determine the livelihood of the citizens of Kenya (since the GDP growth may appear to be higher because of various external pressures and not because of the real improvement of country’s development as such) Therefore I remain critical as this data do not necessarily determine the real development of Kenya. On the other hand, I must say on behalf of neo-liberal approach that my research showed that many times substantial development has not been achieved because of irresponsible government decisions and  unreasonable distribution of money borrowed from healthy nations. It follows that to considerable extend, government itself impeded Kenya’s development rather then International trade did.

On the other hand I strongly criticized the defects of the structure of international trade stressing that it causes impoverishment of some sectors- particularly the manufacturing one.

It follows that even though Kenya has achieved some kind of economic development since participating on international trade, the structure of international trade and government often acted negatively by minimizing investment and just practice of free trade and therefore the bloom of economic development of Kenya too.

Bibliography:

Books:

Ahamed, L. Edwards, S. Economic Adjustment and Exchange Rates in Developing countries, National Bureau of Economic Research. University of Chicago Press, 1986. pp.300

Branson, W. H  Stabilization, Stagflation and Investment Incentives: The Case of Kenya, National Bureau of Economic Research. University of Chicago Press, 1986. p.267

Rodrik, D Trading in Illusions, Foreign Policy. No specified Press, 2001. p.160

Journals:

Babb, S ‘The Social Consequences of Structural Adjustment: Recent Evidence and Current Debates’. Annual Review of sociology, Vol. 31, August 2005, Boston College, Massachusetts, pp.199-222.

Dollar, D. Svensson, J ‘What explains the success or failure of Structural Adjustment Programs?’ The Economic Journal, Vol. 110, No. 466, October 2000, Blackwell Publishers, Oxford, pp. 894-917

Perches, P ‘Economic and Social Council’. International Organization, Vol. 2, No. 1, February 1990, pp. 99-109

Web. documents:

Cheeseman, N. Griffith, R ‘Increasing tax revenue in sub-Saharan Africa: The case of Kenya, project Development and Fiscal Policy, The Oxford Council on Good Governance’, OCGG Economy analyses, No 6, viewed on 4 April 2010, <http://ocgg.org/fileadmin/Publications/EY006.pdf&gt;

Gurushri, S, ‘Structural adjustment in the 1980s: Kenya’, Success of international economic participation, January 1994, viewed on 7 April 2010, <http://ideas.repec.org/p/wbk/wbrwps/1238.html&gt;

James, A, ‘Textile Players lobby for 5-Year Tax Waiver’, in East African Standard, January 2004, viewed on 11 April 2010, <http://allafrica.com/stories/200412070605.html&gt;

McCosker, L, ‘How Development Aid Causes Economic Downturn and Poverty in Africa’, in Aid, Economic Decline and Poverty in Africa, December 1009, viewed on 11 March 2010, <http://subsaharanafricanaffairs.suite101.com/article.cfm/development_aid_declining_african_economies

Sanders, E, ‘Kenya’s problems are rooted in the land’, in article, December 2008, viewed on 12 March 2010, < http://articles.latimes.com/2008/dec/20/world/fg-land20&gt;

Sources without author (Reports, Treaties, Statistic portal):

International Centre for Settlement of Investment Disputes: ICSID Database of Bilateral Investment Treaties, viewed on 20 March 2010 <http://icsid.worldbank.org/ICSID/FrontServlet&gt;

Human Development Report 2009: H. Development Index, accessed on 9 April 2010<http://hdrstats.undp.org/en/countries/country_fact_sheets/cty_fs_KEN.html,&gt;

Statistic Portal, Development , Macroeconomic indicators, Kenya, viewed on 9 April 2010,< http://stats.oecd.org/Index.aspx?DataSetCode=CSP2009,&gt;

‘Republic of Kenya’, in Bureau of African Affairs, January 2010, viewed on 15 March 2010, < http://www.state.gov/r/pa/ei/bgn/2962.htm,&gt;