Economic Development of Kenya since 1980 - Case Study Example

Economic Development of Kenya since 1980 Name: Professor: College: Course: Date: Introduction The paper uses Kenya as the low-income country (LIC) to explain its economic development since 1980. According to the World Bank, a low-income economy is that with a per capita income of $1045 or less (The World Bank Group A to Z. 2015). Kenya is rated the regional hub for trade and finance in East Africa as well as the natural entry point to the region. Kenya is a market-based economy driven by a liberalized foreign trade policy. The economy of Kenya has grown by 5.4% in 2014 and has a current growth projection by 6% in 2015. The World Bank Group’s economic analysis suggest that such a resilience has the likelihood to continue with the expansion of the economy at 6.65 in 2016 and 6.5% I 2017. As reflected in the Kenya Economic Update for March 2015, the economy is emerging as one of the continent’s core growth region. Such projection have poised Kenya to become the fastest growing economies in the East Africa region. Such suggestion rest on the lower energy cost, agriculture, manufacturing industries as well as the country’s high level of infrastructural development. Body Economic Status The Kenya’s economies have remained inconsistent since its independence. The independence early periods saw the country’s GDP grew by 6% and thus diminished to 4% in the subsequent decades. During the 1990s, the country’s economy with respect to GDP further showed significant inconsistencies. There were negative GDP growth rates going up to 4% in the 1990s. The country, however, began to showcase promising economic records after the Millennium. The climax of the Kenya economic growth was recorded in the 2007 with a 7% growth rates. However, this was washed down with 1.7% following the boggled election of December same year alongside the 2008 global financial crisis particularly on exports and remittance. Nonetheless, the Kenyan economy has revamped from the 2007-2008 impacts. In 2010-11, the growth rates went as high as 5% with the economic prospects of the country for subsequent years showcasing high levels of favorability. Ceteris paribus, the Kenya’s economies remains projected to be the first East African country to shift from low-income to middle-income status with its current GDP per capita being in the neighborhood of 760 dollars. Reasons for the Performance High Inflation The Kenyan economy has been fiercely hit by high inflation in the past going as high as 12%. However, the country has always counteracted this problem by fiscal consolidation as well as strict monetary policies. In addition, the stabilization of the Kenyan Shillings has also positively worked towards a declining trend in inflation rates. Industries Kenya’s economy significantly rest on the industries as the country is rated the most industrialized in both Central and East Africa. The industries have significantly contributed to the economic development of Kenya based on its export partnership with the rest of East Africa and United Kingdom, United States and Netherlands. Further, the imports have also benefited the country with its key import partners being China, UAE, South Africa and India. Also, agriculture has remained the backbone of the country’s economy. Kenya is thus, the source of several agricultural products for the world export. The agricultural industry is evenly distributed in the country with particular region favoring the growth of different agricultural products based on the favorable climatic conditions. Thus, the country’s popularity in the horticultural products has always remained a key driver of economic growth in the country. The horticultural has therefore become an international leader and the most dynamic industry. For example, the country exported 322 million dollars of fruits and vegetable as well as 313 million dollars of cut flowers in 2006 as opposed to 79 million dollars and 13 million dollars in 1990 respectively mostly in European countries especially in UK. Moreover, the industry has become more of processing and packaging works like chopping and bagging vegetables. Currently, the horticultural industry remains one of the key sources of employment for both rural farm laborers as well as urban packhouse workers. Further, the tourism industry has also continued core driving force for the promising economic development in Kenya. The Kenya government has realized the significant contribution of the tourism sector to the economic development and hence extremely invested in the industry to enhance tourist attractions and hospitality levels for the tourist and traveler around the globe for maximum benefit. Further, the manufacturing industry is another major contributor to the economic development of the Kenyan economy. The manufacturing industries has shifted focus from the export of raw materials or products to retaining more of the added-value processes in the nation. Trade Policy The production of coffee has remained a key contributing factor to the country’s economic development. For example, by 1980, the price coffee subsided, and a subsequent reversing of the initial terms of trade took place. On the other hand, the country’s import substitution policy ran its course as imports of consumer commodities went lowest indicating the little probability of future substitution hence poor prospect for economic future development and growth. The country, however, lost its market share in the EAC after its collapse and reduced the demand by Uganda and Tanzania for the country’s manufacturers. Subsequently, Tanzania tightened its borders and import demand in Uganda worsened following its internal instability. Therefore, these worsening conditions shrunk the small export market and hence the pressure for reform evaporated as the economy’s fault line already masked by the temporary inflow of foreign exchange when coffee boomed reassert (Rahnama-Moghadam at al. 1995). Subsequently, the government signed its first Structural Adjustment Loan with the World Bank in 1980. Such a move was conditional on the government embracing further liberal trade while interest rate regimes and outward-based industrial policy. Moreover, the government also sought loans with the IMF in 1982 to as the government pledged to expand liberalization policy that saw a liberalization of tariffs (Fund 2009). The second half of the 1980s saw further pressure leveled on the government by donors to liberalize trade such as replacing import restrictions with tariffs from quotas, as well as declining levels of tariffs. The 1990s saw several of import liberalization, and the loosening of foreign restrictions that resulted in the introduction of Forex CS opened a clear roadmap for the development of the economy through trade of the agricultural products. Thus, by 1994 the Kenyan economy freely traded in foreign exchange and hence eliminating the determination of the quantity of imports by the availability or lack of because of that of foreign exchange. Moreover, the economic development has also been greatly linked to export promotional strategies to spur trade. The export promotion platforms introduced primarily meant to eliminate the tariffs payable for the inputs of processed exports. Subsequently, the country adopted the first export promotional platform in 1988 dubbed the manufacturing-under-bond program. However, much was never achieved by the MUB program despite the implementation of the duty-free import factory plant and equipment including raw materials for those manufacturers producing primarily for exports. In addition, the Export Processing Zones were instigated in 1990 accompanied by a generous government incentives that attracted several investors manufacturing export. The introduction of the EPZs contributed to import tariffs waivers, corporate tax holidays as well as exempting a number of business restrictions. Presently, the economic development of Kenya has greatly benefited from the EPZ as it employs a number of people despite the significant foreign exchange resulting from the export processing zones particularly garment production to exported to the United States. Also, in 1993, the Ministry of Finance started a third export promotion program called Export Promotion Programmes Office (EPPO). The EPPO policy refunded import taxes paid on factor inputs in the export production. The EPPO was favorable for both sole exporters as well as partially producing firms for the domestic market and export reaped the benefits. Thus, EPPO benefited the economy than MBU and EPZs during the 1993 through to 1998. Therefore, the 1980s and 1990s saw Kenya’s economy growing based on the trade policies that evolved from the import substitution towards outward orientation (Ochieng & Maxon 1992). Thus, the growth and development of the exports evaporated during this period and greatly contributed to the economic development of the country. Financial Sector As outlined in the Kenya’s blueprint, Vision 2030, this sector plays a key role in the achievement of the objectives of Vision 2030. The financial sector of the Kenya’s economy does this by being an efficient intermediator between the surplus and deficit sector in the economy. Therefore, there is an inevitable relationship between financial development and growth and development of the Kenya economy since 1980 (Ahmed & Islam. 2010). Indeed, the relationship has been described as a reciprocal one as each affects the other in almost equal measure. The country has greatly benefited from both its formal and informal sector with the formal sector comprising the banking, capital markets, insurance, Savings and Credit Cooperative Societies and pension funds. Moreover, the financial infrastructure that aids the trading and payment alongside settlement systems have also been integral parts of the formal sector. The lack of supervision and regulation in this sector derailed the economic development as it led to the banking crisis in 1986 leading to massive default by many financial institutions. Subsequently, the reformation in 1989 addressed both institutional and policy reforms to strengthen the regulatory powers of the central’s bank and interest rates liberalization (Banerji at al. 1996). However, the economy was hit again due to the laxity of these regulations towards the 1992 general election as funds were borrowed from politically connected financial institutions to fund campaigns of the ruling party. Subsequently, the inflation shot to over 50 percent culminating in another financial crisis in the 1993. Consequently, the government counteracted by the issuance of mass quantities of Treasury bill that also emptied into inflationary pressure easing but negatively harming the economy due to increased rates of interest for the Treasury bills (Central Bank of Kenya. 1994). Thus, the expansion of the economy was at stake as the extreme interest rates on treasury bills shied away the private investment as well as scaring consumer spending. 2007 violence and 2008 Financial Crisis The economic development of Kenya was greatly affected in 2007-2008 violent election accompanied by an immediate financial crisis in 2008. The economic development in Kenya had peaked in 2007 just before the bungled election and the post-election violence in 2008 coupled with the fierce effects of the financial crisis. The financial crisis rendered the exports unproductive with the GPD being declined to 1.7%. Thus, both 2007 election and the global financial crisis of the 2008 greatly contributed towards the worsening economic development. Exchange rate reforms The exchange rate policy was updated from the 1975 IMF’s Special Drawing Rights (SDR) believed to have a favorable stability than the US dollar in 1982. The updating of the exchange rate in 1982 was based on a crawling peg that focused on the composite basket of the currencies of the principle trading partners with the 1990s seeing the country taking a dual exchange rate policy. Thus, the 1993 saw the country’s currency freely floating and subsequent devaluation of currency before collapsing to market-determined exchange rates (Mcpherson 1998). The exchange rates reform was key in determining the country’s international competitiveness and determines both export and import quantities and their profitability. Liberalization of Domestic Markets The economic development of the country has anchored in the ability to reduce the government’s control of the economy and favor market forces. The late 1980s and early 1990s saw a major elimination of price controls prior to the structural adjustment loans. Indeed, the wheat and oil markets were also decontrolled despite being core resistors. Moreover, the domestic prices were liberalized besides privatization of parastatals (Hornsby 2012). Such strategies greatly impacted the economic growth of the country as market forces were freely left to take control rather than the infringement by the government policies. Conclusion The Kenya’s growth momentum is anticipated to be sustained by a continued investment in infrastructure, stable macroeconomic environment, regional integration, improved business environment and exports (Altmann 2011). In addition, the Kenyan government has maintained a discipline in both monetary and fiscal policies even with the ever increasing pressure from devolution that have shot public sector wage bill higher. In addition, it is projected that the total public debt of 43 percent of GDP will remain capped at below 50% of the GDP threshold. Moreover, the economy is expected to have an annual inflation to decline to 6.4% from the 6.9% projection at the end of the year 2014 as reflected in the Kenya National Bureau of Statistics. Reference Ahmed, A. D., & Islam, S. M. N. 2010. Financial liberalization in developing countries: Issues, time series analyses, and policy implications. Heidelberg: Physica-Verlag. Altmann, M. P. 2011. Contextual development economics: A holistic approach to the understanding of economic activity in low-income countries. New York: Springer. Banerji, A., Bruton, H. J., & Hill, C. B. 1996. The evaluation of public expenditure in Africa. Washington, DC: World bank. Central Bank of Kenya. 1994. Monthly economic review. Nairobi, Kenya: Central Bank of Kenya. Fund, I. M. 2009. Kenya. Washington: International Monetary Fund. Hornsby, C. 2012. Kenya: A history since independence. London: I.B. Tauris. Mcpherson, M. F. 1998. Exchange rates and economic growth in kenya: An econometric analysis. Cambridge: Harvard Inst For Intl Dev. Ochieng', W. R., & Maxon, R. M. 1992. An economic history of Kenya. Nairobi, Kenya: East African Educational Publishers. Rahnama-Moghadam, M., Samavati, H., & Dilts, D. A. 1995. Doing business in less developed countries: Financial opportunities and risks. Westport, Conn: Quorum Books. The World Bank Group A to Z. 2015. Read More