Why value addition pays more
Processing of tea leaves through crush, tear and curl method at Gathuthi tea factory in Nyeri. Value addition can ensure farmers earn more from their produce.
What you need to know:
- The Covid-19 pandemic dealt a blow to the global economy, and Kenya was no exception.
- Kenya has made great progress over the past few years, especially with the transport infrastructure.
Forecasts indicate that the population in Africa will cross the 2.5 billion mark by the year 2050. Fred Swaniker, founder and chief executive of African Leadership Group, quoted, "if we do not create jobs for an extra one billion people in Africa by 2050, we are sitting on a ticking time bomb."
What would it take to create such a large number of jobs? Industrialisation is arguably the most pertinent and talked about subject among policymakers across Africa. Most economies have witnessed the promise of industrialisation during political campaigns, with its acknowledged ability to bring prosperity, new jobs, and better incomes for all. The population deserves and wants a better quality of life.
Policymakers need to reduce the cost of essentials by introducing pricing guidelines, create a consistent stream of jobs while ensuring the economy does not suffer supply shocks. Introducing policies that would attract investors to finance manufacturing would be a blessing for the product value chain.
The Covid-19 pandemic dealt a blow to the global economy, and Kenya was no exception. There has been an increase in the levels of economic uncertainty and growing unemployment, compounded with rising costs of living brought about by disrupted supply chains, rising fuel costs, lower levels of production, and drought.
As the economy tries to emerge from the pandemic, inflation rates are still on the rise and the solution to the problem is to create employment and strategise to reduce supply shocks by increasing local production. Development and industrialisation go hand in hand.
Kenya has made great progress over the past few years, especially with the transport infrastructure. A prime example is the Nairobi expressway, a milestone achieved by the government. There has also been great emphasis on the Big Four agenda of food security, affordable housing, universal health care, manufacturing, and job creation.
Although Kenya is the most industrially developed country in East Africa, manufacturing accounts for only 14 percent of GDP. As can be witnessed in most countries across Africa, it is difficult to industrialise without reliable and cost-effective power supply, water supply, and efficient transportation of goods to and from ports. It is time for countries to think about ways to reduce fuel dependency where possible. Africa has fuel-producing States, yet the continent has very few refineries.
During the industrial revolution of the 19th Century, there was a scramble for Africa, primarily because it generated an increasing demand for low-cost raw materials that were widely available throughout the continent.
Perhaps the continent is being exploited by powerful donor States to a point where carefully designed protectionist policies are required. Change is taking place and most major economies across Africa are gradually witnessing improved infrastructure and development, while maintaining the environment and green spaces.
What are the manufacturing opportunities to be spotted? The continent has a population of close to 1.4 billion people, of which the majority are less than 23 years old. There is a big pressure in terms of unemployment. Focusing on manufacturing will help resolve this problem.
Africa is blessed with agriculture and natural resources. Gone are the days when Africa should be, for instance, exporting raw cashew nuts and gin cotton rather than the finished product. We need to focus more on value addition. If countries focus on value addition, employment opportunities would increase and economies would not use as much foreign currency as they otherwise would.
Over the past two years, Kenya’s exports have fallen substantially in contrast to imports. The Central Bank of Kenya has directed commercial banks to ration dollars due to a shortage of the US currency and depletion of reserves, impacting manufacturers and importers. Shortages are attached to cost implications, these added costs are eventually pushed onto the end consumer leading to an escalating inflationary situation.
Many countries, including South Africa, Mozambique, Zambia, Kenya, and Tanzania, are focusing on impact investing. The textile industry across the African continent is suffering. Countries across Africa produce huge quantities of cotton. After separating the seeds from the lint, the cotton is exported. Benin exports much of the world’s cotton needed by textile factories abroad and still remains one of the world’s poorest nations.
There are many barriers that should be corrected to encourage manufacturers to set up shop in the region. What hinders countries from picking up this low-hanging fruit and attract investors for specialised setups enabling ginning, spinning, weaving, processing, mercerising, dyeing, printing, knitting, and garmenting to take place locally? The same applies to manufacturing across a vast range of products from flooring/building materials to domestic items.
Rwandan Economist Donald Kaberuka quotes, "We have to figure out how to use the resources of this continent for its own transformation." Almost six decades since independence, most African countries export their underpriced raw materials to processing factories in Europe and Asia before final products are shipped back to be sold at a higher price.
There are now some coffee processing plants across Kenya, Ethiopia, and Uganda. However, previously, these same countries were exporting almost all the coffee beans to countries, including the UK for processing, and later importing expensive processed coffee from Europe.
This is now changing, and economies have started developing solutions that can result in the full production of items in all stages. Kenya is the top exporter of black tea in the world. Yet, it is hard to export tea from Kenya to Cameroon as compared to exporting it to France and then from France to Cameroon.
Ghana and Ivory Coast are yet to work on their product value chains and process cocoa beans to make chocolate for export. Ghana exported cocoa beans amounting to $1.28 billion, making it the second-largest exporter of cocoa beans in the world. The country could benefit from processing cocoa and producing chocolate.
Countries must practice sophisticated or "smart protectionism" to impose temporary tariffs to shield budding industries from the negative effects of cheap imports as part of a strategy to industrialise. At the moment, Africa is awash with cheaper and sometimes substandard products, mostly imported from China and other nations for basic items.
According to the Africa Economic Development report, during the year 2020, Zimbabwe spent $105 million importing wooden toothpicks, diapers, and chewing gum. Rich countries preach a free market to poorer countries in order to capture the largest share of the poor countries' market share.
If we look at employment beyond manufacturing, in the finance sector, where brokerage firms are also suffering losses, and the securities exchange is impacted, perhaps policymakers could consider removing withholding tax from dividends to encourage local and foreign investors to invest in the shares of blue-chip companies.
The commodities that we export raw could be processed locally if the value creation chain is strengthened. Kenya is blessed with bountiful nature. Most of all, we need to preserve our nature and make money out of what is naturally ours, keeping in mind our responsibility to build a green economy.
Ritesh Barot is a business and financial analyst, humanitarian, conservationist, occasional artist, recipient of OGW honor. [email protected]
