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Arrested development: East Africa vs South Korean growth

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By IEA KENYA
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The year is 2018 and the average East African – let us call her Kazuri – is richer than her Chinese and Russian counterparts.

A citizen of an industrialised region, earning $12,723 per annum and owes much of her wealth to manufactured goods produced in her country, from cellular phones and refrigerators to merchant vessels and warships, aircraft and luxury vehicles, you name it, East Africa makes it.

East Africa is of course not large enough a market to absorb all these expensive and sophisticated goods that the region produces. But that is not a problem.

The global market is large enough and in fact cannot have enough of East Africa’s goods.

There are more than enough buyers for the industrial goods that German, Korean and the East African manufacturers are producing.

An insightful East African reader suspects by now that we have played an awful trick on his mind.

If his perceptions and insights suggest that he is not that wealthy, he is right. The average income for East Africans is $700 per annum.

And the reason for this low level of income is that the region has remained largely agricultural, with most jobs and incomes coming from agricultural activities.

Viewed in another way, East Africa is a low manufacturing and industrial region.

Industrialisation is the process by which a nation changes its major source of income from agriculture-based activities to manufacturing.

Industrialisation has an unmatched record of lifting large numbers of people out of poverty, raising national incomes and increase employment rates.

A comparison of East Africa’s and South Korea’s industrialisation history, by focusing on its effects on incomes, employment creation and economic activities, illustrates how the region was left behind.

In 1960, the average South Korean earned $158.24 whereas the average Kenyan (Kenyans have the highest average income in the region) earned $97.62.

By 2017, the average income per Kenyan had grown to $1,507 while the equivalent for a South Korean had reached $29,742.84.

This means that in 1960, a South Korean’s wealth was only about twice that of a Kenyan. In 2017, the average South Korean citizen had become 20 times wealthier.

Even more astonishing is the fact that since 1960, South Korea’s total annual income has grown by about 188 times, whereas Kenya’s has only grown 15.45 times.

Had Kenya’s economic wealth grown by the same factor as South Korea’s, a Kenyan would be earning an income of $18,348 today.

The level of growth seen in South Korea has also been observed in Taiwan, Hong Kong and China, all of which raised their incomes on the back of the manufacturing industry.

China’s story is particularly remarkable as it lifted 400 million of its citizens out of poverty within 30 years.

What explains the disparity in incomes between a developing country in Asia and those in East Africa?

In 1960, the manufacturing sectors of South Korea, Uganda and Kenya were comparable.

Then, South Korea’s manufacturing sector made up 11.23 per cent of the economy, whereas Kenya and Uganda’s made up 8.71 per cent and 8.15 per cent respectively.

By 2017, the contribution of manufacturing to South Korea’s economy had more than doubled to 27.57 per cent, while for Kenya and Uganda, it has hovered around eight per cent.

This disparity suggests that South Korea’s faster growth and greater incomes are linked to the successful expansion of its manufacturing sector, unlike Kenya, Uganda and rest of East Africa.


Changes to the agriculture sector’s share of gross domestic product, however, places in relief the changes observed in the other sectors.

In 1960, Korea’s agricultural sector made up 36.23 per cent of that nation’s economy while Kenya and Tanzania’s agricultural sectors comprised 35.35 per cent and 29.88 per cent respectively.

As the years passed, the difference between the evolutions of the two nations’ agricultural sectors becomes stark.

Where South Korea’s agriculture sector comprises a relatively insignificant 1.96 per cent of Korea’s GDP in 2017, Kenya’s and Uganda’s agricultural sectors are up to 15 times larger, and yet the income levels of citizens of the latter two is much lower.

Clearly, East Africa’s low incomes are a factor in its failure to restructure economies and shift the centre of growth and income towards manufacturing and away from agriculture.

Put another way, South Korea’s manufacturing sector growth and the subsequent decline in its agricultural sector seems to explain the large difference in incomes between it and East Africa.

Manufacturing as a source of employment.

Most East Africans work in the agriculture sector, where incomes are still very low, despite being the largest and most lucrative sector of the economy.

This leads to the question: How does industrialisation affect availability of jobs?

Industrialisation, because it involves adding value to basic material and producing sophisticated products, requires many levels of skilled workers.

This can create a big base for employment, especially in developing nations with low costs of labour.

Industrialisation creates both direct and indirect employment.

The increase in employment in the manufacturing sector is a sign of industrialisation and confirmation that the composition of the economy is changing.

An analysis of the evolution of sectoral shares of employment rounds out the analysis on the economic changes of East Africa as compared with South Korea.

Sectoral employment is a reflection of the economic structure of a nation.

Where a sector is a veritable source of higher incomes, the region’s average incomes should be reflected in that sector’s contribution to employment.

In the 26 years from 1991 to date, Ethiopia’s manufacturing sector employment rose from 2.184 per cent to 9.375 per cent of all employment in that country.

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The dramatic changes in employment in Rwanda’s and Ethiopia’s manufacturing sector employment can be partly explained by both nations’ emergence from civil war and the stabilising economic reforms that followed.

Both nations were starting from a relatively low manufacturing base.

Kenya’s manufacturing share of employment grew from 15.9 per cent in 1991 to 25.73 per cent in 2017.

This partly reflects the primacy of Kenyan manufacturing sector in the region, albeit small when compared with South Korea’s.

In the rest of East Africa, the manufacturing sector share of employment remained stagnant.

On the other hand, South Korea’s employment share in manufacturing shrank from a peak of 36 per cent in 1991 to 24.78 per cent in 2017. This calls for a closer look at other sectoral changes.

In East Africa, Kenya’s services sector employs more people than happens in other regional countries.

But it is obvious that South Korea’s and Kenya’s services sectors are made up of very different ingredients because the average services sector worker in South Korea earns more than the services sector worker in East Africa.

This can be down to the sophistication of products produced by each sector.

A robust manufacturing sector offers higher wages that attract workers from low paying agricultural jobs.

This is because the sector has a higher productivity and creates goods of higher value.

Higher incomes then promote demand for more domestic goods and services. This in turn leads to improving the living standards of the people and an increase in the overall productivity of the economy.

So, where Korea’s manufacturing sector’s share of total employment has shrunk in favour of its services sector, East Africa maintains a large agricultural sector, employing a large proportion of the workforce but has an unsophisticated services sector.

In Korea, only about five per cent of citizens today work in the agriculture sector. This put together suggests that Korea’s manufacturing industries drove economic growth, raised average incomes and added to total employment.

The opposite is true of East Africa. The agriculture sector is dominant, the manufacturing sector is stunted and produces basic goods and the service sector is not so sophisticated either. This explains the difference in the incomes and welfare of the people of East Africa and South Korea.

Coming back to the reality in East Africa, Kazuri probably works on a farm but desires a job in the manufacturing sector.

The case of a Korean of the same age as Kazuri is different. Most probably the Korean’s grandparents were farm labourers and her parents toiled in factories that produced clothing and other textiles, but she is likely to be a lawyer, an accountant or a banker.

Her employer owes the existence of the firm to the large local manufacturers to whom it offers services. This is the reality for many Koreans today.

An industry adds value to a basic good. Let’s assume Kazuri owns forestland inherited from her family.

Ideally, forests are considered a factor of production for the agro-forestry sector. Kazuri can opt to either sell the land, or harvest the trees and sell timber, or use the timber herself to produce furniture or music instruments.

It is evident that if she was a wood worker, she could reap greater economic benefits from her forest.

The wood worker who transforms Kazuri’s timber into music instruments or furniture will earn more from the “added’’ value to the wood.

The said wood worker will invariably earn more out of the forest than Kazuri, the lumberjack and everyone down the chain offering intermediary services.

But over time, everyone along the production chain of agro-forestry can earn more if the value of the final product is higher than raw timber.

At the very core, it is the prospect of adding value to this basic product (wood) that generates profit that serves to motivate all workers in the sector.

Furthermore, they will seek ‘‘innovations’’ and make investments that will contribute to the process of value addition.

This in essence, is how the process of industrialisation grows out of agriculture and raw natural resources.

If she was interested in earning more from her forest, Kazuri would do well to educate herself in the work of transforming on wood into high value goods. What is true for Kazuri also applies to the economy.

Japan, South Korea and the United States sell products that demand innovation and investment in research and development.

It takes valuable technical skill to build the Boeing 787 Dreamliners that Tanzanian, Kenyan and Ethiopian airlines fly.

The historical background we have explained here, illustrates how economic sectors are interlinked. Evolutions in the agricultural and manufacturing sectors have the effect throughout the economy.

Countries raise their incomes by producing goods of ever increasing sophistication and value.

South Korea owes its growing wealth to the Hyundai and Samsung products, that are so ubiquitous in the global market.

Hyundai Motor Group, Korea’s largest car manufacturer, reported revenues of $221.91 billion ($12.24 billion in net profits) in 2016 and represents a part of Korea’s automotive industry that is itself a wing of that nation’s greater manufacturing industry.

More dramatic, perhaps, is Samsung’s history as a noodles and groceries trader.

Both are emblematic of South Korea’s sensational rise to an industrial giant starting from an economy dominated by farming families to a modern one dominated by industrial firms.

The value of South Korean manufacturing was $379 billion in 2016, exceeding the entire annual output of the greater East African economy of 300 million people.

By 2017, South Korea’s GDP stood at $1.53 trillion to Ethiopia’s $80.5 billion and Kenya’s $75 billion.

It is clear from this historical accounting of growth and development that East Africa cannot count on natural resource revenues to drive the growth of national income and standards of living.

South Korea represents a model of economic growth for East Africa because the nation’s profile as a resource-poor nation resonates with countries in East Africa.

In our next part of this series, we will examine what economic promise manufacturing sector growth holds.

The Institute of Economic Affairs is a Nairobi-based think tank.

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General

Sordid tale of the bank ‘that would bribe God’

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Bank of Credit and Commerce International. August 1991. [File, Standard]

“This bank would bribe God.” These words of a former employee of the disgraced Bank of Credit and Commerce International (BCCI) sum up one of the most rotten global financial institutions.
BCCI pitched itself as a top bank for the Third World, but its spectacular collapse would reveal a web of transnational corruption and a playground for dictators, drug lords and terrorists.
It was one of the largest banks cutting across 69 countries and its aftermath would cause despair to innocent depositors, including Kenyans.
BCCI, which had $20 billion (Sh2.1 trillion in today’s exchange rate) assets globally, was revealed to have lost more than its entire capital.
The bank was founded in 1972 by the crafty Pakistani banker Agha Hasan Abedi.
He was loved in his homeland for his charitable acts but would go on to break every rule known to God and man.
In 1991, the Bank of England (BoE) froze its assets, citing large-scale fraud running for several years. This would see the bank cease operations in multiple countries. The Luxembourg-based BCCI was 77 per cent owned by the Gulf Emirate of Abu Dhabi.  
BoE investigations had unearthed laundering of drugs money, terrorism financing and the bank boasted of having high-profile customers such as Panama’s former strongman Manual Noriega as customers.
The Standard, quoting “highly placed” sources reported that Abu Dhabi ruler Sheikh Zayed Sultan would act as guarantor to protect the savings of Kenyan depositors.
The bank had five branches countrywide and panic had gripped depositors on the state of their money.
Central Bank of Kenya (CBK) would then move to appoint a manager to oversee the operations of the BCCI operations in Kenya.
It sent statements assuring depositors that their money was safe.
The Standard reported that the Sheikh would be approaching the Kenyan and other regional subsidiaries of the bank to urge them to maintain operations and assure them of his personal support.
It was said that contact between CBK and Abu Dhabi was “likely.”
This came as the British Ambassador to the UAE Graham Burton implored the gulf state to help compensate Britons, and the Indian government also took similar steps.
The collapse of BCCI was, however, not expect to badly hit the Kenyan banking system. This was during the sleazy 1990s when Kenya’s banking system was badly tested. It was the era of high graft and “political banks,” where the institutions fraudulently lent to firms belonging or connected to politicians, who were sometimes also shareholders.
And even though the impact was expected to be minimal, it was projected that a significant number of depositors would transfer funds from Asian and Arab banks to other local institutions.
“Confidence in Arab banking has taken a serious knock,” the “highly placed” source told The Standard.
BCCI didn’t go down without a fight. It accused the British government of a conspiracy to bring down the Pakistani-run bank.  The Sheikh was said to be furious and would later engage in a protracted legal battle with the British.
“It looks to us like a Western plot to eliminate a successful Muslim-run Third World Bank. We know that it often acted unethically. But that is no excuse for putting it out of business, especially as the Sultan of Abu Dhabi had agreed to a restructuring plan,” said a spokesperson for British Asians.
A CBK statement signed by then-Deputy Governor Wanjohi Murithi said it was keenly monitoring affairs of the mother bank and would go to lengths to protect Kenyan depositors.
“In this respect, the CBK has sought and obtained the assurance of the branch’s management that the interests of depositors are not put at risk by the difficulties facing the parent company and that the bank will meet any withdrawal instructions by depositors in the normal course of business,” said Mr Murithi.
CBK added that it had maintained surveillance of the local branch and was satisfied with its solvency and liquidity.
This was meant to stop Kenyans from making panic withdrawals.
For instance, armed policemen would be deployed at the bank’s Nairobi branch on Koinange Street after the bank had announced it would shut its Kenyan operations.
In Britain, thousands of businesses owned by British Asians were on the verge of financial ruin following the closure of BCCI.
Their firms held almost half of the 120,000 bank accounts registered with BCCI in Britain. 
The African Development Bank was also not spared from this mess, with the bulk of its funds deposited and BCCI and stood to lose every coin.
Criminal culture
In Britain, local authorities from Scotland to the Channel Islands are said to have lost over £100 million (Sh15.2 billion in today’s exchange rate).
The biggest puzzle remained how BCCI was allowed by BoE and other monetary regulation authorities globally to reach such levels of fraudulence.
This was despite the bank being under tight watch owing to the conviction of some of its executives on narcotics laundering charges in the US.
Coast politician, the late Shariff Nassir, would claim that five primary schools in Mombasa lost nearly Sh1 million and appealed to then Education Minister George Saitoti to help recover the savings. Then BoE Governor Robin Leigh-Pemberton condemned it as so deeply immersed in fraud that rescue or recovery – at least in Britain – was out of the question.
“The culture of the bank is criminal,” he said. The bank was revealed to have targeted the Third World and had created several “institutional devices” to promote its operations in developing countries.
These included the Third World Foundation for Social and Economic Studies, a British-registered charity.
“It allowed it to cultivate high-level contacts among international statesmen,” reported The Observer, a British newspaper.
BCCI also arranged an annual Third World lecture and a Third World prize endowment fund of about $10 million (Sh1 billion in today’s exchange rate).
Winners of the annual prize had included Nelson Mandela (1985), sir Bob Geldof (1986) and Archbishop Desmond Tutu (1989).
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Tracking and monitoring motor vehicles is not new to Kenyans. Competition to install affordable tracking devices is fierce but essential for fleet managers who receive reports online and track vehicles from the comfort of their desk.

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Agricultural Development Corporation Chief Accountant Gerald Karuga on the Spot Over Fraud –

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Gerald Karuga, the acting chief accountant at the Agricultural Development Corporation (ADC), is on the spot over fraud in land dealings.

ADC was established in 1965 through an Act of Parliament Cap 346 to facilitate the land transfer programme from European settlers to locals after Kenya gained independence.

Karuga is under fire for allegedly aiding a former powerful permanent secretary in the KANU era Benjamin Kipkulei to deprive ADC beneficiaries of their land in Naivasha.

Kahawa Tungu understands that the aggrieved parties continue to protest the injustice and are now asking the Ethics and Anti-corruption Commission (EACC) and the Directorate of Criminal Investigations (DCI) to probe Karuga.

A source who spoke to Weekly Citizen publication revealed that Managing Director Mohammed Dulle is also involved in the mess at ADC.

Read: Ministry of Agriculture Apologizes After Sending Out Tweets Portraying the President in bad light

Dulle is accused of sidelining a section of staffers in the parastatal.

The sources at ADC intimated that Karuga has been placed strategically at ADC to safeguard interests of many people who acquired the corporations’ land as “donations” from former President Daniel Arap Moi.

Despite working at ADC for many years Karuga has never been transferred, a trend that has raised eyebrows.

“Karuga has worked here for more than 30 years and unlike other senior officers in other parastatals who are transferred after promotion or moved to different ministries, for him, he has stuck here for all these years and we highly suspect that he is aiding people who were dished out with big chunks of land belonging to the corporation in different parts of the country,” said the source.

In the case of Karuga safeguarding Kipkulei’s interests, workers at the parastatals and the victims who claim to have lost their land in Naivasha revealed that during the Moi regime some senior officials used dubious means to register people as beneficiaries of land without their knowledge and later on colluded with rogue land officials at the Ministry of Lands to acquire title deeds in their names instead of those of the benefactors.

Read Also: Galana Kulalu Irrigation Scheme To Undergo Viability Test Before Being Privatised

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“We have information that Karuga has benefitted much from Kipkulei through helping him and this can be proved by the fact that since the matter of the Naivasha land began, he has been seen changing and buying high-end vehicles that many people of his rank in government can’t afford to buy or maintain,” the source added.

“He is even building a big apartment for rent in Ruiru town.”

The wealthy officer is valued at over Sh1.5 billion in prime properties and real estate.

Last month, more than 100 squatters caused scenes in Naivasha after raiding a private firm owned by Kipkulei.

The squatters, who claimed to have lived on the land for more than 40 years, were protesting take over of the land by a private developer who had allegedly bought the land from the former PS.

They pulled down a three-kilometre fence that the private developed had erected.

The squatters claimed that the former PS had not informed them that he had sold the land and that the developer was spraying harmful chemicals on the grass affecting their livestock and homes built on a section of the land.

Read Also: DP Ruto Wants NCPB And Other Agricultural Bodies Merged For Efficiency

Naivasha Deputy County Commissioner Kisilu Mutua later issued a statement warning the squatters against encroaching on Kipkuleir’s land.

“They are illegally invading private land. We shall not allow the rule of the jungle to take root,” warned Mutua.

Meanwhile, a parliamentary committee recently demanded to know identities of 10 faceless people who grabbed 30,350 acres of land belonging to the parastatal, exposing the rot at the corporation.

ADC Chairman Nick Salat, who doubles up as the KANU party Secretary-General, denied knowledge of the individuals and has asked DCI to probe the matter.

Email your news TIPS to [email protected] or WhatsApp +254708677607. You can also find us on Telegram through www.t.me/kahawatungu

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William Ruto eyes Raila Odinga Nyanza backyard

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Deputy President William Ruto will next month take his ‘hustler nation’ campaigns to his main rival, ODM leader Raila Odinga’s Nyanza backyard, in an escalation of the 2022 General Election competition.

Acrimonious fall-out

Development agenda

Won’t bear fruit

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