Discussion Paper Series Vol.2006-7
Alternative Export-Oriented Industrialization in Africa:
Extension from “Spatial Economic Advantage”
in the Case of Kenya
Yoshi TAKAHASHI, Atsushi OHNO, and Shunji MATSUOKA
Graduate School of International Development and Cooperation,
Hiroshima University
yoshit@hiroshima-u.ac.jp
January 12, 2007
No part of this paper may be reproduced in any form or any means without written permission from
author.
Abstract:
This paper aims at analyzing the capacity development (CD) that is necessary for
export-oriented industrialization in Kenya by focusing on selected export industries
and investigating the current condition and future direction of industrial development.
In East Asian countries, export-oriented industrialization functioned as one of the
main vehicles for long-term growth. In more specific terms, there was a consensus that
labor-intensive export played a considerable role in facilitating the industrial
development processes in those countries. However, as compared to Asia, the exports
from Africa have been stagnating. This is mainly because African countries do not
enjoy a competitive advantage in terms of labor intensive manufacturing, particularly
when compared to Asian exporting countries. However, in recent times, some
industries have been increasing their exports due to their “spatial economic advantage”
that is based on location characteristics and land abundance. However, further
domestic value chain development is required for the sustainability and extension of
such industries.
East Asian export-oriented industrialization is reviewed at the onset of this paper,
and its applicability, particularly to Africa, is questioned. Subsequent to this, we
describe the historical export performance and investigate the trade and industrial
policy in Kenya. In addition, we analyze the selected industries—i.e., tea and cut
flower industries—as prospective cases enjoying spatial economic advantages and the
garment industry for African Growth and Opportunity Act (AGOA) as a negative case.
Furthermore, the strategy and action plan to be formulated and implemented is
examined from the CD perspective. In conclusion, based on the study results, we will
propose a research plan for further evaluation of policy recommendations for the
Tokyo International Conference on African Development IV (TICAD IV).
* This paper was made as the background paper for the Workshop on Industrial
Development, Trade and Investment Promotion in Africa: Lessons from Asia at Eighth
Annual Global Development Conference of Global Development Network (January 17,
2007, the Beijing Friendship Hotel, Beijing, China)
Keywords: Industrialization, Capacity Development, Export Promotion, Competitive
Advantage, Africa
1. Introduction: The African competitive advantage
In East Asian countries, export-oriented industrialization functioned as one of the
main vehicles for long-term growth. More specifically, there exists a consensus among
researchers and practitioners that the utilization of low cost advantage, particularly low
cost labor, played a considerable role in increasing the exports and facilitating the
process of industrial development in these countries. Currently, the economic structure
of these countries predominantly comprises more of capital and knowledge-intensive
industries. However, this situation is the result of a long process of industrialization
that started from labor-intensive import substitution and subsequently moved to
labor-intensive export orientation; this shift was accompanied by a relatively enhanced
capital- and/or knowledge-intensive import substitution and export orientation,
regardless of the different extents of “success” among the countries.
As Rodrick (2002) and Lall (2004) claimed, “the East Asian miracle” was
accomplished by producing labor-intensive products that were based on cheap but
relatively high quality labor as a source of competitive advantage. Lall (2004) also
emphasized the role of import substitute industrialization in the early stage of the
miracle, as a key policy aimed at future labor-intensive, export-oriented
industrialization.
In comparison with Asia, the merchandize export—manufactured goods from
Africa, in particular—has been stagnant. The principal reason is that African countries
do not have an advantage in terms of labor cost, at least in the formal manufacturing
sector, particularly when compared with Asian exporting countries such as China and
India1. However, in recent times, there have been increasing exports of some natural
resource based goods from Kenya, which are exported on the basis of “spatial
economic advantages” originating from land abundance and appropriate location in
terms of latitude and altitude. In this paper, we focus on this trend and analyze the
capacity development (CD) of not only the industries but also other concerned parties
such as the government.
There have been discussions pertaining to the reason why the manufacturing sector
in African countries lacks international competitiveness. Wood and Mayer (2001)
pointed out the need to conduct a conventional investigation of not only the relative
factor endowment of labor and capital but also that of land and skill. Wood and
Mayer’s analysis identified that African countries possess a competitive advantage not
in the manufacturing sector generally but in the natural resource based industry with
“spatial economic advantage” (including some manufacturing industries such as
agro-processing). Furthermore, they asserted that Africa should not refer to the East
Asian experience for skill-intensive development; rather, it should draw upon
relatively natural resource oriented countries such as Latin America in the mid term.
Nevertheless, as the authors admitted, the Latin American achievement is inferior to
that of East Asia. Therefore, it is necessary to further discuss the strategy that Africa
should adopt after reaching the Latin American level.
In contrast, Collier (2000) paid attention to the high transaction costs in Africa that
occur due to expensive and unreliable transport, difficult contract enforcement, high
information cost, and poor ancillary public services. In addition, he emphasized that
since manufacturing is a transactions-intensive activity, it cannot have a competitive
advantage. The implication of this argument is that reducing the transaction costs is the
responsibility of institutional reform. However, with regard to “spatial economic
advantage” based exports, we notice that the gap between exportable natural resource
goods and manufacturing goods has been narrowing in recent times. In particular, the
horticultural products that are sold at the mega retailers in developed countries are
required to meet the social, environmental, and safety standards (Ethical Trade
Initiative 2005). Although the relatively lower labor cost in the agricultural sector
compensates to some extent, this advantage is expected to shrink in the long run when
compared with the manufacturing sector.
Moreover, the conditions in Africa are different from those in Asia. Therefore, it is
obvious that Africa should pursue a different path to industrialization. In this paper, we
propose a plausible option—the strategy to start with natural resource based industries
that enjoy “spatial economic advantage”. This strategy is useful for internalizing the
value chains of such industries and expanding their impact to a broader base2.There are
already successful cases as a result of the implementation of this strategy.
2.
Kenyan export performance
Over almost a 40-year period, Kenya’s exports experienced some significant
structural changes; however, these changes were not very drastic compared to those of
the countries that made the transition to “successful” exporters of manufactured goods,
such as East Asian countries (Table 1).
The most notable negative share change occurred for coffee, tea, and spices. This
was due to a decline in the international price of coffee, even though the export of tea
has been steadily increasing. The other negative share change occurred in the case of
textile fibers made of sisal, which were replaced by synthetics. Two apparently
positive changes occurred with respect to mineral fuels and clothing. The increased
share for energy products is the result of increased local refinery operations for foreign
produced crude petroleum, mainly destined for Uganda and Tanzania. Second, the 10point share increase for clothing is largely due to the adoption of the United States
(US) African Growth and Opportunity Act (AGOA) preferences3. In addition, fruits
and vegetable (including flowers, hence these items should be regarded as horticulture
products as a whole) showed a significant growth in the share of exports4.
Table 1
Export by major product groups: comparison between 1964 and 2003
Product Group (SITC)
Food and live animals (0)
Fruits & vegetables (05)
Coffee, tea, & spices (07)
Beverages and tobacco (1)
Crude materials (2)
Textile fibers (26)
Crude vegetable materials (29)
Mineral fuels and lubricants (3)
Petroleum & products (33)
Animal & vegetable oils (4)
Chemicals (5)
Manufactured goods (6)
Machinery & transport (7)
Misc. manufactures (8)
Clothing (84)
Other goods (9)
All goods (0 to 9)
1964 Exports
Value
Share
($000)
(%)
110,163
6,166
92,323
9
67,626
43,827
9,509
2,948
2,880
82
5,491
4,021
3,667
804
39
1,451
196,261
56.1
3.1
47.0
0.0
34.5
22.3
4.8
1.5
1.5
0.0
2.8
2.0
1.9
0.4
0.0
0.7
100.0
2003 Exports
Value
Share
($000)
(%)
937,326
307,892
486,579
28,559
402,691
18,672
309,978
262,066
260,358
12,334
108,706
172,751
70,046
265,142
209,197
8,345
2,268,595
41.3
13.6
21.4
1.3
17.8
0.8
13.7
11.6
11.5
0.5
4.8
7.6
3.1
11.7
9.2
0.4
100.0
1964-03
Share
Change
-14.8
10.4
-25.6
1.3
-16.7
-21.5
8.8
10.0
10.0
0.5
2.0
5.6
1.2
11.3
9.2
-0.3
--
Source: Ng and Yeats (2005).
In general , the transition of export products over the last 40 years can be regarded
as that from agro products to manufacturing products. However, as mentioned below,
recent trends appear to indicate steady tea exports and growing horticultural exports.
After independence and till the end of the 1970s, Kenya was focusing on the
import substitution phase. The policies that sustained it had mixed results. On the
positive side, the country enjoyed a considerably high rate of industrial growth by the
1970s, with the manufacturing sector growing at an average rate of 8.0%, as compared
with the rates in the 1980s and 1990s, which were below 5%. The general import
substitution strategy was also strongly biased against exports. Consequently, the
industrial production for export markets substantially slowed down, and hence,
manufactured exports comprised only a small proportion of the country’s exports.
Between 1984 and 1994, while traditional commodity products such as food and
beverages—accounting for over 50% of the total exports—continued to dominate over
the period when there were signs of increasing diversification. The share of the food
and beverage products in total exports had declined from 68% in 1986 to 52% by 1994,
while that of fuels and lubricants had dropped by about two-thirds, from 19% to 7%.
Meanwhile, between 1984 and 1994, the shares of industrial supplies and consumer
goods categories increased from 15.0% to over 26% and 3.8% to 13.6%, respectively.
The European Union (EU) and Africa continue to be the main export destinations for
Kenyan exports, both accounting for over 70% of the total exports between 1985 and
1999.
Nonetheless, Kenya’s industrial sector remained predominantly inward-looking
throughout the 1980s and 1990s. Moreover, a number of factors restricted the
country’s export growth. First, the government was not only slow in implementing
liberalization but also did little to implement effective export promotion policies.
Secondly, the government’s institutional and administrative system continued to be
biased in favor of import substitution, leading to the slow and uneven implementation
of export-promotion. Finally, both the public and private sectors exhibited adverse
attitudinal stances that worked against a successful push to increase the export of
manufactured goods (Ikiara et al. 2004).
Table 2
Recent trends in major exports
(Ksh million)
Commodity
Fish & fish preparations
Maize (raw)
Meals & flours of wheat
Horticulture
Sugar confectionery
Coffee, unroasted
Tea
Margarine & shortening
Beer made from malt
Tobacco & tobacco mfs
Hides & skin (undressd)
Sisal
Stone, sand & gravel
Fluorspar
Soda ash
Metal scrap
Pyrethrum extract
Petroleum products
Animal & vegetable oil
Pharmaceuticals
Essential oils
Insecticides & fungicides
Leather
Wood mfs
Paper & paperboard
Textile yarn
Cement
Iron & steel
Metal containers
Wire products
Footwear
Articles of plastics
All other commodities
Grand Total
Source: Central Bureau of Statistics (2004).
1999
2,267
488
423
17,641
874
12,029
33,065
1,309
202
1,554
311
636
166
501
1,280
147
656
9,555
2,186
1,657
3,361
501
387
384
618
303
1,248
2,757
193
181
1,121
1,573
15,831
115,405
2000
2,953
33
201
21,216
1,326
11,707
35,150
246
69
2,167
494
606
123
644
1,440
153
704
9,429
11,204
2,350
2,116
465
486
388
713
488
1,358
2,605
97
113
1,140
2,104
15,476
129,764
2001
3,858
18
155
19,846
1,576
7,460
34,485
245
29
2,887
635
728
85
652
1,993
123
993
12,345
1,298
1,570
2,470
523
576
449
784
518
1,031
3,673
121
117
1,204
2,572
16,415
121,434
2002
4,205
1,693
32
28,334
1,879
6,541
34,376
306
483
3,454
445
792
65
734
2,127
98
798
3,896
2,277
1,697
2,452
353
601
433
647
485
1,479
4,122
144
100
1,549
2,990
22,271
131,858
2003
4,010
125
6
36,485
1,829
6,286
33,005
383
75
2,982
551
906
78
664
2,392
147
813
69
2,410
2,153
2,838
255
1,018
288
777
394
1,976
4,047
204
154
1,457
2,598
25,323
136,698
Table 2 demonstrates the product-wise recent trends in export. As a result of
globalization, export-led growth strategies have become a major focus for many
countries, including Kenya. Although there have been efforts towards diversification of
the export sector, Kenya’s exports are still dominated by primary agricultural products.
Tea, horticulture, and coffee continue to be the leading exports, jointly accounting for
52.7% of the total earnings in 2002 as compared with 50.9% in 2001. The export
earnings from tea nearly remained at the 2001 levels, while those from coffee
decreased by 12.3%. The earnings from horticulture increased by 42% in 2002;
however, they declined by 6.5% in 2001.
3.
Export promotion and industrial policy
Kenya’s industrialization efforts in the post-colonial period have been undertaken
through four principal phases of industrial policy—import substitution, export
promotion attempt under structural adjustment, and orientation for poverty reduction.
This section highlights the main features of each phase.
After independence, Kenya pursued an import substitution strategy as a means of
promoting industrialization. In order to protect local producers against foreign
competition, the government relied on a variety of policy instruments including an
overvalued exchange rate, high tariff barriers, import licensing, foreign exchange
controls, and quantitative restrictions (Bienen 1990).
With regard to the foreign exchange measures, Foreign Exchange Allocation
Committee was established to administer foreign exchange quotas for imports; this was
implemented to protect domestic producers. The tariffs imposed on imports of final
products were generally high as compared to those of capital and intermediate goods.
However, due to a weak administrative capacity, quantitative restrictions—import
license requirements—proved to be more effective in controlling imports than the
imposition of tariffs.
After realizing the limitations of the import substitution phase toward the end of
the 1970s, Kenya attempted the export promotion phase. Some of these intentions were
evident from the development plans and policy documents published during the late
1970s and early 1980s. The Fourth Development Plan (1979–1984) clarified the
recommended measures: the replacement of quantitative restrictions with equivalent
tariffs, the reduction of tariff rates, a more liberal exchange rate policy, and the
strengthening of export promotion schemes.
However, the export promotion measures implemented were not very substantial.
This poor implementation record of policy measures was partly attributed to the policy
constraints that the policy-makers encountered (Bienen 1990). After the initial round of
liberalization, the government temporarily reversed the reform process and
reintroduced import controls for certain items (Swamy 1994).
A number of institutional and market oriented initiatives were taken between
1985–90, such as the export compensation, the Manufacturing Under Bond (MUB),
and import duty and Value Added Tax (VAT) remission schemes. However, even after
the publication of the 1986 Sessional Paper No. 1, which clearly mentioned the
transition from import substitution to export promotion the World Bank’s Structural
Adjustment Program (SAP), these measures met with limited success.
Somewhat similar problems also emerged in other African countries. In general,
the governments of these African countries failed to implement across-the-board
import liberalization. Regardless of the intended results, these reforms weakened the
industrial base of their economies and reduced the overall productive dynamism.
Moreover, they squeezed the import-competing sectors without sufficiently stimulating
new, non-traditional export sectors5.
The early 1990s marked the beginning of sweeping economic and political reforms
that aimed to achieve an effective transition from a highly protected domestic market
to a more competitive environment.
However, in general, the liberalization policies that started in 1980 had a number
of drawbacks in terms of speed and enforcement, which resulted from a lack of
ownership. This period witnessed the implementation of numerous measures such as
foreign exchange liberalization, further reduction in import duties, restructuring of
VAT, introduction of an Essential Goods Production Support Programme, and
increased incentives for the Export Processing Zone (EPZ) enterprises. In spite of these
measures, the manufacturing sector continued to be highly protected.
In the 1990s, the government established organizations such as Export Promotion
Zone Agency, Export Promotion Council (EPC), and Kenya Investment Agency for
export promotion, including the inducement of foreign direct investment. Nevertheless,
the implementation of the activities planned by these organizations was difficult not
only due to the recession that was caused by the stoppage of loans from the
International Monetary Fund and World Bank but also because of the retrenchment of
the government budget.
Following this, the World Bank changed its main policy from SAP to Poverty
Reduction Strategy (PRS). As in the Kenyan version of PRS, the Economic Recovery
Strategy for Wealth and Employment Creation 2003–2007 (ERS) made a mention of
“volume growth of exports of 5.7% annually as well as diversification,” and trade
capacity development was officially recognized for further export growth and
diversification. As a result, the Ministry of Trade and Industry has undertaken several
efforts including the formulation of the Export Strategic Plan.
Consequently, poverty reduction became one of the main objectives in the process
of industrial development, particularly export promotion. For instance, in the case of
horticulture products, not only export growth itself but also the ratio of smallholders
for export production or labor conditions, such as wages, came to be taken into
consideration. Western donors like the Department for International Development of
United Kingdom are more concerned about these matters. In the short run, export
promotion and poverty reduction might be traded off with requests from mega retailers
in developed countries regarding an increased estate-type production for securing
safety conditions in their market. Moreover, in the long run, direct measures for
poverty reduction might also weaken the international competitiveness. Kenya, like
other exporting countries in the developing world, is at the point of cautiously
balancing and pursuing two objectives at the same time.
4.
Case studies of the selected industries
This section identifies the current conditions and future prospects of competitive
advantages and value chain expansions in the selected industries from the viewpoint of
the factors for success and the role of the government. The cases are of relatively
successful industries, namely, the tea, cut flower, and garment industries located in
EPZs. In more specific terms, this section discuses the production and export
performance, international competition conditions, product and market characteristics,
Kenyan competitive advantages, and value chain expansion.
As regards value chains in particular, it should be noted that the different aspects
are emphasized and compared with the emerging discussion on this matter in the aid
community, which focuses on labor input, production, logistics, and marketing, with
particular emphasis on the direct contribution to poverty reduction through the
improvement of labor conditions6. Here, we include inputs other than labor, that is,
intermediate goods, capital goods, and research and development, which are equally
important for further industrial development.
4.1
Tea industry
Tea is Kenya’s largest exported commodity item; it comprises 21.8% of the total
export (Central Bureau of Statistics 2006). Approximately 95% of the locally produced
tea is exported—mostly in bulk, while only a small percentage is packaged for export.
In 2003, over 300,000 tons of tea was exported and earning reached approximately
Kshs 41 billion (Figure 1). The major tea export destinations were Pakistan (23.7%),
Egypt (18.5%), United Kingdom (15.5%), and Afghanistan (13.7%).
Kenya is the fourth largest tea producer and the second largest exporter in the
world. The country contributes 10% of the total global tea production and commands
21% of all global tea exports.
In 2003, the total hectarage under tea cultivation was approximately 131,418, with
a production of 293,670 tonnes. The smallholder tea covered about 86,338 ha, with a
production of 180,789 tonnes. Table 4 provides the trend in tea hectarage and the
production of tea from 1999 to 2003. Over the five year duration, both hectarage and
production have increased. Currently, approximately 62% of the country’s total crop is
produced by the smallholder growers who process and market their crop through their
own management agency, Kenya Tea Development Agency (KTDA) Ltd., which is the
largest single tea producer in the world. The balance of 38% is produced by the large
scale estates, which are managed by major multinational firms that are associated with
tea.
Figure 1
Kenyan tea exports volume and value
(Volume in metric tons, value in thousand US$)
600,000
499,037
500,000
465,442
437,914
435,746
439,686
400,000
300,000
271,739
270,151
275,225
269,962
216,990
200,000
100,000
0
1999
2000
2001
Volume
Source: Export Processing Zone Authority (2005).
2002
Value
2003
Table 3
Production, Area, and Average Yield of Tea by Type of Grower, 2001–2005
2001
AREA (Ha) '000
Smallholder*
Estates
TOTAL
PRODUCTION (Tonnes) '000
Smallholder*
Estates
TOTAL
AVERAGE YIELD (Kg/Ha)**
Smallholder
Estates
Source: Tea Board of Kenya
** Obtained by dividing current production by the area four years ago
* Provisional
2002
2003
2004
2005*
85.5
38.8
124.3
85.9
44.4
130.3
86.4
45.1
131.5
88.0
48.8
136.7
92.7
48.6
141.3
181.7
112.9
294.6
175.9
111.2
287.1
180.8
112.9
293.7
192.6
132.1
324.6
197.7
130.8
328.5
2,147.0
3,453.0
2,078.0
3,294.0
2,136.0
3,331.0
2,263.0
3,739.0
2,312.0
3,372.0
Source: Central Bureau of Statistics (2006).
Small-scale tea growers who are estimated to be 400,000 in number, process and
market their tea through 53 tea factories under KTDA, while large-scale tea growers
(tea estates) process and market their tea through 39 tea factories that are operated on
an individual, private basis 7 . KTDA is overseeing almost 15,000 employees and
liaising with over one-quarter million tea growers nationwide. In addition to processing
and marketing smallholder tea, the KTDA also offers a number of services to farmers,
such as fertiliser supply and extension, on the payment of a fee. Fertilizer is offered to
tea producers on credit; its payment is recovered after the tea is sold.
East African tea is superior to Asian tea in some aspects. In particular, Kenyan tea
does not have to contend with pests because it is cultivated at high altitudes; therefore,
it boasts of almost 100 years of pesticide-free cultivation. A year-round production
results in stable quality and delivery, due to which, the land productivity of tea
production is 1,938 kg/ha—much higher than the world average of 1,222 kg (FAO
2000).
In recent times, other characteristics of Kenyan tea have also been appreciated;
these include: (1) high levels of catechin, (2) high levels of polyphenol, and (3) the tea
leaves, which are picked by hand, are clean because they do not come into contact with
the ground (JETRO 2005)8.
Another advantage of the tea industry is its domestic deployment of the value
chain. In this context, we have categorized the elements of a value chain into five
aspects: production, research and development, capital goods, intermediate goods, and
marketing (branding).
In terms of research and development, research on improvement in the breeding
and cultivation method is conducted domestically by the Tea Research Foundation of
Kenya under Tea Board of Kenya. Its mandatory is to carry out research on tea and
advise growers on the control of pests and diseases, improvement of planting material,
general husbandry, yields, and quality. Thus far, the foundation has developed and
released over 45 well-adapted tea clones to growers. Universities and individual firms
also contributed to this research.
It was crucial to develop clones that were not only high yielding but also resistant
to drought, pests, and diseases. The foundation also aims at producing germplasm
targeted for specific agrozones. In order to do so, the foundation has embraced the use
of new tools for breeding, which include tissue culture and biotechnology. In addition
to researching crop volume and teas that are resistant to pests, the foundation has
purportedly discovered high catechin, extremely low caffeine teas.
The main source of seeds and seedlings is the commodity marketing body, KTDA.
The availability and the quality of the planting materials are hampered by the lack of
commercialization of seed and seedlings and their multiplication and distribution by
the commodity bodies. In this respect, it is necessary that the domestic production of
seeds and seedlings should be more evaluated.
Certain capital goods such as machines and equipment used in the roasting process
are domestically produced, while packaging machines are imported, mainly from
Europe.
Nairobi is the main location for the manufacturers of tea (and coffee) machinery.
(Matthews 1987). However, according to a large manufacturer of tea processing
equipment, the basic design of tea machinery has not undergone a major, successful
innovation. A standard mechanical process—still in demand today—had been in
operation since the late nineteenth century. These examples reflect the lack of
product-innovation in Kenya’s machinery producing sector (Matthews 1991). In
comparison to India, where a considerable number of tea processing machinery firms
are producing and exporting their products, the situation in Kenya leaves much to be
improved.
Intermediate goods—not only tea leaves but also packaging materials—are
produced in Kenya. Fertilizers are purchased in bulk, mostly from international
suppliers9. A large proportion of the Kenyan imports come from Romania, Ukraine,
the United States, Europe, Middle East, and South Africa. Tea fertilizers, mainly NPK
(nitrogen, phosphoric acid, and kalium) fertilizer, account for 21% of the national
consumption. Tea fertilizer imports have risen by 85% from the previous period.
(Ariga et al., 2006).
According to the Ministry of Tourism, Trade and Industry (1999), there are only
two factories for fertilizer production in Kenya. The first one is based at Thika, which
manufactures single superphosphate (10,000 tons per annum), and the other is based in
Nakuru, which imports manufactured fertilizers and blends them according to various
NPK grades (40,000 tons per annum).
With regard to marketing (branding), Kenya tea has been traditionally sold in the
market in a bulk form and is much sought after by leading tea companies for blending
and adding taste to the most respected tea brands in the world. Over the last few years,
Kenya has increased the volume of value added tea sales from under 5% of total sales
to approximately 12%. Till date, all the tea exported to Sudan is packaged under
company brand names. The biggest brand in the domestic market, Kenya Tea Packers
(KETEPA), is exporting products to the countries in the Middle East. Although the
current export ratio is 5%, KETEPA plans to increase it to 20% in the next five years.
However, most of the products are still sold under the name of multinational
enterprises. There is an emerging vibrant value-adding sub-sector led by the Tea
Packers Association, which aims at providing consumers across the world with pure
Kenya branded teas.
4.2
Cut flower industry
Exports of flowers such as roses have been drastically increasing since late the
1990s; at present, cut flowers constitute the second largest export item after tea.
Table 4
Year
1980
1985
1990
1995
1996
1997
1998
1999
2000
2001
2002
Export volume and value of cut flower industry
Volume
(Tons)
7,422
10,000
14,425
29,374
35,212
35,853
30,221
36,992
38,757
41,396
52,106
Value
(Kshs. Millions)
227
463
940
3,642
4,366
4,900
4,857
7,235
8,650
10,627
14,792
Source: Dolan et al. (2002)
Table 4 demonstrates the export volume and the value of the flower exports from
1980 to 2002. In addition, according to Horticulture Crops Development Authority, the
export volume of cut flowers was 62,614 tons in 2003, 88,243 tons in 2004, and 81,219
tons in 2005. Since almost all cut flowers are intended for export, the production
volume appears to be around the same amount. A recent increase in the production
volume is because of the high freight rates from Nairobi; growers have been selecting
high value flower types and varieties in order to maintain their market share and
enhance their production capacity. Among other flowers, roses are also the most
important cut flowers for African producers. They represent 71% of Kenya’s flower
production.
Table 5
World’s leading exporters of cut flowers
(thousands of US$)
Countries
Netherlands
Colombia
Ecuador
Kenya
USA
Israel
Spain
Zimbabwe
Italy
Thailand
Others
TOTAL
1992
2,153,560
395,644
25,330
61,477
14,359
146,120
52,665
28,743
111,277
27,579
266,950
3,283,704
1998
2,296,041
600,014
201,883
131,550
20,569
175,196
95,977
61,925
80,158
51,856
369,194
4,084,363
1999
2,095,183
546,210
210,409
141,326
14,762
115,884
85,450
58,810
67,921
50,175
383,313
3,796,443
2000
2,003,393
566,986
215,414
144,441
13,738
102,292
77,407
63,797
58,235
50,042
390,009
3,685,754
2001
Share for 01
2,027,932
55.7%
562,466
15.5%
206,561
5.7%
165,336
4.5%
114,436
3.1%
114,415
3.1%
78,582
2.2%
65,520
1.8%
54,885
1.5%
43,775
1.2%
206,231
5.7%
3,640,139
100.0%
Source: Labaste ed. (2005).
Although Kenya is an emerging exporter in the industry, the market is still
controlled by Holland, the market share of which is still over 50% of the total share.
However, among African countries, Kenya has demonstrated an outstanding
performance.
The Kenyan cut flower industry secures the market in winter—including
Christmas and St. Valentine’s Day—when the production in Europe decreases. It
complements the supply shortage in the northern hemisphere by utilizing the locations
in the southern hemisphere. Similar to tea production, Kenyan cut flower production is
situated at high altitudes of 1,500 to 2,000 meters above the sea level; this leads to
fewer insect pests and allows the use of minimal amount of pesticides. It is reported
that there are few cases of finding insect pests at the plant quarantines of importing
countries, as compared to other exporters.
Large scale firms internally integrate the processes of production, packaging, and
export. In addition, each package is attached with a barcode, which enables traceability.
Dutch companies occupy most of the industry, with the introduction of an up-to-date
production management technology; moreover, their production is uniform and stable.
Among over 500 producer/exporters growing cut flowers in Kenya, the production
for export is largely concentrated on approximately 60 medium to large-scale flower
operations, of which the 25 largest producers account for over 60 percent of total
exports. The larger flower operations range in size from 20 to over 100 ha under
production, with a labor force ranging from 250 to 6000. Supplementing these larger
growers are approximately 50 medium-scale commercial growers and an estimated 500
small growers.
The costs of complying with changing standards have an inverse relation with
company size and present a real challenge to small-scale farmers. There has also been
growing pressure from nongovernmental organizations for the industry to take bolder
steps to preserve the environment. A few flower farms have taken steps to address
some of these concerns by building water treatment and water harvesting facilities
(World Bank 2004). The industry faces cost-up factors such as the Euro-Retailer
Produce Working Group Good Agricultural Practices (EurepGAP) certification, safety
certification of agro products exported to the EU, and decline in the share of the EU
market by the export expansion of new countries like Ethiopia, which have
government’s support such as tax preferences.
With regard to the value chain, in contrast to the tea industry, the flower industry
mainly specializes mostly in production, while new breeds are developed in Europe.
Following Kenya’s accession to the International Union for the Protection of New
Varieties of Plants (UPOV) in February 1999, the supply of planting material is more
readily available from local propagators at present. The starting material for cut
flowers and pot plants (cuttings and young plants) is currently strong. Starting material
presents good opportunities because of its relatively high value/volume ratio and high
levels of labor intensity, which render it impossible for being produced in Europe as
yet. Starting material is also a growing supply industry for the international
horticultural production sector.
Both capital goods (such as materials for greenhouse) and intermediate goods
(such as fertilizer) are imported. With regard to input, propagation materials, fertilizers,
pesticides, irrigation, and fertilizer application equipment have to be imported from
other countries. New sources of special fertilizers for horticulture are India, China, and
Singapore. The infrastructure for cut flower production is, in particular, very expensive,
and small-scale farmers can often not afford it. However, the improvements in
technology have resulted in an increased production per unit area and enhanced the
quality of the produce (EPC 2004).
Due to the characteristics of the commodity, it is not feasible for small-scale
farmers to sell under their own brand name. Therefore, it is important for Kenya or its
specific regions to be regarded as flower producing areas in the market. In this respect,
it should be noted that Kenya is becoming increasingly popular in Europe.
However, some flower producers, including locals, have started moving their
production base to Ethiopia; this is because higher altitudes enable the cultivation of
bigger flowers, and the government tries to attract investors with preferential measures
such as land provision at lower prices and tax exemptions. Moreover, poor value chain
deployment boosts the relocation with lower opportunity cost.
4.3
Garment industry in the EPZs
The garment industry, as a whole, is occupying only 0.1% of the total export
(Central Bureau of Statistics 2006). However, we have included the industry as one of
the case study targets because it is dominant in the EPZs and enjoys benefits from
AGOA.
The value chain flow of the garment industry in EPZ is as follows. The mega
retailers in the US decide the design. In accordance with the design, garment producers
import fabrics from China or other countries. Fabrics are processed using imported
sewing machines, following which, the sample products are checked with imported
testing equipment. Finally, the finished products are exported to the US and sold as the
retailers’ own brands. In this sense, the industry is a typical enclave.
Although Kenya originally had a supply chain of cotton cultivation, yarn-making,
and weaving, it was diminished by the liberalization policy of the 1990s. AGOA
allowed African countries to utilize imported fabrics; hence, garment manufacturing
factories, mainly foreign direct investment, can be located in Africa. Although the US
congress has voted to allow Kenya and other eligible African countries to continue
using foreign fabrics in the textiles and clothing that they export duty-free to the US,
the time given to them—at least another six years, until 2013—is not very long.
In ERS, the revival of cotton production was emphasized as one of the two
sub–sectors that were specified. The objective was to “revamp growth in the cotton
industry and reduce the cost of cotton production to US$ 0.46/1b, consistent with
international prices.” However, this target has not been realized, and the prospects for
2007 are weak.
5.
Outline of the strategy and action plan for industrial development
The three abovementioned industries accomplished considerably good export
performances. Tea and cut flower exports depend on the “spatial economic advantage”
derived from natural resource endowment including climate (because of latitude and
altitude), while the garment industry managed to export with the help of AGOA.
We propose the strategy that Kenya should pursue the possibility of fully utilizing
its “spatial economic advantage” and extending its impact through the value chain.
This is one plausible starting point for further industrialization. Further, Thailand was
described as a “newly agro industrialized country (NAIC),” with of its increasing agro
industry export. In this context, it was expected that a modernized and internationally
competitive agro industry would possibly require domestic, intermediate, and capital
good production for accomplishing better quality, cost, and delivery. The cotton
industry in the US also underwent a similar experience in the nineteenth century
(Wood and Mayer 2001).
It is obvious that a NAIC type is not sufficient to develop broad-based
industrialization. For broader industrialization, it is crucial to realize and create a
considerable impact.
In addition, the strategy to strengthen the currently competitive industry might
appear to be contrary to the diversification advised by Ng (2005). However, as
mentioned below, intermediate and capital goods for agriculture and agro-processing
can be exported, particularly to other African countries. By means of this process, we
can expect export diversification.
The following is a tentative outline of the action plan for industrial development in
the event it is necessary to start from scratch, based on the strategy mentioned.
1) Create a niche based on competitive advantage, usually “spatial economic
advantage”, in the cases of sub-Saharan countries.
2) Secure international partners such as mega retailers for horticultural products and
major multinationals for tea.
3) Realize production to meet the needs of international partners, and ultimately, final
consumers.
4) Expand the activity base in value chains, particularly backwards, such as
intermediate goods, capital goods, and research and development, in cooperation
with international partners.
5) Utilize the operation of a value chain by exporting intermediate and capital goods
or modifying them for different domestic industries.
In an age of rapid change and stiff competition, changing external conditions are
likely to result in the sudden deterioration of the industrial accomplishment. For
example, the abolishment of AGOA appears to seriously affect the garment industry in
African countries. In addition, these stages might not occur step by step but would
rather overlap. For example, it would be more efficient to ask for advice from
international partners while selecting the appropriate niche. In that case, the second
objective in the action plan should be accomplished before the first.
The tea industry in Kenya can be considered to be in the fourth stage; however, it
has somewhat stagnated while the cut flower industry is in the third stage and appears
to be at a standstill.
6.
Further research plan
In accordance with the abovementioned discussion, it is necessary to conduct
additional research on the industrial development in Africa. The research should aim at
identifying the capacity for industrial development and making policy
recommendations for Tokyo International Conference on African Development IV
(TICAD IV).
With regard to the selection of the industry, we have already decided upon the tea,
cut flower, and garment industries for further investigation. They are appropriate cases
since they have already reached a certain stage (or at least are in the third stage as
mentioned in the previous section). It is possible to learn from their experiences in
climbing up the ladder, and at the same time, consider the possibility of further
development as a feasible objective (for instance, refer to Figure 2 on Kenyan
horticulture industry’s position among African countries). More importantly, they
already are or are capable of becoming “spatial economic advantage” based, which is
suitable for current factor endowment.
Figure 2
Kenyan horticulture industry’s position among African countries
Advanced production
South Africa
2
1
Kenya
Morocco
Domestic market
orientation
3
4
5. Selfsufficiency
West African
countries such
as Senegal, Mali
Central Afican
countries
Small countries
like Rwanda,
Burundi
Source: Labaste ed. (2005).
Basic prduction
structure
Code d'lvolre
Egypt
East African
countries such as
Zambia, Zimbabwe,
Tanzania, Uganda
Export
orientation
1)
2)
3)
4)
1
This research aims to achieve the following.
Reinvestigate the experience of the case industries, particularly in terms of CD and
its vulnerability to changes in external conditions.
Set the overextended but feasible target of export industry development (e.g.,
growth of a certain percentage over that mentioned in the national plan or attain a
certain level of share in the world market).
Set the target of CD for realizing the export target—the current capacity level has
to be analyzed in detail by conducting questionnaire surveys in the case industries
and interviews with key informants such as the government and trade associations.
Formulate an action plan for developing the necessary capacity.
African countries have accomplished relatively high labor productivity. This derives
from the fact that the ratio of capital-intensive industries such as steel, metal products,
petrochemicals, beverages, and cigarette is high. In many cases, the concerned firms
are run by the government or foreign direct investment. As the result, the wages in the
manufacturing sector are also likely to be high. The labor market is divided into one
section for the minorities, with fixed and high wages, and the other section for the
majorities, with fluid and low wages. However, Kenya’s figures as regards wages are
not as high as those in most other countries in the region.
2
As mentioned in the previous section, it is necessary for the target industry to be
different from countries other than Asia. However, we would like to emphasize that
Africa to learn from Asia in terms of the role of government in industrialization.
The industrial policy in the developing countries has been one of the central issues
since the 1950s. There have been discussions, mainly between the relatively
market-oriented neoclassicals and the intervention-oriented structurists (Lall 2004).
Since the mid-1990s, the focus has been on how to evaluate the East Asian experience
regarding the success in import substitution and export orientation and its applicability
to other developing countries, including Africa.
New institutionalist schools that are based on the neoclassical framework but are
more intervention-oriented recognized the significance of “market-oriented industrial
promotion policies,” such as general export promotion and policy finance. However,
they did not agree with the applicability of selective intervention in the form of
promoting specific industries, especially to the countries other than East Asian ones
(The World Bank 1993). Further, in the recent analysis on industrial cluster
development, the government’s role in promoting innovation is limited to general
deregulation, incentive measures, and reformation of laws (Yusuf 2004). Some
structurists, in Lall’s term, “the technological capabilities approach” intended to adopt
the result of evolutionary economics and the economics of information and strengthen
the theoretical base with regard to a selective industrial policy. They focus on the
technological capability formation process in a broad sense, including marketing (Lall
2004, Westphal 2002). Unlike the new institutionalists, they emphasize that the East
Asian experience demonstrates that it is possible for selective intervention to function;
however, they admit that it did not work as expected in many countries including
Africa. In addition, it failed to support the CD of the private sector because of the
government’s lack of capacity.
In a broad sense, this difference comes from the difference in the measures
undertaken to realize the necessary CD, including social capabilities for
industrialization (Minami and Makino 2002). According to new institutionalists,
market mechanisms and non-selective interventions such as education and physical
infrastructure development would realize CD. The technological capabilities approach
emphasizes global sophistication that goes along with selective intervention and the
specialization of industrial technology and know-how has boosted the importance of
CD.
There has been a debate regarding whether the selective interventionist policy is
appropriate for enhancing industrial development (Weiss 2002; Lall 2004; Pack 2006).
However, according to Lall (2004), all interventions are eventually selective,
regardless of whether or not they are intentional. For instance, physical infrastructure
and human capital investment, which new institutionalists admit is necessary, is
impossible to implement non-selectively. In this sense, we need to consider
selectiveness as a precondition. Even though the government plays a role in human
capital, research and development, and physical infrastructure, selective effects must
be taken into consideration. Hence, selectiveness is still a significant issue, although
under the circumstances of liberalization, only a few policies introduced by South
Korea and Taiwan can be implemented.
Regarding the implementation of deliberate selective measures, we should
investigate the possibility of short- and long- term competitive advantage formation,
and the target industry should be decided on the basis of these criteria, without
selecting the specific industries in advance. This is necessary for avoiding an attempt at
rent-seeking. Here, although we already have some limited information for the
decision, we need to attempt to implement the process as rationally as possible. Weiss
(2002) pointed out that from a fundamental perspective, the developing countries have
to secure the institution that sets the common objective, i.e., the economic development
between the government and private sector in order to prevent rent-seeking activities
and ineffectiveness.
3
Regarding some specific clothing products, AGOA provides Kenya with preferences
of up to 35% over those offered to countries facing MFN tariffs. In December 2006,
the adoption of AGOA preference to Kenya and other African countries was extended
till 2013.
4
Manda and Sen (2006) offered the following argument. Since the 1980s, Kenya has
been gradually integrating with the global economy. Using both industry-level and
firm-level data, this paper examines the effects of globalization on employment and
earnings in the Kenyan manufacturing sector. The industry-level analysis suggests that
the overall effect of international trade on manufacturing employment has been
negative in the 1990s. The firm-level analysis indicates that the less-skilled workers
experienced losses in earnings and there was increasing inequality between the
earnings of skilled and unskilled workers during this period. This suggests that in
Kenya, globalization has been associated with adverse labor market outcomes.
5
During this period, compared to African countries, Asian countries reformed their
economies differently—they initially focused on providing non-traditional export
activities, direct inducements, and subsidies. The specific policies employed varied
from the export subsidies (in South Korea and Taiwan in the 1960s) to export
processing zones (in Singapore and Malaysia in the 1970s) to the special economic
zones (in China in the 1980s and 1990s). However, in each case, the focus was more
on targeting new export sectors rather than on import liberalization.
6
These findings can be evaluated as emphasizing the increasing influence of mega
retailers. Hence, the differences by characteristics of international partners are more
evident.
7
According to Bedford et al. (2002), one of the major estate holders has 18,000
employees, of which 90% are tea pluckers. The work force predominantly belongs to a
trade union which complies with the Kenyan collective bargaining agreements. The
company operates an equal opportunity policy with basic pay at Ksh 135 per day; a
good plucker earns an average of Ksh 327 per day.
8
JETRO (2005) highlights other characteristics of Kenyan tea: (1). Most of the
foreign companies are currently managing tea businesses in India and Sri Lanka and
have implemented quality assurance standards that meet global market standards. (2).
East Africa’s tea history is short as compared to those of India and Sri Lanka.
Therefore, the equipment in tea factories is more modern, and there are fewer cases of
contaminants getting mixed in the tea.
9
The total fertilizer use in Kenya has risen from a mean of approximately 180,000
tons per year during the 1980s to 250,000 tons per year during the early 1990s and
over 325,000 tons from 1996–2003. In 2004/05, Kenyan farmers used 351,776 metric
tons of fertilizer. At present, commercial fertilizer imports are approximately three
times the levels achieved during the late 1980s and early 1990s (Ariga et al. 2006).
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Discussion Paper List
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Murakami, K., Matsuoka, S. and Kimbara T. (Graduate School for International Development and
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Senbil, M., Zhang, J. and Fujiwara A. (Graduate School for International Development and Cooperation,
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Vol.2006-2
Nakagoshi, N., Kim, J. and Watanabe, S. (Graduate School for International Development and
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"Social Capacity for Environmental Management for Recovery of Greenery Resources in Hiroshima"
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Vol.2006-1
Murakami, K. and Matsuoka, S. (Graduate School for International Development and Cooperation,
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Murakami, K., Matsuoka, S. (Graduate School for International Development and Cooperation,
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Matsuoka, S., Fuchinoue, H. (Graduate School for International Development and Cooperation,
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Yosida, K. (Department of Social Systems and Management, University of Tsukuba) Benefit Transfer of
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Matsuoka, S., Murakami, K., Aoyama, N., Takahashi, Y., Tanaka, K. (Graduate School for International
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Matsuoka, S., Murakami, K., Aoyama, N., Takahashi, Y., Tanaka, K. (Graduate School for International
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Murakami, K., Matsuoka, S. (Graduate School for International Development and Cooperation,
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Cheng Ya Qin (China Association for NGO Cooperation) NGO’s Activity and its Role in China,
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Kimura, H. (Graduate School of International Development, Nagoya University) Present Condition and
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Vol.2004-6
Kimbara, T., Kaneko, S. (Graduate School for International Development and Cooperation, Hiroshima
University) Possibility of Simultaneous Pursuit of Environmental and Economical Efficiency, 2005/3/10
(Japanese only).
Vol.2004-5
Honda, N. (Graduate School for International Development and Cooperation, Hiroshima University) The
Role of the Social Capacity for Environmental Management in Air Pollution Control: An Application to
Three Pollution Problems in Japan, 2004/6/18 (Japanese, English Abstract: p.14).
Vol.2004-4
Matsumoto, R. (Department of International Development Studies, College of Bioresource Sciences,
Nihon University) Development of Social Capacity for Environmental Management: The Case of
Yokohama City, 2004/5/31 (Japanese, English Abstract: p.17).
Vol.2004-3
Yagishita, M. (Graduate School of Environmental Studies, Nagoya University) Evaluation of Nagoya
Stakeholder Conference Aimed for the Realization of Environmentally Sound Material-Cycle Society
based on Citizen's Participation, 2004/11/15 (Japanese only).
Vol.2004-2
Fujikura, R. (Faculty of Humanity and Environment, Hosei University) Role of Stakeholders in the
Process of Japanese Successful Pollution Control during the 1960s and 1970s ? Sulfur Oxide Emission
Reductions in Industrial Cities ? (Japanese, English Abstract: p.18).
Vol.2004-1
Fujiwara, A., Zhang, J., Dacruz, M.R.M. (Graduate School for International Development and
Cooperation, Hiroshima University) Social Capacity Development for Urban Air Quality Management
the Context of Urban Transportation Planning, 2004/4/20.
Vol.2003-3
Yoshida, K. (Graduate School of Systems and Information Engineering, University of Tsukuba)
Socio-Economic Evaluation of Urban Ecosystem, 2004/3/31 (Japanese, English Abstract: p.19).
Vol.2003-2
Kimura, H. (Graduate School of international Development, Nagoya University) Issues on the Social
Capacity Development for Environmental Management under the Decentralization of Indonesia,
2003/11/21 (Japanese, English Abstract: p.20).
Vol.2003-1
Matsuoka, S., Okada, S., Kido, K., Honda, N. (Graduate School for International Development and
Cooperation, Hiroshima University) Development of Social Capacity for Environmental Management and
Institutional Change, 2004/2/13 (Japanese, English Abstract: p.26).