Fostering Inclusive Growth During Challenging Times in Kenya’s Economy
Author: Bernard Isaiah
Balancing the short-term challenges of macroeconomic stability with policies focused on achieving long-term, inclusive growth is crucial for Kenya. Inclusive growth, characterized by widespread increases in earnings, benefits the overall economy and improves individual well-being. High disposable income translates into higher domestic demand for private sector output, resulting in more jobs, opportunities for structural transformation, and increased government revenues. Evidence shows that many Kenyans, faced with recent high inflation, have sought additional income-earning opportunities, underscoring the importance of economic inclusion.
To formulate strategies for promoting inclusive growth, it is essential to identify key groups that have not benefited from the economy’s growth and tailor policies to meet their needs. Revitalizing productivity growth is also critical, as higher productivity is essential for creating more and better jobs. This approach, drawn from the Kenya Country Economic Memorandum (KCEM), addresses two overarching policy questions: what factors affect the inclusiveness of Kenya’s economic growth, and what policies can make growth more inclusive?
With a GDP of over $100 billion, Kenya has recently attained lower-middle-income status and established a diverse and dynamic economy. Serving as the entry point to the East African market of 300 million people, Kenya has seen economic growth that, unfortunately, has not been inclusive. As a result, many Kenyans continue to live in poverty, exacerbated by COVID-19, corruption, inefficient and inequitable systems, exclusion of youth and women, lack of reliable electricity and sanitation, and increasing crises such as droughts.
Despite relatively stable growth, Kenya lags behind other fast-growing lower-middle-income countries like Bangladesh and India. Between 2010 and 2019, Kenya’s GDP grew at an average annual rate of 5%. However, significant public investments in infrastructure to improve connectivity have not fully translated into increased trade and foreign investment as drivers of growth.
Low or negative contributions of productivity have limited Kenya’s growth. Although labor productivity has been increasing in both agriculture and services, total factor productivity (TFP) and the efficiency with which capital and labor are used to produce output have made negative contributions to growth. Neither labor productivity nor TFP growth is converging to levels seen in more advanced countries. TFP is a crucial determinant of sustained long-term growth, and growing productivity in the private sector is essential for generating more, better, and sustainable jobs.
The private sector plays a key role in enhancing the quality of growth by mobilizing private financing and improving aggregate investment efficiency. It positions the economy to benefit from global market opportunities and innovation, and sustainably increases the supply of jobs and earnings opportunities.
Kenya’s economic growth has not sufficiently translated into improved well-being and poverty reduction. According to the World Bank, poverty in Kenya fell from 46.7% to 36.1% between 2005 and 2015, coinciding with robust GDP per capita growth of 2.1% and strong growth in private consumption. However, the pace of poverty reduction slowed to an average annual reduction of 0.6 percentage points between 2015 and 2019, with the poverty rate at 33.6% in 2019. The COVID-19 pandemic reversed modest gains in poverty reduction, increasing the poverty rate to 42% in 2020 before partially recovering to 38.6% in 2021, still above pre-pandemic levels.
Poverty has become less responsive to changes in economic growth over time. Between 2005 and 2015, a 1% increase in per capita GDP resulted in a 1% reduction in poverty. Since reaching middle-income status in 2015, the responsiveness has fallen to 0.73%. This decline in the transmission of economic growth into increased household consumption highlights gaps in the inclusivity of growth. A focus on income growth among the poorest 40% reveals these gaps, which are larger than the average for Sub-Saharan Africa (SSA) but smaller than those for Kenya’s lower-middle-income peers.
The weakening relationship between growth and poverty reduction raises concerns about inclusivity and how well the poorest 40% are connected to economic growth. Inclusive growth in Kenya is hampered by several factors: the pace, composition, and distribution of growth; limited inclusivity in labor markets; inequality of opportunity and outcomes; and increasing shocks, particularly extreme weather events, with limited resilience among the poor.
A successful strategy to reignite inclusive growth and advance the BETA priorities of the Government of Kenya (GoK) would have a three-pronged approach: (a) ensuring sustained high rates of economic growth; (b) connecting the poor and vulnerable to growth through labor market integration and better jobs; and (c) strengthening households’ resilience to shocks, particularly extreme weather events.
Across these three pillars, it is important to use fiscal policy more effectively to support inclusion. Cushioning the poor against the negative impacts of growth-stimulating policies is crucial, especially in the short term.