Smart manufacturing and our future competitiveness

Thomas Rogers Muyunga Mukasa shares this blog with those who have Africa's development at heart and in their planning agenda. Enjoy reading.

By BITANGE NDEMO
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The manufacturing sector is changing everywhere, except in Africa. New concepts like New Manufacturing Economy (NME) are emerging and leveraging the increasing number of highly educated young people.

Africa has plenty of these graduates languishing in the streets, looking for jobs. What is lacking is someone to connect the dots and put Africa in manufacturing's driving seat.

According to Wikimedia, the NME describes the role of advanced manufacturing in the rise of the New Economy.

The term describes manufacturing enabled by digital technologies, advanced systems and processes, and a highly trained, knowledgeable workforce.

The new manufacturing economy integrates networks, 3D printers and other proficiencies into business strategies to further develop manufacturing practices.

In his column for the New York Times, Thomas Friedman references Lawrence F. Katz, who notes that hubs of "universities, high-tech manufacturers, software/service providers and highly nimble start-ups" are a needed economic development strategy.

This is very similar to NME even though that exact term is not used.

A Time magazine feature article, “What is Smart Manufacturing ?”, says that in the near future, the global manufacturing sector will look nothing like it does today.

Advanced manufacturing technology is rapidly transforming the global competitive landscape.

The companies — and nations — that act now to seize its promise will thrive in the twenty-first century. Those that are devoted to incremental change and fail to engage in smart manufacturing will rapidly fall behind.

Profound transformations are coming within this decade in the way goods are manufactured, changes that will fundamentally alter the worldwide competitive marketplace.

MANUFACTURING INTELLIGENCE

The Time article proposes that smart manufacturing technologies will drive these transformations in three rapid progressive phases:

1. The integration of all manufacturing data throughout individual plants and across enterprises will facilitate significant, immediate improvements in costs, safety and environmental impacts.
2. This data, paired with advanced computer simulation and modelling, will create robust “manufacturing intelligence” that will enable flexible manufacturing, optimal production rates, and faster product customisation.
3. As that manufacturing intelligence grows, it will inspire innovations in processes and products that comprise smart manufacturing’s promise — a major market disruption such as a $3,000 automobile or a $300 personal computer.

The article further emphasizes that the countries and companies that strategically start this journey toward smart manufacturing and are first to achieve “manufacturing knowledge” will earn long-term competitive advantages well into the coming decades.

A Wall Street Journal article, “Germany Bets on ‘Smart Factories’ to Keep Its Manufacturing Edge” highlights what the manufacturing of the future looks like.

The trouble with us is that we shall be in denial that old manufacturing practices employ more people without paying attention to the efficiencies that will make us more competitive than other countries.

SUGAR CANE IN MAURITIUS

The unions, without fully understanding exactly where the jobs would be lost and new ones created, opposed the use of machines in tea-picking, arguing that many people would lose jobs.

We are now paying for decisions that were not backed by any evidence. Our tea production is no longer competitive, and returns to farmers are dwindling.

The sugar industry is crumbling under the weight of escalating costs, lack of innovative production methods and the fear of any form of reforms.

We can borrow a leaf from other countries. Mauritius, which found itself in trouble with sugar cane production, is reversing its losses by focusing on large plantations after many years of producing sugar at $500 per tonne and selling it at $435 a tonne, reports the Inter Press Service news agency (IPS):

“To keep the industry alive, the government implemented drastic reforms. It centralised private sugar production factories and from the original 17 there are now four flexi-factories that crush cane, produce special and refined sugars, molasses, ethanol and renewable energy from bagasse — the fibrous pulp left over after cane is squeezed for its juice.”

ARCHAIC MACHINES

Soon they will also produce bio-plastic, reports IPS. The few smallholder farmers moved on while others were helped to set up eco-friendly methods that helped raise their incomes.

Any reforms that fall short of what the Mauritians did will be a waste of public resources. We lost the plot when we sold the molasses factory.

The Pan Paper mills, as well as our only oil refinery, are dead. The machines are too archaic and are only good for scrap metal. How did we not upgrade our production systems?

How come things worked well when Booker Tate managed Mumias? Is it too difficult for us to maintain, repair and innovate new ways of doing things?

Are we not able to learn from what the rest of the world is doing to be competitive? What is the benefit of the many benchmarking trips we make abroad when we cannot repair a leaking tap?

We need to answer all these questions when we take up positions of responsibility.

ENERGY NOT OUR ONLY PROBLEM

Until we take responsibility for our failures, even with a sound rescue plan we shall fall into the trap of blaming others for our own inadequacies.

This body of knowledge, about these manufacturing transformations around the globe, is not in our public discourse, including that of the Kenya Association of Manufacturers (KAM).

Indeed KAM has persistently sought to lower the cost of energy as if it is the only problem our manufacturing sector is facing.

According to the Kenya National Bureau of Statistics 2013 report, the manufacturing sector contribution to GDP worsened from 9.6 per cent in 2011 to 9.2 per cent in 2012, while the growth rate deteriorated from 3.4 per cent in 2011 to 3.1 per cent in 2012.

These adverse changes are attributed to high costs of production, stiff competition from imported goods, high costs of credit, and drought incidences during the first quarter of 2012.

WE STILL IMPORT 'MITUMBA'

Influx of counterfeits and volatility in international oil prices continued to affect the performance of the sector. Stiff competition and costs cannot just be dealt with piecemeal; we need to automate, be more creative with disruptive technologies and make bold policy decisions.

There is no justifiable reason why we continue to import mitumba clothes, cars and other accessories when we have preferential trade agreements like AGOA that can enable us to maximise on the economies of scale and lower the cost of manufacturing clothing.

We must wake up and make serious policy decisions like banning mitumba. New textile factories will come up with affordable clothing and no one will walk naked as a result of such a drastic policy decision.

What most people don’t know is the fact that majority of mitumba businesses are run by powerful cartels which benefit the most, while small traders hardly make any money.

DO THE 'OBAMA THING'

If we had the interest of people at heart, we would change technical schools into incubators or manufacturing hubs similar to President Obama’s National Network for Manufacturing Innovation (NNMI). It consists of regional hubs that will accelerate development and adoption of cutting-edge manufacturing technologies for making new, globally competitive products.

Over the last two years, he has acted to jump-start the network by launching four innovation hubs and initiating the establishment of four more, all by executive order while awaiting congressional action.

In my view, President Uhuru just needs to do the Obama thing through Executive order and we can start putting our youth to work.

I can attest to that fact because just last Friday, I took some of my 280 fourth-year entrepreneurship class students to the College of Agriculture and Veterinary Sciences, Upper Kabete, to show them opportunities in manufacturing with the research output from the college.

PASSIONATE STUDENTS

Our Lower Kabete campus is across the valley, barely two kilometres away, but these student have never been to Upper Kabete campus and hardly knew anything that went on there.

You could see the passion with which the students observed each pilot process. They want to design their own new products, but they will need an incubator to accelerate their ability to create new products.

The College of Engineering, where I have been working with Dr Kamau Gachigi, too has similar opportunities.

There is a need for a technology park, like in most universities, to accelerate new innovations through multidisciplinary approaches that remove silos that now exist even within one institution.

SHARE IDEAS WITH INDUSTRY

The role of universities is not just teaching and research; they also must foster synergies with the private sector as well as government to create a sustainable growth model.

Universities must provide the evidence for policy decisions, while seeking to understand the future direction of any industry through international collaborations and precipitate change at home.

There must be urgency to commercialise our research output through collaborative efforts, and share new ideas with industry. This how we can create the much-needed confidence to build competitive nations in Africa.

Julia Gillard, the former prime minister of Australia, said “Our future growth relies on competitiveness and innovation, skills and productivity... and these in turn rely on the education of our people.” We shall fail Africa if innovation, productivity and competitiveness are not part of our hearts and mind. 

Bitange Ndemo is a senior lecturer at the University of Nairobi's School of Business, Lower Kabete campus. He is a former permanent secretary in the Ministry of Information and Communication. Twitter: @bantigito

SUMMARY:

• The Pan Paper mills, as well as our only oil refinery, are dead. The machines are too archaic and are only good for scrap metal. How did we not upgrade our production systems?
• We must wake up and make serious policy decisions like banning mitumba. New textile factories will come up with affordable clothing and no one will walk naked as a result of such a drastic policy decision.
• Universities must provide the evidence for policy decisions, while seeking to understand the future direction of any industry through international collaborations and precipitate change at home.

Why Ndii’s view on Konza City and other projects is misleading

I like reading Dr David Ndii’s column and sometimes I agree with him on a number of issues. 

But in his November 8 column titled, ‘Human capital, not mega-projects, will turbo-charge economy’, he was dead wrong. I wish he had done a bit of research to know the impact of the Vision 2030 flagship projects. 

In my view, he should have spent his valuable time thanking former President Mwai Kibaki for an excellent job he did while he was at the helm and President Uhuru Kenyatta for showing maturity in continuing with these transformative projects. 

When historians come to write about Kenya, they will certainly recognise that it was the Kibaki administration that started what may be called indigenous thinking on how we can chart our economic future. 

MEASURED RISKS

Against all odds, President Kibaki allowed Cabinet ministers and senior civil servants to take measured risks to implement some of the most transformative projects in Kenya’s history. This is how we were able to implement the ICT infrastructure within a short period, giving rise to additional needs such as technology park that would help incubate start-ups and deepen our human capital.

The Konza City project did not drop from the sky, as Dr Ndii suggests. It was conceptualised in such a way that it would leverage on existing and future infrastructure. The expansion of the Mombasa highway into a dual carriage way and the Standard Gauge Railway (SGR) were meant to directly benefit Konza. The government was to spend funds on the infrastructure within the site and a few buildings to support the incubation of local start-ups. 

Most of the vertical infrastructure were to be built by the private sector. We took time to study how we could quickly diffuse technology and leverage on it to transform our economy. We travelled to India and the Silicon Valley, picked up the best practices and signed contracts with global technology companies to co-create and share intellectual property. This is how knowledge is sustainably transferred in modern days. 

(READ: Human capital, not mega-projects, will turbo-charge economy)

(READ: Of bullet trains and delusions of mega techno-cities)

FACILITATING INDUSTRY 

This was as a result of the fact that our university graduates were unemployable, and the private sector was stuck with archaic production systems with little research. 

Today, we see more failures in manufacturing than new companies because the government was not playing its role in facilitating industry and research institutions. Our aim was to create a development corridor similar to the Delhi-Mumbai industrial corridor — a State-Sponsored Industrial Development Project of the Government of India. The purchase of 5,000 acres in the Athi Basin marked the first step in the 1,000-mile project to see our own corridor that would spur the economy. 

The knowledge city was to incubate start-ups, pass the necessary skills to recruits and speed up their development into fully fledged companies that could provide skills and absorb many of our graduates, who, instead of utilising their knowledge, are selling second-hand clothes or running errands for politicians. Parallel to these efforts we asked the President to support the Open Data Initiative, which became the lifeblood of the nascent creative industry in Kenya. 

Indeed, he launched the initiative and more than 400 data sets were uploaded to the Kenya Open Data Initiative (KODI). We were laying the foundation stone for building a knowledge economy.

I was, therefore, perplexed by Dr Ndii’s article, which though it had the correct title, contained misleading content. How else can one develop human capital without the processes we were putting in place? I least expected Dr Ndii, a leading economist, to confuse human capital (the skills, knowledge, and experience possessed by an individual or population) and education (the process of receiving or giving systematic instruction, especially at a school or university). 

FUTURE WORKERS 

In fact, Korea’s success was as a result of its focus on development of skills within its several industrial parks and at technical and vocational education and training, which we have destroyed in favour of a theory-based education system.

In addition, several other successful countries such as Germany put more emphasis on three areas — pre-employment skills development to prepare future workers, in-service training to upgrade the work force’s skills and active labour market training programmes to reintegrate the unemployed and disadvantaged.
The ecosystem of Konza was to provide these three critical missing components in our economic development.

The injection of 5,000 mw into our national electricity grid will be a drop in the ocean if we persistently pursue skills development as I have stated above. 

With the advent of 3D printing and a motivated youth with computer literacy, we can change the world. 

A liberalised energy sector would be more meaningful than attempting to protect small and inefficient operations that would never bring down prices of goods. Such free thinking will enable our economy to leapfrog others and not just grow in the linear format that Dr Ndii favours.

This linear business model that Nobel laureate Amartya Sen censures in favour of rationalism, is a Western empiricist mentality that my brother Dr Ndii buys as wholesome truth. Western economists themselves admit that their economic modelling does not fully explain our growth patterns. That is how they created Development Economics, a branch of economics that deals with the developing countries.

Dr Ndii should focus on a growing body of research that has been emerging among development economists since the beginning of this century, focusing on interactions between ethnic diversity and economic development, particularly at the level of the nation-state. Wikimedia says that while most research looks at empirical economics at both the macro and the micro level, this field of study has a particularly heavy sociological approach. 

ETHNIC DIVERSITY 

The more conservative branch of research focuses on tests for causality in the relationship between different levels of ethnic diversity and economic performance, while a smaller and more radical branch argues for the role of neoliberal economics in enhancing or causing ethnic conflict. 

This will be more relevant to our situation just like the contribution of Amartya Sen to welfare economics that highlighted the plight of the poor in his native India.

Back to Vision 2030 Mega Projects. The Standard Gauge Railway benefits far exceed the costs. I do not know if Dr Ndii’s modelling factored in productivity gains to Rwanda, Burundi, Uganda and Kenya. It takes more than two weeks to transport goods from Mombasa to Kampala and three to four days from Mombasa to Nairobi. 

It is cheaper to transport a container from Durban to Mombasa than from Mombasa to Nairobi. Also, the Mombasa-Malaba road is constantly damaged by heavy vehicles and needs repair all the time. These vehicles are not just the major causes of accidents, especially when they stall on the highway, but are also heavy polluters. 

It is a shame when Dr Ndii suggests that the Thika Superhighway should never have been built. The completion of this short distance highway has attracted more foreign direct investment than the cost of constructing it. Garden City would never have been built at Ruaraka if the road had not been expanded. 

In fact, three more major private mega-projects are about to come up. These projects create employment and an opportunity for farmers to supply their produce.

Dr Ndemo is a former PS for Information Communications and Technology

SUMMARY:

• The Konza City project did not drop from the sky, as Dr Ndii suggests. It was conceptualised in such a way that it would leverage on existing and future infrastructure.
• The knowledge city was to incubate start-ups, pass the necessary skills to recruits and speed up their development into fully fledged companies that could provide skills and absorb many of our graduates, who, instead of utilising their knowledge, are selling second-hand clothes or running errands for politicians.
• Dr Ndii should focus on a growing body of research that has been emerging among development economists since the beginning of this century, focusing on interactions between ethnic diversity and economic development, particularly at the level of the nation-state. 

Of bullet trains and delusions of mega techno-cities

• his country, and much of the continent, is in the grip of a cargo cult. It is now an article of faith that grand infrastructure is the fairy ship that will deliver all the goodies we have ever dreamed of possessing. What else are we to make of this?:
• The underperformance of our railway service has nothing to do with the gauge of the track. Neither is it on account of the low speed or load capacity. The single most important reason for its underperformance is lack of trains. 
• Over the last decade, the economy has expanded by about 60 per cent. Electricity consumption has increased by about the same. These figures are based on the current GDP, which we expect to be revised upwards shortly. 

During World War Two, the erstwhile isolated, poor South Pacific Islanders of Vanuatu (then known as New Herbrides) enjoyed a brief episode of prosperity. 

This was on account of the Western Allies establishing military bases there. 

With the bases came bounty beyond belief, as well as jobs. Ships and aircraft brought supplies regularly. Western goods became commonplace. 

Then, as suddenly as it appeared, the prosperity vanished. The war had ended. The soldiers left. The ships and aircraft stopped coming. 

This episode gave rise to the most famous of what anthropologists call cargo cults—religions that have sometimes emerged when hitherto isolated people are suddenly exposed to western consumer culture.

Charismatic religious entrepreneurs took to promising the villagers that they could restore the flow of cargo, which they claimed was actually sent to them by their ancestors. 

They devised cargo summoning rituals that involved imitating military practices such as marching and building symbolic life-size replicas of aircraft, control towers and even airstrips. 

WEALTH AND PROSPERITY

The cargo did not come, and many of the cults soon died out. The most prominent survivor is the John Frum movement practised in the island of Tanna. 

Its adherents believe that John Frum, a messianic figure usually depicted as an American soldier, will return and bring back the wealth and prosperity of the good old days. 

Asked by a western reporter how the movement has survived so long, one of its leaders quipped: “We’ve only been waiting for our prophet for only 60 years. You’ve been waiting for 2000.”

The term cargo cult has become a metaphor for misguided modernisation ventures that confuse form for substance. There is no shortage of such delusions in recent history, perhaps none more deluded than Mao Zedong’s Great Leap Forward. 

Mao believed that industrialisation could be speeded up by producing more grain and steel, so the Chinese government seized all the resources it could marshal to produce them. 

Agriculture was collective by force. The government set a target of doubling steel production within a year and overtaking Britain’s steel production in 15 years. 

Villagers were instructed to set up backyard furnaces to produce iron. People’s pots, pans and other metal possessions were seized to provide scrap metal for the furnaces to meet production quotas. Trees were decimated and even furniture burned to fuel the furnaces. It did not work, but it claimed between 20 and 40 million lives. 

In his irreverent classic The Trouble with Nigeria, Chinua Achebe attributes underdevelopment to a cargo cult mentality of ruling elites. 

“One of the commonest manifestations of under-development is a tendency among the ruling elite to live in a world of make-believe and unrealistic expectations. This is the cargo cult mentality that anthropologists sometimes speak about — a belief by backward people that someday, without any exertion whatsoever on their own part, a fairy ship will dock in their harbour laden with every goody they have always dreamed of possessing,” he wrote.

This country, and much of the continent, is in the grip of a cargo cult. It is now an article of faith that grand infrastructure is the fairy ship that will deliver all the goodies we have ever dreamed of possessing. What else are we to make of this?:

“Bullet trains flashing from capital to capital in just a few minutes. Happy passengers waving goodbye to their relatives on the platform… The vision is one of techno-modernity: even you Africans can jump into the modern world. Fast passenger trains! Even fast goods trains!”

You will probably have guessed correctly what this is about, but I doubt very much whether you can guess where the quote is from. It is not from a letter to the editor of one of those weekly tabloids.

BURDEN OF PROOF

It is an excerpt from the report of the Parliamentary Transport Committee in defence of the standard gauge railway. I will leave it to you to contemplate what evidence and analysis the committee considered to arrive at this conclusion, although perhaps the better question would be what herbal product they had with their lunch.

Here are the sober facts. The underperformance of our railway service has nothing to do with the gauge of the track. Neither is it on account of the low speed or load capacity. The single most important reason for its underperformance is lack of trains. Where did the trains go? We “ate” them. 

Nothing remarkable. I mean Kenya Railways was “eaten” like many other state corporations such as the defunct Kenya National Assurance Company, among others.

Another red herring is that the railway lost business to the road because trucks are faster—the argument being that faster trains will shift freight back to the railway. 

Ha! A 2010 study put the truck travel time from Nairobi to Mombasa at 30 hours, a stately 16km per hour. To be fair, this includes 21 hours of stops comprising of nine hours of weigh bridge and police checks and another 11 hours referred to as “other driver delays.” 

This leaves nine hours of travel time which works out only 55km per hour if the trucks travelled non-stop. But since there have to be some stops, let us assume a best case scenario of cutting the stops by two thirds to seven hours. This still works out to a leisurely 33km per hour.

So how is it that trucks which are more expensive and not any faster stole the business of the railway? Simple. Railway public. Trucks private. In one case I know about, Kenya Railways won a tender to transport government imports. Immediately, the permanent secretary concerned got a call from very high up directing him to give half the business to a trucking company. Simply put, road haulage is part of the eating of the railway. 

The SGR is not the only lunacy in town. I’m told of a mad rush to install 5000MW of electric power generation within the next two years. 

Here’s the math. Over the last decade, the economy has expanded by about 60 per cent. Electricity consumption has increased by about the same. These figures are based on the current GDP, which we expect to be revised upwards shortly. Once that happens, we will find that the economy has become less electricity intensive.

SERVICE DRIVEN ECONOMY

If the GDP is revised upwards by 20 percent as I expect, this will mean that we are using 10 per cent less electricity to produce one unit of GDP as we did a decade ago. This should not be at all surprising. Everyone is trying to be more energy-efficient. Our economy is also increasingly becoming service-driven and services are not very power-hungry. How long will it take us to double the size of the economy? Best case scenario, growing at 7.5 per cent per year, 10 years. This translates to a requirement of at most 2700MW five years from now.

So where did this 5000MW target come from? What is the economic rationale? I have not heard a single one that makes sense. The one I hear most often is that we will need a lot of power to electrify trains. Amazingly, many smart people believe this crap. 

Not too long ago, these contraptions ran on firewood. What kind of technological progress would it be that they now require a whole power station to run? Just sizing up a diesel locomotive will tell you that it is no bigger than the stand-by generator that you find in a normal office building. 

For the record, a regular electric train needs the equivalent of three litres of diesel to move a tonne of cargo from Mombasa to Nairobi, or as much power per passenger as a light bulb.

POOR RURAL ROADS 

The long and short of it is that the belief that 5000MW will bring investors in droves is as fantastic as John Frum’s second coming. If we achieve it, which I doubt, it will steeply raise the cost of electricity as the installed but unused capacity will have to be paid for. 

Why do we need these sensational targets? What is wrong with normal, sober, scientific planning for the capacity that we actually need? Who are we trying to impress?

Do we need infrastructure? Yes. Lots of it. There is not a single city or town in Kenya, and East Africa for that matter, with adequate sewerage. We lose a quarter of our meagre harvests to poor rural roads and lack of proper storage. 

Before London built its iconic underground, it first built the world’s first modern sewerage system. Before Japan industrialised, it reformed governance and modernised and massively expanded education. The East Asian Tiger economies industrialisation was preceded by the Green Revolution. What is wrong with our leaders? 

Franz Fanon: “In the colonial countries, the spirit of indulgence is dominant at the core of the bourgeoisie; and this is because the national bourgeoisie identifies itself with the Western bourgeoisie, from whom it has learnt its lessons. It follows the Western bourgeoisie along its path of negation and decadence without ever having emulated it in its first stages of exploration and invention, stages which are an acquisition of that Western bourgeoisie whatever the circumstances. 

“In its beginnings, the national bourgeoisie of the colonial countries identifies itself with the decadence of the bourgeoisie of the West. We need not think that it is jumping ahead; it is in fact beginning at the end. It is already senile before it has come to know the petulance, the fearlessness or the will to succeed of youth.”

Enough said.

Dr Ndii is the Managing Director of Africa Economics. (ndii@netsolafrica.com)

Human capital, not mega-projects, will turbo-charge economy

• Agriculture accounts for 30 per cent of GDP directly and close to 40 per cent including indirect contribution such as agro-processing (tea factories, sugar millers, milk processing etc.). Very little if any, of this economic activity is in Nairobi. 
• Some inputs, say a techno-city, or 5000 megawatts of power, can do magic, catapulting the economy so dramatically that, in the blink of an eye, we have caught up or even overtaken South Korea for instance. If you are one of those who’ve bought into this, I have news for you.
• The only African country with a comparable human resource to the Asian Tigers in 1965 was Mauritius. Not surprisingly, it is the only African country that industrialised alongside the Asian tigers.

By DAVID NDII
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A couple of years ago, following the release of the 2009 census, Kibera lost it’s global standing as the largest slum in Africa.

Hitherto, it was an article of faith among the poverty aficionados that Kibera had a population of a million people.

The census put the population of Kibera at a disappointingly modest 170,000 souls.

The funny thing is, the actual population could have been obtained from the previous censuses. It would also not have been too difficult to estimate it from number of registered voters. Moreover, the notion that close to a third of Nairobi’s population lived in Kibera should in itself have been sufficient cause to question the authenticity of the figure.

It is philosopher and mathematician Bertrand Russell who observed: “If a man is offered a fact that goes against his instincts, he will scrutinise it closely, and unless the evidence is overwhelming, he will refuse to believe it. If on the other hand, he is offered something which affords a reason for acting in accordance to his instincts, he will accept it even on the slightest evidence.”

There is another number, just as fantastic, that is increasingly bandied about - that Nairobi accounts for 60 per cent of Kenya’s GDP. Let us examine it. Agriculture accounts for 30 per cent of GDP directly and close to 40 per cent including indirect contribution such as agro-processing (tea factories, sugar millers, milk processing etc.). Very little if any, of this economic activity is in Nairobi. If Nairobi were to account for 60 per cent of GDP, and agriculture is 40 per cent, there is nothing left for the non-agricultural economy outside Nairobi to contribute!

So how much does Nairobi actually contribute to the economy? We do not know because the Government does not compute sub-national economic accounts.

SAME ORDER OF MAGNITUDE

There is however a simple way of arriving at a “back-of-the-envelope” estimate. If capital, both physical and human, was evenly distributed across the country, the contribution of GDP of a region should be of the same order of magnitude as its share of the labour force. Nairobi’s share of the national labour force is 10 per cent.

But we do know that Nairobi has a higher share of capital than the rest of the country, which means that output per worker will be higher than the national average. What we do not know is by how much. But even if it were double the national average, this would make Nairobi’s share of GDP only 20 per cent. It is unlikely to be as high as that, however.

We can safely put Nairobi’s share of GDP at between 15 and 20 per cent.

The latest purveyor of this urban legend is Dr Bitange Ndemo. This was in an article titled “Where economists go wrong on growth”, in which he sought to defend mega-infrastructure projects against my various critiques of them, the most recent being one in which I likened the obsession with mega-projects to cargo cults (‘Of bullet trains and delusions of mega techno-cities’). Dr Ndemo’s dodgy economic accounting is not the only deficiency in his argument, I’m afraid. His understanding of economic growth is even more suspect.

Dr Ndemo’s defence of mega-infrastructure projects rests on the contention that economic growth is not necessarily a linear process. He writes: “Dr Ndii tends to think that economic growth will always be linear. And that economic growth trajectory can be used to predict other aspects for economy because each of these aspects is either a constant or the product of a constant and a single variable.”

NEWS FOR YOU

What this unnecessarily impenetrable argument is trying to say is that economic output is not necessarily proportional to inputs. Some inputs, say a techno-city, or 5000 megawatts of power, can do magic, catapulting the economy so dramatically that, in the blink of an eye, we have caught up or even overtaken South Korea for instance. If you are one of those who’ve bought into this, I have news for you.

Economics has a very robust LINEAR model of economic growth that is able to account for all the systematic wealth differences between countries using only three inputs - labour, capital and knowledge. Human capital alone accounts for two thirds of the differences in incomes between countries.

For evidence, let us examine another urban legend. It is said, widely believed and much lamented that sometimes in the 60s and 70s, we were at the same level of development as the “Asian Tiger” economies and somewhere along the line, they left us behind. There are many pop theories as to why we lagged behind including corruption, tribalism and lack of benevolent dictators. Can the linear model of growth that Dr Ndemo is contesting explain why the Asian Tigers took off and we did not?

The two charts compare education attainment of selected countries over time. The first chart compares the Asian tigers with the big industrialised nations in 1950 and fifty years later in 2000.

The second chart compares the Asian Tigers with East Africa in 1965 and in 2000. In 1950, the US had the most educated workforce, followed by Japan, the UK, Germany and France.

None of the Asian Tigers was ahead of the western countries. Fifty years later, South Korea had a more educated labour force than all but the US; Taiwan had overtaken UK, Germany and France, and Malaysia had overtaken the UK. The overall development trajectory of the Asian Tigers closely mirrors their human capital formation.

INDUSTRIALISED ALONGSIDE ASIAN TIGERS

In the second chart, we see that in 1965 our workforce had on average, 1.7 years of education. Malaysia’s workforce had twice as much, Singapore’s had two and a half times and South Korea’s had more than three times. In fact, our human resource base in 1965 was less than what the Asian Tigers had in 1950.

The only African country with a comparable human resource to the Asian Tigers in 1965 was Mauritius. Not surprisingly, it is the only African country that industrialised alongside the Asian tigers. There never was a time that we were at par with the Asian Tigers!

We also see that we started out with a better human resource base than our East African peers, and have done better than them since. Not surprisingly, we also have done better economically by any measure. There is no mystery why we have preceded them in joining the ranks of middle-income countries.

It all fits with the linear economic model that Dr Ndemo wants to wish away. Outputs are proportional to inputs. The model is able to explain why for instance, resource poor Singapore’s income per person (US$55,000) is more than twice that of Saudi Arabia (US$25,000), even though Saudi Arabia has the money to invest and has indeed invested in all the mega-projects you could dream of.

In the words of two Asian economists Mahbub ul Haq and Khadija Haq: “The East Asian economic miracle is attributable, among other things, to the region’s sustained levels of investment in human capital over a long period. One can identify an education miracle behind the economic miracle.”

I can now restate my case. We are investing Sh300 billion or thereabouts in the standard gauge railway. A year of tertiary education costs about Sh300,000. The opportunity cost of the SGR is a million person years of tertiary education (250,000 degrees, or 500,000 diplomas). Which mega-project, the SGR or an additional million person years of tertiary education would have a bigger impact on long term economic growth rate?

CHALLENGE DR NDEMO

I would challenge Dr Ndemo and the mega-project brigade to demonstrate that any one of these mega-infrastructure projects has a higher rate of return than the equivalent investment in human capital. But the challenge is pointless. Dr Ndemo justifies the mega projects not with scientific evidence but perhaps aptly by quoting a Hollywood blockbuster Field of Dreams: “If you build, they will come.”

Unsurprisingly, Dr Ndemo’s strongest defence is of the Konza techno-city. This he justifies by anecdote, pointing out that Facebook is moving from Boston to Silicon Valley. But Silicon Valley did not drop from the sky into the wilderness. It has grown out of an industrial part started by Stanford University in the 1950s.

If Dr Ndemo had taken an evidence-driven approach, or plain common sense, he would have arrived at the conclusion that spreading the money being spent on Konza on many technology parks around our universities would be a better investment.

Unwittingly Dr Ndemo affirms my critique of the mega-infrastructure projects. He writes: “[Economists] would tell you to put the money where you would have the greatest number of people benefit from the investment. This argument would make sense if rural areas were productive enough and contributed the most towards the GDP”

We can now see why Dr Ndemo is quick to believe than Nairobi contributes 60 per cent of GDP. The figure accords with his prejudices. He already believes that most of us are low potential people, incapable of being the agents of our own development.

Development will have to be brought to us by more advanced people. That is why Dr Ndemo has no qualms spending the same poor people’s tax money to build gleaming new cities in the unspoiled wilderness to afford the purveyors of development the creature comforts they are accustomed to, so that they can come.

This seems to me, to quote Achebe, to be precisely “the cargo-cult mentality that anthropologists sometimes speak about.” Dr Ndemo is by his own admission not in the business of developing the people. He and his ilk are in the business of summoning cargo.

David Ndii is the managing director of Africa Economics

ndii@netsolafrica.com

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.

MY POINT

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.

(READ: Human capital, not mega-projects, will turbo-charge economy)

(READ: Of bullet trains and delusions of mega techno-cities)

(READ: Smart manufacturing and our future competitiveness)

(READ: Why Ndii’s view on Konza City and other projects is misleading)

THIS IS NOT GROWTH

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.

INDUSTRY POSITIONING

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”.

KEY ASSETS

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 ndii@netsolafrica.com

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http://www.nation.co.ke/oped/Opinion/Why-skyscrapers-and-superhighways-are-not-development/-/440808/2531176/-/ca1g05/-/index.html