Essays, poems and Stories of an African-American

Saturday, 22 November 2014

Why skyscrapers and superhighways are not development

Githunguri Dairy Cooperative Society, the owner of the Fresha brand, is rightfully feted as one of our most successful enterprises.
According to research conducted by the agricultural policy think-tank Tegemeo Institute, dairy farming in Githunguri, Kiambu, is at least six times more profitable than comparable (zero-grazing) smallholder dairy farming elsewhere in the country.
At the time Tegemeo conducted the research, Githunguri dairy farmers made a profit of Sh5,400 per dairy cow a month, six times more than similar farmers in Trans Nzoia and 13 times more than similar farmers in Kinangop, while farmers in Nyeri were making losses.
The higher profits in Githunguri reflects three factors, higher productivity (33 per cent more milk per cow), better prices (25 per cent more) and lower cost (30 per cent less).
One item that really stands out is maintenance and repair costs, primarily of vehicles used to transport milk.
Maintenance and repairs cost Githunguri farmers Sh143 per cow. Kinangop farmers paid spent seven times more (Sh1,048), Nyeri farmers eight times more (Sh1,115) and Trans Nzoia farmers paid, believe it or not, 20 times more (Sh2,860).
Roads as good as Githunguri’s, even assuming double the unit costs on account of longer distances since Trans Nzoia is much larger, would increase Trans Nzoia farmers’ profit per cow by 3.6 times.
My critique of large-scale infrastructure projects have been widely misread as opposition to infrastructure investment.
It is not. My contention in a nutshell is that the specific mega infrastructure projects we are investing in are mostly bad investments.
I have argued that even those that are economically viable are biased towards making existing capital more profitable at the expense of productivity raising, job creating investments.
It is noteworthy that Prof Mwangi Kimenyi (Saturday Nation, November 15) cites evidence of very high returns to education, but his assertion that large infrastructure projects “can have” high returns is speculative.
But he also writes that “evidence shows that paved roads may not necessarily yield as high returns as well-maintained non-paved roads.” My point precisely.
Dr Ndemo asserts in the same edition that the benefits of the Standard Gauge Railway far outweigh the costs. Where is the feasibility study that shows this? There isn’t one. It’s a belief.
In an earlier article, I asked why we were building a railway line next to another one instead of one from Lamu to Thika. Silence.
Dr Ndemo as I showed before, needs to work on his economic accounting.
Let us suppose that he succeeds spectacularly, builds his technocity within a year and creates 100,000 jobs contributing $2.5 billion to the economy annually (equivalent to five per cent of GDP, about the same as the mobile phone industry). How much will the techno-city contribute to growth?
In the year that it comes into being, it would bump up growth by five percentage points, that is, if the economy would have grown by five per cent otherwise, growth will be 10 per cent.
Thereafter its contribution to growth will be zero. The techno-city will have expanded the economy one off, but it will have no impact on the growth rate thereafter (for the mathematically inclined, an intercept shift with no change in slope).
What we will end up with is a high productivity enclave unconnected to the rest of the economy.
The Lappset project exhibits the same enclave thinking.
The counties that it traverses have over 70 per cent of our livestock, but remarkably, the livestock economy does not feature at all in the project – an issue I have raised with the authorities in charge of the project.
The northern Kenya pastoralists will have to be content with watching trains and cars zooming past and planes taking off and landing as they graze their animals —as their southern counterparts have done for a century.
This is not what economists mean by growth.
By economic growth we mean and are interested in widespread and sustained rise in productivity, year after year, that translates into mass prosperity. Let’s go back to the cattle.
We have an improved dairy cattle herd of 3.5 million animals owned by an estimated 650,000 dairy farmers, an average of 5.4 animals per farmer.
The average yield per cow is 2,500 kg a year which works out to seven kg a day. If Githunguri farmers can get 19 kg, there is no reason why others elsewhere cannot do likewise.
In fact, when you visit dairy farmers anywhere in the country, they don’t talk of Holland, New Zealand or South Africa.
They talk of Githunguri — so much so that the co-operative now charges them a hefty fee when they visit.
If we value milk at Sh35 per kilo, the average output per farmer works out to Sh470,000 a year. In Githunguri it is close to three times as much at Sh1.23 million. How to raise the output of 600,000 farmers from Sh470,000 per farmer to Sh1.24 million is the kind of growth question that those of us Dr Ndemo calls orthodox economists are interested in. It’s not glamorous, it does not inspire metaphors like Silicon Savannah, or slick Dubai-like graphics to put on Vision 2030 promotional material, but it sure gets the job done.
If you doubt, visit Githunguri town. There are more banks than in the entire old North Eastern province and plots cost as much as in Nairobi.
Konza will not be our first mega project to build.
In the early 90s we borrowed money from the World Bank to build a state-of-the-art EPZ facility in Athi River. We offered generous tax incentives such as a 20-year income tax holiday.
Did they come? No. They went to Bangladesh. Today we are exporting $200 million worth of garments with help from Agoa— they were in ICU before Agoa came along.
Bangladesh is exporting $20 billion. Bangladesh infrastructure is no better than ours. Electricity is unreliable — two weeks ago there was a nationwide blackout for a whole day.
So why is Bangladesh exporting 100 times more? Plentiful cheap labour, that’s why. The minimum wage for Bangladeshi garment workers was recently raised to $70 per month following a very tragic fire in a crowded Dhaka sweatshop.
Ours is more than double that ($170), and even significantly higher than other Asian competitors such as Vietnam and Cambodia ($100-120).
But cheap labour is not the only competitiveness driver in the industry. Turkey rivals Bangladesh in value of garment exports, but its industry wage is more than twice ours ($380).
This is because Turkey has positioned its industry for the high end, fashion oriented market. Our labour is not cheap enough to compete with Bangladesh, Cambodia, Laos and the like in the low value market, or skilled enough to compete with Turkey, Tunisia, Morocco and the like in the high value market.
We are, as we say in my language, neither with the skin nor with the flesh.
During his tenure as permanent secretary in charge of ICT, Dr Ndemo did a sterling job. It is paying off.
ICT services are now our fourth largest foreign exchange earner (after transportation services, tea and tourism), on course to overtake tourism and possibly also tea sooner rather than later.
We earned $940 million from ICT services in 2012, up from only $40 million in 2000. Impressive. But over the same period the Philippines increased theirs from $360 million to $12 billion. India’s grew from $13 billion to a phenomenal $50 billion. What are they doing differently?
ICT service exports fall in two categories “ICT Services” and “ICT enabled business services”.
The former includes software, consultancy and data storage, processing and transmission services, and the latter is what the industry calls business process outsourcing. All our recorded earnings are from ICT services. Business process outsourcing exports have not yet registered on the statistical radar.
By contrast, in 2012, India earned 11 times more from business process outsourcing than ICT services, while the Philippines earned five times more.
It’s not the techies who are raking in the cash—it’s the customer service staff, book keepers, medical technologists, technical draftsmen, proof-readers and so on.
The Philippines market positioning statement for the business process outsourcing industry lists six value propositions for prospective investors and customers namely talent pool, Filipino workforce, cost competitiveness, infrastructure, Government support / public private partnership and track record.
On talent pool, it highlights “500,000+ college graduates per year” and “western based legal and accounting education and certification.”
On the Filipino workforce, it exalts a service culture, adaptability, compassion and loyalty – what the HR profession calls “soft skills”.
On cost competitiveness, it avers that Filipino labour costs for English speaking professionals are among the lowest in the world.
On Government support, it emphasizes education.
Evidently, the Philippines sees its people as its key asset and competitive edge.
Even on infrastructure it’s offering highlights, in addition to telecoms and power, plentiful cheap real estate “in several locations and cheap transport “available 24/7”— investors don’t have to worry about housing or transporting night shift workers.
The irony is that it is the high value end of the business process outsourcing industry that least requires fancy new infrastructure. Outsourcers of accounting or legal back office work for instance are probably not too particular where it is done as long as it’s done cheaply, meticulously and on time.
A one-technocity strategy seems to me to defeat the purpose of building a national fiber-optic backbone —I had assumed the purpose of taking fiber to the counties was to take business there. As with the EPZs, we continue to confuse form for substance.
Some people have wondered why I make a case of investing in yet more human capital when we have 40 per cent unemployment including “millions” of unemployed graduates. We don’t have 40 per cent unemployment—we could not survive it.
When we last counted, unemployment was 13 per cent (1.9 million people), over 80 per cent of them young unskilled primary (50 per cent)and secondary school leavers (34 per cent).
There were 17,000 unemployed university graduates and 200,000 employed ones making a grand national total of 217,000 — one percent of the labour force. We are not exactly a highly educated society.
Can we guarantee investors 100,000 reliable skilled workers in the next five years? As it is, high staff turnover is one of the big challenges facing Kenyan business process outsourcings —and we are talking customer service staff.
In countries oversupplied with skilled workers, banks don’t poach tellers from each other. A 100,000 primary-schooled athletic AK-47 marksmen we can supply for sure (with own weapon if required). Good workers I doubt.
My dear #Nairobi-bubble Kenyans. You need to know your country.
David Ndii is Managing Director of Africa Economics


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