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Tripartite FTA: How EA manufacturers can compete with South Africa
The ongoing tripartite negotiations will open up new markets for Kenyan goods in the EAC, Comesa and SADC blocs.
But how will Kenya respond to the threat of South Africa’s manufacturing industry while still leveraging on the opportunities of a larger trading bloc?
Both nations share similarities as they are influenced by access to local resources and therefore have strong food, textiles and metal processing activities.
The largest manufacturing sectors in both nations are food and beverage and non-metallic mineral processing while petroleum and chemical products are among the fastest growing sub-sectors. This makes South Africa a formidable competitor.
But a comparative study done this year by the Carnegie Mellon University of Australia shows that it could be a David vs Goliath scenario since the South African manufacturing industry is 9.3 times larger, less import-dependent and more sophisticated.
It includes a significant production level of elaborately transformed products such as electrical machinery with an export value that is nearly 13 times higher than Kenya’s.
Growth rate
Still, the fastest growing sub-sectors are relatively small while the largest sub-sectors feature modest growth, and this is the reason why the growth rate in both nations has been disappointing.
Manufacturing remains a declining part of GDP, prompting both governments to target manufacturing to accelerate future development.
Both nations export much less than they import and they have a significant trade deficit.
To compete with South Africa, Kenya can exploit a few weaknesses in Pretoria’s policies. For example, the National Growth Path is said to target economic sectors with the most growth potential, but it does not have clear criteria to determine that potential, nor is it obvious why fast growth sectors need assistance.
The Industrial Policy Action Plan II targets 14 different sectors, eight of which are manufacturing sectors and again, the criteria for targeting remain unstated and the list of targets is very long.
In effect, the country tries to support all of its industries.
South Africa’s policies are aimed at multiple objectives. The National Growth Path seeks to address economic development, but also deals with unemployment, inequality and poverty.
The Industrial Policy Action Plan II has mixed goals: While addressing the nation’s industrial development, it also includes historically disadvantaged people and marginalised regions. In a nutshell, while South Africa talks about targeting, it has no strategy for targeting.
Industrial clusters
By contrast, Kenya has a clearer policy and strategic intent. As outlined in the Second Medium Term Plan under Vision 2030, Kenya will develop industrial clusters such as meat and leather through the establishment of meat processing plants, tanneries and the promotion of dairy products processing.
As part of the policy development work within the EAC, some clear criteria have been identified. Using a framework developed by the UN Industrial Development Organisation (Unido), two parameters – attractiveness and strategic feasibility – are used with 17 weighted sub-criteria for calculating them. Industries that score highly on both parameters become priority.
While the scoring system used is unclear in the policy documents, we take this to indicate that Kenya appreciates the need for a targeting rationale within a national development strategy even though it lacks a sophisticated approach to manufacturing and fails to clarify how these targets fit into the continental supply chains that will emerge with the Tripartite Free Trade Agreement (T-FTA).
The best way to respond to the upcoming T-FTA and competition from South Africa, is not to defend all Kenyan industries. Rather, policies should augment the current approach to give it a more pro-Kenyan focus.
If the government can build clusters around benefits emanating from strong industries, it can effectively restructure the economy to make it less assistance-dependent and more self-supporting in a way that promises greater benefits with the same base level of government-assistance expenditure.
Written by Betty Maina, Chief Executive Officer, Kenya Association of Manufacturers
