Stabilizing revenue will lead Kenya to greater prosperity
Table of contents
Evolution of freedom
Aggregate freedom in Kenya has increased substantially and constantly since 1995, but the data correctly show a marked structural change in 2010. This was a crucial year in the recent politico-economic history of the country as it marked the inauguration of the new constitution, which has been the driving force behind many of the trends shown in the Freedom Index and subindexes. The 2010 Constitution reformed Kenya’s highly centralized institutional architecture, creating a devolved and highly decentralized system. This ensured that lower levels of government (regions and counties) receive much higher levels of funding, that can be better allocated according to the needs of local populations.
The economic freedom subindex clearly presents a jump around 2010, mainly attributable to a significant increase in women’s economic freedom. Legal changes that accompanied the constitutional reform had important effects on women’s empowerment and freedom. The endorsement of the 2010 Constitution established vital rights and encouraged additional reforms towards greater legal gender equality, including reserving seats for women’s political participation and encouraging nondiscrimination and equality. For example, the constitution outlined new principles relating to land policy, including the elimination of gender discrimination in law, customs, and practices related to land. Financial inclusion of women is an important area of improvement, and the Central Bank data—based on various FinAccess Surveys—clearly show that women are becoming much more economically included and empowered. Also, when you look at the disaggregated data for different regions of the country, you find that the gender gap in financial access is actually declining in many counties in Kenya. The growing economic empowerment of women is also evidenced by increasing employment rates of women and a reduction in the gender wage gap in many professions. Legislative changes have allowed women to hold and manage property, and placed them on a more equal legal footing with men in matters relating to property. For example, the passage of the Land Act and Land Registration Act in 2012 increased women’s rights over marital property. Regarding access to education, the gender gap is closing very fast. For example, in many university courses, the proportion of women and men enrolling is now much more equal than was the case a decade ago. The new decentralized constitutional framework has been crucial in creating the conditions in which women’s freedoms can improve. The situation of women is significantly worse in rural areas, but now local and regional governments have the autonomy and resources to provide and generate economic opportunities for women at a devolved level.
The economic freedom subindex also shows a sustained increase in property rights protection, which seems to reflect the judicial reforms that have been introduced since the 1990s. In the last three decades, there has been a significant improvement in the speed of judicial processes, and in the reliability of the guarantees given to domestic and foreign owners. For example, since the inauguration of the new constitution in 2010, parliament has enacted four major land laws aimed at improving land property rights: the Land Act of 2012, the Land Registration Act of 2012, the National Land Commission Act of 2012, and the Community Land Act of 2016. The World Bank’s Ease of Doing Business Index also undoubtedly incentivized Kenyan governments in this period to improve the institutional architecture of the country in order to facilitate economic activity. For example, the move towards “e-government”—the myriad reforms aimed at digitalizing interactions between citizens and government agencies—received a big push in order to improve Kenya’s position in the Doing Business ranking. This was, in fact, achieved in several successive years. The recent digitization of land records in Kenya is a means to improving security, by requiring a landowner to approve all applications relating to a specific property. Digitized records will also reduce the cost and time of land transactions. Section 9 of the Land Registration Act of 2012 facilitated the coming wave of digitalization and e-government by providing the Registrar of Lands with the right to maintain relevant documents in a secure and accessible format, including in electronic files.
Political freedom shows a substantial increase during the 1990s, which captures the movement from a one-party political system to a multiparty system. This was a generalized change in Sub-Saharan Africa, with levels of political freedom increasing in several countries. But such changes are always complicated, because it is easy to introduce political competition on paper, but always difficult in practice. This was a period of great political agitation in Kenya, reflecting broader political liberalization across Africa, with a very intense push for constitutional reform from civil society, resulting in significant achievements. External pressures to liberalize the political space were also crucial.
Kenya is probably one of the countries in Africa with the highest levels of civil and political liberties. However, the data show a significantly lower score for civil liberties than for the rest of the indicators of political freedom. It is likely that this relates to the protests, campaigning, and activism before and after electoral periods, which reached a peak with the serious electoral violence of 2007–08. But in general, Kenya is a society in which civil and political freedom is high, where citizens can express freely their political views, with a vibrant opposition in evidence. Electoral results have been challenged various times in recent years, accompanied by judicial reviews of the electoral results after several recent elections.
The large increase in legal freedom observed in 2010 is single-handedly driven by improved judicial independence and effectiveness, and this again is a product of the new constitution. The judicial system has proven to be very independent from political pressures; the challenges to—and judicial reviews of—the electoral results are a clear sign of this. The clarity of the law also improved significantly during the constitutional reform discussions that crystalized in 2010, and that is also evident in the data. In 2015, the judiciary adopted a nationwide case-tracking tool which enhanced the level of judicial accountability. There has been an attempt to standardize and speed up the handling of cases.
But the decentralization of power brought about by the new constitution has also had a negative side, at least in the short term. This is because now there is an additional level of government, the regional level, which necessarily increases the bureaucracy in the country. Moreover, three levels of government means a significant effort of coordination is required in order to efficiently provide the public services that were concentrated in the central government. These difficulties explain why bureaucracy quality does not show a significant change after 2010. Also, more bureaucracy opens the door for more corruption, especially with such a large structural change in the institutional framework. In recent years, there has been a clear aim to improve bureaucratic quality—for example, with the push for e-government—but Kenya has still a lot of room for progress.
From freedom to prosperity
The rapid growth in income in Kenya starts in 2002, a critical year for the country. In 2002 the country experienced a major political transition when the president, who had run the country for twenty-five years, stepped down. The new leadership was very keen on detailed government planning. They introduced a long-term development plan, called Vision 2030, with the objective of making Kenya an upper middle-income country by the year 2030. It was based on some crucial pillars, one of them being innovation. Kenya has led the region in some critical sectors thanks to this forward-thinking approach. Today, approximately 54 percent of Kenya’s gross domestic product (GDP) is generated by the services sector, parts of which are particularly vibrant and innovative, like tourism and financial services. The latter is a great example. Thanks to the innovative tool of mobile money, financial inclusion increased from 25 percent of the population in 2006 to about 84 percent in 2021, according to the 2021 FinAccess Survey, one of the highest levels in the whole Sub-Saharan Africa region. Mobile money in Kenya, which gained local popularity through the M-PESA application, allows users to deposit, withdraw, transfer money, make payments for goods and services, and access credit through cell phones. Mobile money products have evolved considerably since their introduction to Kenya in 2007, with a considerable range of innovative products and mobile service providers emerging. The agricultural sector, even though it is still very important in terms of employment, has been declining in terms of its contribution to GDP in Kenya and in several Sub-Saharan African countries. For several decades it represented about 30 percent of GDP in Kenya, but this has declined to about 20 percent—a fact reflected in the country’s debasing of GDP, which was carried out in 2021. Kenya is also trying to diversify its exporting industries towards nontraditional sectors. Today, 40 percent of Kenya’s exports are within the region, and these are mostly manufactured goods. With a strong base in manufacturing, Kenya is uniquely placed to benefit from the recently launched African Continental Free Trade Area.
Regarding inequality, the country clearly benefited from the constitutional change of 2010, because the devolved system of government significantly reduced regional disparities. Historically, the northern part of the country, for example, has lagged behind in terms of development because of its severe (semi-desert) climatic conditions. With the new system, funds are more easily transferred and more effectively administered by the regional and local governments, and inequality between rural and urban areas has clearly been reduced. The process of financial inclusion mentioned above, which was given major impetus by the introduction of mobile money in 2007, has been a second driver of reduced inequality. Segments of the population at the lower end of the income distribution have benefited most from this process, because it has opened the door to financing opportunities to start businesses, increase human capital, and so on.
Minority rights are also better protected with the decentralized system of government. The 2010 Constitution enables the state to put in place affirmative action programs to protect minorities and marginalized groups. Communities and ethnic groups that were somewhat marginalized before have been empowered in different regions. Even at a political level, it is clear that there is an effort to include previously silenced communities. The work carried out by civil society organizations has also been crucial on this point, in terms of creating an awareness about minority rights and demands in different parts of the country. This was demonstrated by the broad-based civic education carried out during the constitutional review process that culminated in the 2010 Constitution.
One of the primary goals of the political leadership that took power after 2002 was to improve the level and quality of education in the country. The aim was to reach 100 percent enrollment in primary education, and to increase significantly the enrollment levels in secondary and university education. However, the starting point was very low, so there is still a long way to go, particularly in secondary and tertiary enrollment. According to UNICEF, before the COVID-19 pandemic, nationwide enrollment in primary education in Kenya was at 93 percent while secondary school enrollment was only at 53 percent. Another important aspect is that increasing enrollment at a very fast pace requires vast resources to ensure that the quality of the education pupils receive is high. And this is not always the case in Kenya, even though education forms a very large part of the government budget. Some educational indicators, like the number of teachers, have not kept up with the levels of enrollment. The pupil-to-teacher ratio remains very high in some Kenyan counties. For example, in Turkana County in northern Kenya, it is at 77:1 according to UNICEF. So, the big challenge for the country at present is to improve both quality and quantity.
Once again, the 2010 Constitution will have major effects on life expectancy, and health more generally, but these are probably going to take longer to materialize in the data. Moreover, the slowing of progress on the health indicator in the decade before the COVID-19 pandemic may be explained by the same reason. The implementation of healthcare is now decentralized and run by the regional governments, even though healthcare policy is still in the hands of the central government. It is not easy to start running a regional health service from scratch, and there is obviously a learning period when indicators may even deteriorate. Inadequate resources provided by the national government to the counties and understaffed health facilities in many areas remain critical challenges. But in the medium and long run, once the implementation constraints begin to ease, it seems likely that healthcare services will be delivered more efficiently, and health statistics will show the results.
The future ahead
One of the critical issues that Kenya faces now is how to keep improving productivity. I see manufacturing as an obvious area for improvement, and this should include growing its share of GDP. Today, it is slightly below 10 percent, and Kenya should almost double that. I think we have a big opportunity in Africa with the implementation of the African Continental Free Trade Area. It would create tremendous opportunities for countries like Kenya that have some manufacturing base. Kenya is competing with manufactured goods from Asia and other places that have major cost advantages. Bigger markets, such as those that will become available through the African Continental Free Trade Area, can generate productivity improvements through export competition and also provide economies of scale benefits.
An important challenge for Kenya relates to the large share of informal employment. Moving part of these workers and firms towards formalization will ensure that economic opportunity and development are more stable. And, obviously, higher levels of formal employment and production generate larger and more stable sources of government revenue, as tax compliance is easier with formal sector firms. This will help the already firm path of fiscal consolidation that Kenya has followed in recent years. The current account deficit has also been declining, partly because of reduced imports, but also due to stronger and more competitive exports. This is a very promising path for Kenya, and the country now needs to take advantage not only of regional value chains, but also global value chains, particularly in areas like tourism where Kenya has long-standing experience and a diversity of tourist attractions.
But economic reform and development needs to be accompanied by continued institutional reform and transformation. Further pushing the inclusivity of institutions is the only way to ensure that increasing prosperity in Kenya is based on solid foundations and is therefore sustainable in the long run.
Robert Mudida is currently the director of the Research Department of the Central Bank of Kenya. He was a full-time academic for seventeen years, having taught and carried out extensive research at two leading universities in Africa: the University of Nairobi and Strathmore University. At Strathmore University he was full professor of political economy. He has published four books and numerous articles in top international peer-reviewed journals in the areas of political economy, financial economics, macroeconomics, and industrial organization.
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Image: General view of Nairobi in Kenya December 1, 2018. REUTERS/Ahmed Jadallah