Systematic Country Diagnostic Kenya © 2020 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Cover image of Nairobi city courtesy of UN-Habitat. Contents Acknowledgments .............................................................................................................................................................................................................8 Acronyms.......................................................................................................................................................................................................................................................... 9 Executive summary........................................................................................................................................................................................................ 10 1. Country context.......................................................................................................................................................................................................... 21 1.1 Geography and people: A land of great diversity....................................................................................................... 21 1.2 Ethnic fractionalization, social cohesion, and governance: The journey so far.......................... 21 1.3 Governance and development outcomes....................................................................................................................... 24 1.4 SCD conceptual framework: Growth, inclusiveness, and sustainability........................................... 25 2. Critical factors driving output and productivity growth..................... 27 2.1 Growth experience: From economic slump to robust growth.................................................................... 27 2.2 Drivers of Kenya’s growth experience..................................................................................................................................29 2.2.1.  Supply- and demand-side drivers of growth....................................................................................29 2.2.2.  Growth accounting: The productivity challenge.......................................................................... 30 2.2.3.  Structural reforms, productivity, and governance........................................................................32 2.3 Constraints on productivity growth in Kenya.............................................................................................................. 34 2.3.1.  Macroeconomic constraints on productivity growth..................................................................35 2.3.2.  Microeconomic constraints on productivity growth.................................................................. 38 2.3.3.  Challenges in human capital development and better development outcomes for women...................................................................................................................................... 41 2.3.4  Constraints on productivity from inadequacy of physical capital....................................... 43 2.3.5.  Constraints on productivity from inadequacy of use of natural capital......................... 45 2.3.6.  Constraints on productivity and growth due to climate change........................................ 47 CONTENTS 3. Critical drivers of inclusiveness in Kenya......................................................................................... 49 3.1 Trends in poverty and shared prosperity.......................................................................................................................... 49 3.2 Drivers of monetary measures of inclusiveness......................................................................................................... 53 3.3 Drivers of nonmonetary measures of inclusiveness............................................................................................. 54 3.3.1. Health...................................................................................................................................................................... 54 3.3.2. Education..............................................................................................................................................................55 3.3.3. Water.......................................................................................................................................................................56 3.4 Gender and inclusion............................................................................................................................................................................. 57 4. Pathways to reduce poverty and boost shared prosperity.........60 4.1 Boosting productivity and job creation............................................................................................................................... 61 4.1.1.  Fostering macroeconomic stability and fiscal sustainability................................................... 61 4.1.2.  Improving access to finance for MSMEs.............................................................................................63 4.1.3.  Removing regulatory hurdles................................................................................................................... 64 4.1.4.  Addressing inefficiencies in the land market and land use................................................... 64 4.1.5.  Addressing the infrastructure challenge............................................................................................65 4.1.6.  Enhancing worker capabilities through integrated interventions on skills development, self-employment, and entrepreneurship........................................ 66 4.1.7.  Enhancing capabilities by leveraging digital technologies and fostering innovation...............................................................................................................................67 4.1.8.  Strengthening regional trade integration and boosting participation in global value chains.................................................................................................................................... 68 4.1.9.  Boosting agricultural sector productivity and output............................................................... 70 4.1.10.  Development of the blue economy and wildlife conservation............................................72 4.2 Reducing inequality of opportunities through advancing human capital..................................... 72 4.2.1. Health......................................................................................................................................................................73 4.2.2. Education.............................................................................................................................................................73 4.2.3.  Water, sanitation, and hygiene................................................................................................................75 4.2.4.  Social protection..............................................................................................................................................75 4.2.5.  Digital technologies.......................................................................................................................................76 4.3 Improving governance for service delivery.....................................................................................................................77 4.3.1.  Establishing effective and accountable institutions....................................................................77 4.3.2.  Strengthening devolution to enhance service delivery........................................................... 78 4.4 Foundational issues..................................................................................................................................................................................81 4.4.1.  Fiscal, social, and environmental sustainability............................................................................. 81 4.4.2.  Inclusivity and gender................................................................................................................................. 83 4.4.3.  Digital transformation................................................................................................................................. 83 SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 4 CONTENTS 5. Prioritization....................................................................................................................................................................................................................... 85 5.1 Identifying priorities within the pathways.......................................................................................................................85 5.2 Priorities to achieve the twin goals........................................................................................................................................ 87 5.2.1.  Improving the operating environment for firms........................................................................... 87 5.2.2.  Opening markets and enhancing competitiveness through infrastructure upgrades............................................................................................................................... 89 5.2.3.  Enhancing commercialization opportunities across agriculture value chains........... 90 5.2.4.  Improving access to quality primary/basic health care............................................................. 91 5.2.5.  Improving access to quality education services to improve learning outcomes........ 91 5.2.6.  Strengthening anti-corruption mechanisms and institutions.............................................. 91 5.2.7.  Strengthening devolution to enhance service delivery.............................................................92 6. Knowledge and data gaps........................................................................................................................................................93 References............................................................................................................................................................................................................................................... 96 Appendix A. Modelling framework................................................................. 99 SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 5 CONTENTS List of Figures Projected poverty rate with current growth assumptions......................................................................................... 10 Average GDP growth by period.................................................................................................................................................. 10 The poverty headcount rate measured at the national poverty line.....................................................................13 Shared prosperity, as measured by changes in real per capita consumption among the bottom 40 percent.....................................................................................................................................................................13 Figure B1.1. Ethnic fractionalization by country.................................................................................................................22 Figure B1.2. Language fractionalization by country.......................................................................................................22 Figure 1. Since independence in 1963, Kenya’s per capita income has grown less than its peers.................................................................................................................................................................................................... 24 Figure 2. Kenya’s poverty rate projected to 2030 based on current growth assumptions.......................25 Figure 3. Kenya Systematic Country Diagnostic conceptual framework...........................................................26 Figure 4. Annual GDP growth..................................................................................................................................................... 28 Figure 5. Average GDP growth by period............................................................................................................................. 28 Figure 6. Annual GDP growth for Kenya and peers (%)................................................................................................29 Figure 7. Growth has been a key driver of poverty reduction in Kenya over the past decade...............29 Figure 8. Decomposition of Kenya’s growth in value added by major sector.................................................29 Figure 9. Contribution to growth in value added by country, 2004–2017...........................................................29 Figure 10. Contribution to Kenya’s GDP growth............................................................................................................... 30 Figure 11. Public debt, 2010–2019............................................................................................................................................... 30 Figure 12. Fiscal balance, percent of average tax revenues (2015–2017)................................................................31 Figure 13. The contribution to growth from TFP has risen in recent years . . ...................................................31 Figure 14. . . . nonetheless, TFP growth’s contribution in Kenya is lower than its peers, 2004–2017....31 Figure 15. Drivers of growth in Kenya, 1985–2015 (change in log of GDP per capita)...................................33 Figure 16. Contribution of structural reforms to growth, 1985–2015 (change in log of GDP per capita)...............................................................................................................................................................................................33 Figure 17. Impact of structural reforms on economic growth of Kenya and selected peers (change in log of GDP per capita)............................................................................................................................... 34 Figure 18. Per capita income growth trends for Kenya if it adopted the best (scenario 1), average (scenario 2), and worst (scenario 3) of structural reforms among peers......................................... 34 Figure 19. Within sector improvements have been the predominant driver of productivity growth in Kenya...................................................................................................................................................................................35 Figure 20. Contributions to productivity growth by country and by source....................................................35 Figure B4.1. Manufacturing productivity is lower relative to services...................................................................36 Figure 21. Private investment contribution to GDP growth has declined..........................................................37 Figure 22. Gross capital formation (% of GDP)....................................................................................................................37 Figure B5.1. Economy-wide product market regulation score..................................................................................39 Figure 23. Kenya underperforms most countries in many dimensions of corruption...............................40 Figure 24. Under-five mortality rate (deaths per 1,000 live births) by quintile, mother’s educational attainment, and location, 2003–2014.......................................................................................................... 42 Figure B6.1. Cash flow projections (data from 71 water service providers)....................................................... 46 Figure B6.2. Cash flow projection for Nanyuki water service provider................................................................ 46 Figure 25. Recent trends in poverty, inequality, and shared prosperity............................................................. 50 Figure B7.1. Projected poverty headcount rates by scenario (low impact, medium impact, high impact)............................................................................................................................................................................................51 Figure B7.2. Projected poverty change by sublocation..................................................................................................51 Figure 26. Poverty and vulnerability in Kenya....................................................................................................................52 Figure 27. Regional patterns in poverty indicators..........................................................................................................53 Figure 28. Identified strategies, constraints, and pathways...................................................................................... 61 Figure 29. 19th Replenishment of the International Development Agency Jobs SYSTEMATIC and Economic Transformation Framework.........................................................................................................................62 COUNTRY Figure 30. East Africa is the ninth largest global market by population........................................................... 69 DIAGNOSTIC KENYA Figure 31. Kenya Systematic Country Diagnostic (SCD) methodology............................................................... 87 6 CONTENTS List of Tables Table 1. Kenya’s governance performance, 2009–2018................................................................................................. 24 Table 2. Sector-specific competition restrictions............................................................................................................ 38 Table A1. Description of variables.............................................................................................................................................. 99 Table A2. Economic growth model........................................................................................................................................ 100 List of Boxes Box 1. Ethnic fractionalization and development: Blessing or curse?..................................................................22 Box 2. Effect of COVID-19 global pandemic on near-term gross domestic product growth.................. 28 Box 3. Effect of the economic crisis on potential gross domestic product.......................................................32 Box 4. Productivity differentials and resource misallocation across sectors in Kenya...............................36 Box 5. Productivity gains and fiscal savings from reforms to state-owned enterprises ..........................39 Box 6. Effect of COVID-19 pandemic on Kenya’s water services providers....................................................... 46 Box 7. Expected distributional effects of COVID-19........................................................................................................ 50 Box 8. Vulnerable and excluded groups............................................................................................................................... 58 Box 9. Policy priorities to support medium-term fiscal consolidation.................................................................62 Box 10. Measures to boost agricultural productivity ..................................................................................................... 70 Box 11. Enhancing accountability through participatory governance: The case of Makueni County............................................................................................................................................................................ 79 Box 12. Prioritization process....................................................................................................................................................... 86 SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 7 Acknowledgments This report was led by Allen Dennis and Utz Pape. World Bank staff from all Global Practices contributed to this report. These include Vinay Kumar (Agriculture); Ruth Karimi Charo and Huma Ali Waheed (Education); Laurencia Karimi Njagi, Lucy Wangari Njuguna, and Zubair K. M. Sadeque (Energy and Extractives); Kanta Kumari Rigaud and Banu Setlur (Environment and Natural Resources); Gabi George Afram and Hans Shrader (Finance, Competi- tiveness, and Innovation); Christine Anyango Owuor and Timothy Stephen Williamson (Governance); Jane Chuma and Laura Di Giorgio (Health, Nutrition, and Population); Guigonan Serge Adjognon, Peter Chacha, and Alex Sie- nart (Macroeconomics, Trade, and Investment); Nduati Kariuki (Poverty); Sheila W. Kamunyori and Abdu Muwonge (Urban, rural, and social development); Abla Safir and Yuliya Smolyar (Social Protection and Labor); Josphat O. Sasia, Peter Ngwa Taniform, and Casey Torgusson (Transport and Information and Communication Technology); and Josses Mugabi and Pascaline Wanjiku Ndungu (Water). The safeguards specials who provided inputs were Adrian Howard Cutler and Varalakshmi Vemuru. Tesfaye Ayele (Procurement) also contributed. Colleagues from MIGA who provide inputs to this report were Paul Levy, Moritz Nikolaus Nebe, and Jessica Wade. Contributors from IFC were Sudha Krishnan and Kevin Ndori. The team was further supported by Andrew Zadel. The work benefited from the guidance of Albert Zeufack, C. Felipe Jaramillo, Jumoke Jagun-Dokunmu, Manuel Moses, Paolo Belli, and Helene Rex, as well as supervision of Abebe Adugna and Pierella Paci. The team would like to also thank all other members of the Kenya country team for their inputs as well as the Government of Kenya, Development Partners, and other stakeholders consulted in the process of finalizing the document. SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 8 Acronyms ASAL Arid and Semi-Arid Lands COVID-19 Coronavirus disease 2019 FDI Foreign direct investment GBV Gender-based violence GDP Gross domestic product HCI Human Capital Index HDI Human Development Index ICT Information and communications technology IDA International Development Agency IFC International Finance Corporation JET Special Theme on Jobs and Economic Transformation KES Kenyan shilling KIHBS Kenya Integrated Household Budget Survey KNBS Kenyan National Bureau of Statistics MSME Micro, small, and medium enterprises NCCAPII Second National Climate Change Action Plan NEDI North and Northeastern Development Initiative NER Net enrollment rates NSSF National Social Security Fund OECD The Organisation for Economic Co-operation and Development PPP Purchasing power parity SACCO Savings and Credit Cooperative Society SCD Systematic country diagnostic SDG Sustainable development goals SME Small and medium enterprise SOE State-owned enterprise SRM Social risk management SYSTEMATIC STEP Skills Toward Employment and Productivity COUNTRY TFP Total factor productivity DIAGNOSTIC WASH Water, sanitation, and hygiene KENYA 9 Executive summary This World Bank Systematic Country Diagnostic (SCD) provides an are identified using the latest available data. The docu- analytical foundation for identifying country-level actions and ment then outlines three main pathways to accelerate investments that would increase growth and boost shared prosper- the attainment of the World Bank’s “twin goals” of end- ity in Kenya. It aims to be an objective diagnostic that ing extreme poverty and promoting shared prosperity. analyzes and prioritizes binding constraints on devel- Using filtering criteria and with attention to foundational opment, based on government and external sources, issues that cut across all sectors, this SCD proposes spe- as well as consultations with local stakeholders. cific priorities for development initiatives in Kenya. The conceptual framework adopted for this SCD is organized around Poverty rates in Kenya have declined over the last decade, but two main strategies: (1) higher aggregate output and productiv- nonetheless remain high by the standards of lower-middle-­income ity growth and (2) greater equity and inclusiveness. Constraints countries. The share of the population living below limiting advancement in these two key thematic areas the national poverty line fell from 46.8 percent in Projected poverty rate with current growth Average GDP growth by period assumptions 50 7.5 6.5 40 5.5 30 Percent 4.5 20 3.5 –13 million Shortfall 2.5 10 1.5 SYSTEMATIC 0 COUNTRY 0.5 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 DIAGNOSTIC KENYA 0 Poverty rate Simulated poverty rate –0.5 10 2030 goal 1963–81 1982–2003 2004–2018 Source: Pape and Mejia-Mantilla (2018). Source: World Bank. EXECUTIVE 2005/06 to 36.1 percent in 2015/16 and was projected contribution of productivity to GDP growth in Kenya SUMMARY to decline to 33.5 percent in 2019. Although robust has picked up from the period of economic slump, it gross domestic product (GDP) growth over the past still lags significantly behind that of comparator coun- decade has contributed to the decline in poverty, at tries. This suggests there is room for greater growth by the current pace of poverty reduction, this will not addressing the challenges to low productivity in the be enough to eradicate extreme poverty by 2030. To Kenyan economy. do so, Kenya’s poverty rate would have to fall by an unrealistic 6.1 percentage points each year, while the The pace of structural reforms has increased since the mid-2000s, country’s decade average is just 1.6 percentage points and these have helped boost productivity growth, but there remains per year. If poverty reduction continues at its current further room for improvement. The single most important pace, the poverty rate will remain around 24 percent in determinant of the changes in per capita GDP growth 2030—or higher—given the likely negative effects of in Kenya over the long term has been the pace of struc- COVID-19 on poverty. ­ tural reforms, meaning changes in government poli- cies, practices, and institutions that can help create an enabling environment for growth and job creation. In Kenya has seen a return to strong growth the 1980s, state controls were maintained in several rates, but the increased public spending that has helped drive that expansion will important markets, including a pegged exchange rate, not be sustainable over the long term. interest rate controls, price controls, and the licens- ing of foreign exchange transactions. A lack of struc- The Kenyan economy has emerged from an economic slump and tural reforms contributed to the economic slump that returned to robust, resilient growth over the past decade and a occurred from 1981 to 2003. Successive national gov- half. Kenya’s post-independence economic growth is ernments were able to accelerate the pace of structural characterized by three broadly distinct phases: buoy- reforms after a political shift in 2003. These reforms ant growth in the post-independence period, an eco- included restoring macro stability, strengthening gov- nomic slump in the 1980s and 1990s, and then a robust ernance institutions, and expanding physical infra- rebound. Since 2004, GDP growth has rebounded structure. From a very low contribution in the 1980s to an average of 5.4 percent and remained resilient and 1990s, the contribution of structural reforms to during and in the aftermath of the global financial growth quadrupled in the 2000s. Notwithstanding this crisis. Despite performing better than the average for progress, the contribution of structural reforms to per Sub-Saharan Africa, Kenya’s growth remains weaker capita GDP growth in Kenya still lags that of its aspira- than a number of its regional and structural peers. tional peers. The ongoing COVID-19 pandemic poses a significant threat to near-term growth in Kenya because of the contraction of domestic demand, a decline in exports, Kenya is still facing a range of macroeconomic and microeconomic constraints that are the disruption of global supply chains, and a drop in preventing productivity growth. tourism revenue. Sustained increases in productivity are critical to achievement of The recent recovery in growth has been broad based but driven pri- the twin goals. The recent pickup in productivity growth marily by the services sector on the supply side and by an increase in has been predominantly driven by improvements in domestic demand; the debt-driven, public investment–led growth productivity within firms and farms, with the contribu- model seems to have reached its limit. The services sector tion from dynamic reallocation (entry of new firms and accounted for some three-quarters of the increase rearranging the factors of production) being minimal. in GDP growth, while the agricultural sector contrib- Productivity growth is largely coming from incum- uted the least. The increase in private consumption bents within the same sector, with little room for new and investment were the main drivers of the increase players, a phenomenon that could reflect challenges in domestic demand. Increased government spend- due to barriers to entry. ing has also been a driver of growth in the post-2012 era. Overall, total expenditure by the national govern- Narrowing of the fiscal space poses the single biggest threat to ment increased to an average of 26.6 percent of GDP macroeconomic stability. Debt-to-GDP ratios surged from between 2013/14 and 2017/18, compared with an 39 percent of GDP in 2013 to 62 percent of GDP in 2019, average of 23.4 percent in the preceding four years. with the composition of that debt shifting toward The public sector is however unlikely to remain a more expensive commercial sources. The expansion- driver of growth, given a narrowing of the fiscal space ary fiscal stance, coupled with the interest rate cap, due to an underperformance in revenues. is crowding out private investment and curtailing SYSTEMATIC productivity growth. Unlike the solid contribution to COUNTRY Factor accumulation has been the greatest driver of the recent growth of the public sector, the contribution from DIAGNOSTIC pickup in growth, whereas productivity growth significantly lags private investment has been negative in recent years, KENYA that of comparator countries. The bulk of the increase in with the four-year moving average declining from 11 GDP growth in recent decades has come from capi- 1.3 percent of GDP in 2013 to negative 0.7 percent in tal deepening and labor force growth. Although the 2017. It is expected that the fiscal measures instituted EXECUTIVE SUMMARY to mitigate the economic effects of the COVID-19 the main employer (80 percent of the workforce) and pandemic will widen the deficit by some 1.6 percent a significant contributor to GDP (33.8 percent), it is of GDP, further delaying the urgently needed fiscal important that MSMEs are supported in gaining better consolidation. access to finance. Access to markets, firm capabilities, technology adoption, and innovation absorption also There is a need to improve the business regulatory environment, continue to be major challenges for MSMEs. with investors complaining that it is complex, costly, and unpredict- able. Kenya has attracted only an average of 1.2 percent Inadequate investment in human capital is limiting Kenya’s of GDP in foreign direct investment (FDI) flows in recent productivity growth. Health indicators have improved years, whereas other non-resource-rich countries such significantly in Kenya in recent years. Mortality as Ethiopia and Rwanda have attracted FDI flows among children under the age of five declined from in excess of 3.3 percent of GDP. In part, this reflects 114.6 deaths per 1,000 live births in 2003 to 52 per Kenya’s numerous restrictive regulations that serve as ­ 1,000 in 2014. In parallel, the child stunting rate has barriers to entry and hinder private investment. There dropped to one of the lowest levels in the region, fall- are competition restrictions in many sectors, with ing from 35.6 percent in 2003 to less than 26 percent in examples including government intervention in grain 2014. The expansion of low-cost, highly effective tech- markets, a lack of a transparent regulatory framework nologies such as mosquito nets, along with a decline for procompetitive spectrum allocation in the tele- in fertility rates, has improved health outcomes. communications market, and restrictions on foreign Despite these important gains, Kenya is still struggling equity participation in insurance markets. to improve key health indicators. The maternal mor- tality rate, for example, remains very high at 362 per The large presence of legacy state-owned enterprises (SOEs) rep- 100,000 live births. Although Kenya’s education results resents a major constraint on productivity growth in Kenya. SOEs are relatively good on Human Capital Index (HCI) are the primary vehicle for overseeing, delivering, and measurements, learning outcomes are low in basic implementing large-scale projects and services, but education and wide regional disparities remain. Ken- their governance and administrative arrangements are yan children are expected to complete 10.7 years of often inefficient, and oversight mechanisms are lack- schooling (compared with 7.8 for Tanzania and 6.6 for ing. Direct competition from SOEs and links between Rwanda), but when adjusted for learning outcomes, competing firms through partial government share- this amounts to only 7.8 years of schooling. Almost holding are crowding out the private sector. SOEs 60 percent of youth aged 19 to 20 have an upper sec- also generate a significant burden on fiscal accounts, ondary education score below the basic literacy level, running deficits particularly in agriculture, health, and compared with 40 percent in Ghana and 3 percent in communications. Vietnam. This represents a huge challenge for produc- tivity as more than 1 million youth enter the workforce Corruption is a significant problem for businesses, hindering pro- every year and need support to build their human cap- ductivity and deterring potentially more productive new firms from ital while at work. entering the market. The recent World Bank Enterprise Survey shows that, in almost every dimension of cor- The inadequacy of road networks, electricity generation, and other ruption involving business interactions with public forms of physical capital are major constraints on productivity officials, Kenya ranks worse than the average. Prom- growth. Kenya has chronically underinvested in infra- inent government officials often have large private structure. Low-quality road networks raise logistical sector interests and influence public procurement and and transaction costs, limiting market access and the government priorities through the use of proxy com- mobility of factors of production. Despite significant panies. Government domination of certain subsectors improvements in recent years, only 44 percent of the has crowded out the private sector and made access road network is in good or fair condition. Although to inputs erratic, overly bureaucratic, and vulnerable grid electricity is fundamental for boosting the pro- to rent seeking. Ongoing efforts to combat corruption ductivity of firms, access to grid electricity is still only are commendable and should improve the operating 53.5 percent nationally. Kenya’s information and com- environment. munications technology (ICT) sector is one of the most dynamic in Sub-Saharan Africa, with 70.5 percent of Kenya’s micro, small, and medium enterprises (MSMEs) are con- households having mobile money subscriptions, one strained by challenges stemming from access to finance and also of the highest rates globally. Access to broadband from the business ecosystem. MSMEs were hit the hardest Internet, however, remains limited at only 46 percent, by the interest rate cap introduced in 2016, as com- and a digital divide persists in which broadband has SYSTEMATIC COUNTRY mercial banks no longer able to implement risk-based not yet reached most parts of rural Kenya. DIAGNOSTIC pricing shifted their lending away from riskier bor- KENYA rower segments. Some 71.9 percent of MSME capital The sustainable management of renewable natural capital resources is the resources of the owners, with only 5.6 percent will be critical for Kenya’s long-term growth. Although land is 12 coming from banks. Given the criticality of MSMEs as one of Kenya’s most important natural capital assets, EXECUTIVE restrictive laws, bureaucratic inefficiencies, political level in the East African Community, but is high by SUMMARY interference, and insecure land tenure arrangements the standards of lower-middle-income countries. impede land market efficiency. Appropriate develop- Consumption grew significantly among households ment and management of water resources will also be in the bottom 40 percent, increasing 2.86 percent critical, as Kenya faces major challenges in both phys- per year from 2005/06 to 2015/16, with especially ical water scarcity and lack of appropriate infrastruc- strong gains among rural households. Kenya has been ture. Kenya has annual renewable freshwater resources more successful in boosting shared prosperity than per capita per year of only 526 m3, well below the its regional peers. Pro-poor growth has also caused accepted “water poor” threshold of 1,000 m3. Irrigation income inequality to decline, with the Gini index fall- infrastructure is particularly lacking, with 98 percent ing from 0.45 in 2005/06 to 0.39 in 2015/16, although of Kenya’s arable land being rainfed and only 13 per- the COVID-19 pandemic might have reversed this pos- cent of the identified irrigation potential having been itive trend. developed. The effects of the COVID-19 pandemic may attenuate the decline in Climate change is expected to have a considerable negative impact inequality or even lead to increases in inequality. Public hospitals on livelihoods and economic growth. Changes in temperature are more likely to face shortages of beds and equip- and rainfall patterns have been observed, and extreme ment, and the poor will be most affected. The prolonged weather events have become more frequent. Each flood closure of schools can also have long-term impacts on event affects 68,000 people on average, and 3.4 million human capital, especially for poor households and those Kenyans were classed as food insecure in 2017 due to that rely on school feeding programs. The pandemic will ongoing droughts. The economic effects of climate also have serious distributional effects, as international change will intensify in the coming decades, reducing and domestic mobility restrictions such as lockdowns crop and livestock production, as well as that of coastal are likely to reduce aggregate demand and employ- fisheries, lowering aggregate growth and productivity. ment. A 30 percent reduction in monthly wage income Recent modeling for Kenya places the reduction in GDP for individuals in vulnerable sectors would result in a growth at approximately 2.3 percentage points under projected poverty headcount of 43 percent, an increase current warming conditions (at the upper end of the of more than 6 percentage points. The effect will be estimates), doubling to 4.7 percent at 2°C warming. Cli- larger for urban households, which are more likely to mate will be a powerful economic binding constraint, rely on wages and earnings from self-­ employment. The particularly in rural areas where economic activity economic contraction in other countries will also affect depends on climate-sensitive sectors. Kenya by reducing remittances. The impact of COVID- 19, through the channels of illness, changes in wages, and higher food prices, may increase the projected pov- Geographic and socioeconomic exclusion erty headcount of certain locations within Kenya by as have driven high rates of both monetary and nonmonetary inequality. much as 16 percentage points. Poverty rates in Kenya declined over the last decade, and the Despite recent progress in poverty reduction, poor and vulnerable prosperity of the bottom 40 percent of the consumption distribu- households remain constrained by demographic characteristics, tion has increased. The poverty rate with respect to the low levels of human capital, and limited access to basic services. international poverty line also declined, falling from Poor households are less likely to have access to safe 43.7 percent in 2005/06 to 36.8 percent in 2015/16 drinking water (65.6 percent versus 80.4 percent and 33.4 percent in 2019. This is among the lowest in non-poor households) and improved sanitation The poverty headcount rate measured at the Shared prosperity, as measured by changes national poverty line in real per capita consumption among the bottom 40 percent 60 2.86 3 50.5 Annualized growth in per capita real survey mean 46.8 2 Proportion of the population consumption, bottom 50 38.8 1 0.31 0.35 36.1 40% (%) 40 32.1 29.4 0 30 –1 –2 –1.34 20 –2.2 –3 SYSTEMATIC 10 COUNTRY 2006–2016 2013–2016 2010–2014 2012–2016 2010–2015 Kenya Rwanda Uganda South Africa Ethiopia DIAGNOSTIC 0 KENYA National Rural Urban Source: Pape and Mejia-Mantilla (2018). 13 2005/06 2015/16 Source: Pape and Mejia-Mantilla (2018). EXECUTIVE SUMMARY (47.8 percent versus 72.2 percent), as well as other poor population has increased both in absolute terms basic services. More than half of Kenya’s population and as a share of the total poor population. is vulnerable to falling into poverty in the near term. The inability of poor households to cope with adverse Gains in monetary poverty reduction were accompanied by progress shocks has severe long-term implications, because in several dimensions of nonmonetary poverty. Kenya’s Human reduced spending on food, education, and health can Development Index, which aggregates education, dramatically slow human capital accumulation. income, and life-expectancy indicators, rose from 0.45 in 2002 to 0.58 in 2018. This score is relatively strong The Kenyan government has expanded its social protection pro- given the country’s considerable poverty headcount grams, but their coverage and scale remain limited. The author- and places Kenya ahead of all other countries in the ities increased spending on social protection to East African Community. Kenya nonetheless continues approximately 0.27 percent of GDP in 2015, still well to suffer from pronounced inequality of opportunity, below the average of 1.6 percent for lower-middle-­ with challenges in several areas of human develop- income countries. Although Kenya’s social protec- ment and limited access to essential services. The tion schemes are generally well targeted, they are rural population in Kenya faces considerable spatial small and their geographical coverage is limited. The exclusion with respect to gains from development, COVID-19 pandemic has underscored the need for a due to a combination of geographic isolation, a lack of more comprehensive social registry and more efficient resources, and sociodemographic factors. ways to quickly reach vulnerable groups. There are considerable inequities between geographical areas and Poverty rates vary widely by region and are most severe in histor- socioeconomic groups in health care, education, and access to water ically underserved counties. The poverty rate in the North and sanitation services. For example, a child born in the and Northeastern Development Initiative (NEDI) coun- primarily rural Nyanza region is almost twice as likely ties is 68 percent, almost twice the national average to die before the age of 5 as a child born in the Cen- of 36.1 percent. The gap between NEDI and non-NEDI tral region (82 deaths per 1,000 live births versus 42). counties is even more striking when considering rates High costs limit access to health care for the poor and of extreme poverty, at 31.8 percent and 6.1 percent, perpetuate cycles of poverty. More than one-quarter respectively. These disparities have origins in the colo- of total health care expenditures comes in the form of nial administration, which developed only areas suited out-of-pocket payments by households, and 82 per- to the settler economy, and were exacerbated by the cent of women and 79 percent of men do not have any policies of post-independence governments. health insurance. Primary NERs (Net Enrollment Rates) vary widely, ranging from 42 percent in Garissa County Kenya faces considerable inequality of jobs between regions and to 96.8 percent in Nyeri County. NER gaps between population groups. The overall employment rate in Kenya income quintiles are also significant, and the net sec- has risen substantially, from 60 percent of the working ondary enrollment rate among households in the top age population in 2005 to 76 percent in 2015. None- income quintile (56 percent) is almost twice the rate theless, many challenges persist in the labor mar- of the bottom quintile. Economically disadvantaged ket, including a growing job deficit affecting at-risk counties also lack resources and consequently have groups, a gap in job creation between the formal and worse learning outcomes. In urban areas, 86.7 per- informal sectors, and the low productivity and quality cent of households have access to an improved water of jobs. In Kenya, only 6 percent of total employment is source, whereas only 61.8 percent of rural households in the formal nonagricultural sector, versus 49 percent do. This gap is even larger for sanitation services, with in informal nonagricultural employment. The remain- 50.8 percent of rural households using unimproved ing 45 percent of workers are employed in agriculture, sanitation, compared with 13.2 percent in urban areas. a low-­productivity sector with high rates of underem- These indicators are weaker than would be expected ployment. Government expenditures on job programs given Kenya’s status as a lower-middle-income country. have gradually increased since 2014 but still represent only a very small share of GDP (0.1 percent). Poverty disproportionately affects Kenyan women who have less access to economic opportunities. Women are less likely to Kenya is urbanizing, and inequality in urban areas is increasing. use mobile Internet (with a gender gap of 39 per- In 2005, 21.7 percent of the population lived in cities, cent) and less likely to use the mobile phone-based and this number is projected to reach 30.3 percent money transfer service M-Pesa (16 percent gender by 2025. In Nairobi, poverty is highly concentrated in gap), which is a significant constraint on women’s unplanned settlements, with nearly 33 percent of slum economic opportunities and productivity. Social fac- SYSTEMATIC COUNTRY residents being poor, compared to just 9 percent of tors stemming from traditional gender roles and atti- DIAGNOSTIC those living outside slum areas. Although the national tudes about the advancement of women in the public KENYA poverty rate continues to fall, poverty rates in urban sphere limit the participation of women in politics and areas have stagnated. Over the past decade, the urban community leadership. Large gender gaps are evident 14 EXECUTIVE in business profits, driven primarily by sectoral seg- is used as a sub-framework within the SCD analytical SUMMARY regation. Early childbearing is also a significant chal- methodology. The JET framework rests on two pillars: lenge, with implications for maternal mortality and the need to catalyze private investment and the cre- complications during childbirth. Nearly one-quarter of ation of more productive workers and entrepreneurs. women in Kenya give birth by age 18 and nearly half by age 20. The prevalence of gender-based violence Macroeconomic stability is essential for creating an enabling envi- also presents a significant and persistent development ronment to boost private investment. As noted above, the challenge. biggest threat is from a burgeoning fiscal challenge. Fiscal consolidation is important not only because it Creating opportunities for youth will be critical for ensuring safeguards macro stability, but also more importantly shared prosperity. Approximately half of Kenya’s popula- because it will crowd in the private sector. Measures tion is younger than 18, and 9 million individuals are to support fiscal consolidation with respect to recur- expected to enter the labor force between 2015 and rent spending could include capping growth in allow- 2025. To absorb this “youth bulge,” Kenya needs to cre- ances and benefits, cleaning up public sector payrolls, ate an average of 900,000 jobs every year, but it has and accelerating public procurement reforms. On consistently failed to keep pace. Youth unemployment development spending, Kenya should rationalize the has decreased significantly over the past 10 years but inventory of the 1,600 ongoing government projects still remains much higher than for the total workforce. and, for new projects, establish a system of commit- For instance, in Nairobi, 18 percent of youth are unem- ment control and a readiness checklist. Strategies for ployed, compared with 10 percent of the total working mobilizing domestic revenue could include rationaliz- age population. Youth are also more likely to work in ing corporate income taxes and value-added tax (VAT) sectors and occupations with lower productivity and exemptions. Debt-related measures could include lower earnings. In urban Kenya, almost 80 percent of maximizing the use of concessional resources by employed people aged 15 to 24 have an informal job, increasing the absorption rate of donor-financed proj- versus 70 percent for the rest of the population. ects and replacing more expensive debt with cheaper options. Because of necessary government spending during the COVID-19 pandemic, there is a renewed This Systematic Country Diagnostic identifies urgency to reverse the expansionary fiscal stance three critical pathways that can help Kenya reduce poverty and boost shared prosperity. over the medium term soon after businesses return to normal operation. A stronger focus on the private The analysis in this SCD points to three critical pathways: (1) boost- sector–government nexus would help create opportu- ing productivity and job creation, (2) reducing inequality of oppor- nities for growth while reducing pressure on Kenya’s tunities through advancing human capital, and (3) improving constrained fiscal space. governance for service delivery. No single pathway targets a specific constraint or category of constraints, but each Lack of access to finance is one of the major constraints on growth one instead addresses a range of binding conditions in the MSME sector—a crucial engine of growth for the Kenyan and sustainability concerns. Within each of the three economy. Addressing some of the specific constraints on pathways can be identified specific high-impact inter- lending to MSMEs would increase liquidity and sup- ventions in both the public and the private spheres that port financial innovation. Interventions could include will help Kenya move toward achieving the twin goals. establishing a national credit guarantee scheme, uni- versal adoption of credit scores in credit pricing, and leveraging financial technology and alternative data The first identified pathway is Boosting Productivity and Job Creation. sources to increase access to markets and finance for MSMEs. Youth could benefit from greater access to Productivity and structural reforms are needed across a range of finance if they were part of integrated interventions sectors to encourage the dynamism of the private sector, which is that address other constraints that youth face in being fundamental to economic growth and job creation. The govern- productive and creating jobs. Very low cost and possi- ment needs to address core structural obstacles to bly free financing in the form of business grants should economic growth such as infrastructure deficiencies, be considered for youth, in combination with skills skill shortages, and supply chain inefficiencies, as interventions that cover socio-emotional, technical, well as cross-cutting constraints such as the lack of an and business management skills. Furthermore, capac- enabling environment, insufficient competition, and ity building and liquidity support could be provided to informality. Greater productivity in private sector jobs Savings and Credit Cooperative Societies (SACCOs) to will also be essential for economic growth and poverty help them provide products suitable for MSMEs and to SYSTEMATIC alleviation. To guide the discussion on investment and lend based on data and cash flow rather than deposits. COUNTRY job creation, the framework of the Special Theme on DIAGNOSTIC Jobs and Economic Transformation (JET) of the 19th Regulatory restrictions and distortions in the economy should be KENYA International Development Agency replenishment reduced as much as possible to unleash competitive forces. The 15 EXECUTIVE SUMMARY removal of regulatory barriers and government inter- Such investments are required to meet the fast-­ ventions that restrict market entry and competition growing demand for water in urban centers and in would help generate business opportunities, increase marginalized regions, such as the northern and north- competition, lower prices, and create jobs. In parallel, eastern areas, to help achieve water and food security. removing protective trade barriers and cracking down on anticompetitive practices would allow for greater To increase worker capabilities and foster creation of more pro- competition in the economy, which would in turn help ductive jobs, integrated interventions are needed to address lower prices, boost innovation, and improve quality. supply- and demand-side constraints on employment. Youth Finally, it will be important to limit government inter- unemployment should be addressed with interven- vention and the role of SOEs to situations in which the tions to increase their productivity and help them private sector is unable to operate. find jobs, such as initiatives that build marketable skills and provide specific support for starting busi- The fight against corruption will need to be intensified to reduce nesses. Additional measures can target young women business transaction costs and improve service delivery by the to empower them and provide support for their labor public sector to the private sector. Although the current force participation while they also transition into fam- administration has recently stepped up its anticorrup- ily life. Productivity gains also accrue as workers move tion efforts, more needs to be done, and governance into more productive sectors, firms, and occupations. institutions will need to be reinforced. Transparency Better labor market information systems would help in public procurement will need to be improved, and move trained workers into growing sectors and occu- corporate governance should be strengthened in the pations. Digital technologies can also be leveraged to private sector. Adopting an approach of confronting boost productivity. With 10.8 percent average annual corruption and promoting performance and account- growth since 2016, the ICT sector has been an import- ability (over punitive actions such as arrest and prose- ant source of economic dynamism and job creation, cution of individuals) would help ensure sustainability. with spillover benefits for other sectors. Adoption of technology is having a more positive effect on job cre- Land market distortions will need to be remedied, because land ation for unskilled workers in low-income countries is an important factor of production and one of the most import- than in most high-income countries, and equipping ant assets of the poor. Better functioning land markets Kenya’s workforce with digital skills should similarly can help increase access to credit for households and open doors to new forms of employment. Regarding MSMEs. To address the harms of unplanned land use, firm capabilities, the government has launched inter- the government should accelerate the digitization ventions that support increases in productivity in of land records, complete the National Spatial Plan micro and small enterprises. (2015–2045), and promote the commercial use of idle public land. Urban population growth increases pres- Given underperformance in trade, regional integration holds great sure on existing urban infrastructure, including traffic potential to boost productivity and growth in Kenya. However, congestion, water shortages, and high housing costs, this will require improving subregional connectivity which if not addressed can curtail potential productiv- (physical and digital) and addressing nontariff bar- ity benefits from urbanization. Urban and rural plan- riers. Trade liberalization between countries should ning offices should be fully established at the county be deepened beyond merchandise to cover services, level, and county executives’ participatory planning investment rules, and public procurement. Specific skills should be improved through training. measures to boost trade could include improving regional trade corridors by investing in road and rail Kenya’s significant infrastructure challenges need to be addressed. links and developing the country’s standards and Measures to improve transportation infrastructure quality infrastructure. Kenya could seek to boost for- could include prioritizing transportation networks eign direct investment in its special economic and that directly support productive activity and address- export processing zones by implementing the recently ing gaps in the legal framework for transportation approved Kenya Investment Policy. Leveraging the infrastructure development. Infrastructure planning digital economy could also spur regional integration. needs to be improved significantly, including develop- Implementing a single digital market in East Africa ing a comprehensive urban traffic and transportation would generate a $1.0 billion to $2.6 billion increase in strategy, providing mobility programs in major towns, GDP and between 1.6 million and 4.5 million new jobs and addressing bottlenecks to effective functioning of across the region. the Public-Private Partnership (PPP) Act. At the same time, there is a critical need to increase water devel- Increasing agricultural productivity and output could provide a SYSTEMATIC COUNTRY opment and management infrastructure by boost- path out of poverty for many rural households. Marginal yields DIAGNOSTIC ing investment in strategic water storage, productive have improved little over the last 10 years for staple KENYA watershed management, inter-basin transfers, water crops such as maize and commercial crops such as delivery works, farmer-led irrigation schemes, and coffee. As a result, agricultural productivity has con- 16 water conservation and adaptation infrastructure. tributed little to poverty reduction in rural Kenya, in EXECUTIVE stark contrast to the experience of other countries in economy will not only be beneficial for growth, but SUMMARY the region. Specific measures to boost productivity in will also have a strong effect on reducing inequality the sector could include reforming the fertilizer sub- and promoting human capital formation. sidy program, investing in irrigation infrastructure, boosting livestock productivity, improving land ten- In terms of lost productive capital for Kenya, the long-term costs ure security, and promoting access to agricultural land associated with underinvestment in health care are massive. There for women. Commercial opportunities also need to is an urgent need to increase spending on health be enhanced along agricultural value chains. Kenyan care and launch a battery of priority interventions. farmers face major challenges in marketing produce, The expansion of programs to improve nutrition and and the potential for adding value to products such as reduce rates of stunting will be essential for ensuring tea, coffee, pyrethrum, milk, beef, fruits, and vegeta- that children reach their full productive capacity when bles remains largely untapped. Actions could include they become working adults. High child and mater- removing restrictions on private investment participa- nal mortality rates should also be the focus of major tion in core agricultural value chains, helping farmers public policy interventions. There is an opportunity to gain relevant certifications, leveraging cooperatives reengineer primary health care in the country, with a to help organize farmers to benefit from economies new focus on preventive services and health promo- of scale, and operationalizing the Warehouse Receipt tion. Achieving universal health care coverage is part System and the National Commodity Exchange. of the government’s Big Four Agenda, and progress is being made. The productivity of health care workers Support for sustainable development of the blue economy and should be improved, by ensuring an appropriate mix wildlife conservation would contribute significantly to job cre- of skills among staff and a more balanced distribution ation and environmental sustainability. Growth of the blue of resources. economy will require integrating economic develop- ment with environmental management, fiscal policy, Kenya will need to make strategic long-term investments in edu- and social goals. Given the adverse effects of marine cation. Effective strategies include focusing on school- litter on fisheries, tourism, and biodiversity, sustain- ing for learning (i.e., focusing on learning outcomes able waste management will also be fundamental for and student proficiency), increasing the efficiency of effective delivery of the government’s commitments spending, and addressing wide regional disparities, under the blue economy framework. According to the particularly for the arid and semi-arid regions. Promot- National Wildlife Strategy (2018–2030), nature-based ing collective action and coordination between vari- tourism contributes more than 10 percent of GDP and ous actors in the sector will be required to ensure a 9.3 percent of total employment, but in the past three common approach to policy implementation. Increas- decades, the country has lost more than 60 percent ing secondary school enrollment rates among the of its wildlife. The National Wildlife Strategy identifies poor will require demand-side interventions, includ- priority deliverables, including the maintenance and ing scholarships, in-kind support, and cash transfers. improvement of habitats and the enhancement of spe- In parallel, the quality of teaching should be improved cies conservation and management. through multiple interventions, including strength- ening links between performance and full-time posi- tions or employment benefits. Investments in early The second identified pathway is Reducing childhood development should also be prioritized, Inequality of Opportunities through Advancing Human Capital. and improvements will need to be made in tertiary education performance. Finally, extending broadband Investing in the development of human capital will be an essential connectivity to all schools would enable distance pathway for achieving the twin goals. Disparities in rates of learning capabilities, which are critical in the case of human capital accumulation can dramatically widen a pandemic or more generally to enable students from welfare gaps between socioeconomic groups over the rural areas or those facing other challenges to access medium and long term. Investing in the development educational resources. of human capital means investing in people through better health care, improved nutrition, quality educa- Kenya should increase investment in safely managed water, san- tion, skills training, and the creation of productive jobs. itation, and hygiene (WASH) infrastructure and institutions to Given that constraints on the accumulation of human help develop human capital and combat COVID-19. Because of capital are stronger in rural Kenya than in urban areas, the multi-sectoral nature of human capital develop- policy initiatives should target those regions. Similarly, ment, interventions aimed at combating undernu- development of human capital among women and trition and stunting will not be effective unless they SYSTEMATIC girls is subject to a number of additional constraints include a WASH component. In the context of a dis- COUNTRY that will need to be addressed directly. Many of the ease outbreak, safely managed WASH services are crit- DIAGNOSTIC initiatives of the first pathway will have strong posi- ical not only in combating infection, but also during KENYA tive impacts on the second pathway—measures taken the recovery phase to mitigate secondary effects on to boost productivity and create jobs in the Kenyan community livelihoods and well-being. Within the 17 EXECUTIVE SUMMARY sanitation domain, institutional mechanisms will need and non-state actors regarding public policies, practices, institu- to be established to allow for effective cooperation tions, and outcomes. In Kenya, efforts to create new gov- and coordination between the water, environmental, ernance arrangements need to factor in corruption, and health management entities. To meet the financ- given the role that corruption has historically played ing gap in the water sector, Kenya should employ a in public institutions. Successful programs to reduce combination of dedicated public budget allocation corruption are specific and outcome-focused, and are and blended financing, especially in marginalized and combined with policy changes that reduce opportu- underserved regions. nities for corruption. Addressing corruption effec- tively requires the visible demonstration of concrete The expansion of social protection programs will be important for results. Public trials and convictions for corruption can helping the poor increase their productive potential. The Gov- demonstrate a commitment to punishing misbehavior ernment of Kenya is committed to moving beyond and indicate that no one can act with impunity. At the cash transfers to an integrated social protection sys- same time, simply increasing the number of criminal tem to enhance the social and economic inclusion of convictions or administrative sanctions is unlikely to poor and vulnerable individuals. The immediate pri- have a major effect overall. It is important to identify orities should be to increase coverage of the poorest focal areas for anticorruption work that can serve as households and to reassess the adequacy of benefits, the leading wedge for reducing corrupt practices, such preferably by indexation with inflation. It is equally as reducing corruption in public procurement. critical that the government develop a robust system of social insurance for workers in the informal sector. It will be important to strengthen incentives for collective action in Existing schemes could be expanded with the creation the identification and resolution of constraints that focus on service of a specialized administrative platform that can bet- delivery outcomes rather than institutional or individual inputs. ter manage the small, varying contributions of infor- Crucial to this process is the flexibility to respond to mal sector workers. Given the global economic effect changing problems and the identification of rele- of the COVID-19 pandemic, social safety nets will be vant stakeholders to collaborate with. It will also be even more critical in addressing the needs of the poor. important to broaden the “bargaining space” for pol- A social registry able to identify households most vul- icy making to ensure meaningful participation of all nerable to shocks such as droughts and pandemics relevant players so that their interests are effectively would allow the government to address vulnerabilities rebalanced. However, doing so is challenging because more precisely and quickly. not all counties have put in place mechanisms through which the voices of citizens can influence decision Digital technologies present opportunities to disrupt business as making. Also, the lack of clarity in institutional and usual and address Kenya’s stubborn constraints on human capital organizational mandates and management systems in development. A self-motivated individual has a world many instances works at cross-purposes to the overall of information at their fingertips through digital objective of increasing productivity. Finally, a renewed platforms such as YouTube to build their skills as an focus on coordinated strategic planning will be critical auto mechanic, plumber, or videographer, for exam- for achieving development outcomes over the long ple. Social protection payments and other voucher term. schemes can be implemented using mobile money, linked with the new national identification number Devolution has largely been a political success and has widespread (Huduma Namba) at low administrative cost and with popular support. Since their election in 2013, county gov- little hassle in even the remotest areas. Technological ernments have taken on extensive responsibilities for innovation can be used in health care as well, espe- the management, financing, and delivery of a wide cially at the county level, where resources are lacking. range of public sector functions. Counties can make New digital platforms have already begun to change subnational laws, can raise their own revenues, and public health care administration, increasing the effi- have extensive human resources management pow- ciency of core services. Kenya is making a concerted ers. Nonetheless, the division of functional respon- effort to embed digital skills in the national education sibilities between levels of government needs to be system. Flagship initiatives such as the Digital Literacy further clarified. Although the constitution provides Program have been designed to integrate ICT into the overall normative guidance, in practice there remain education system, but insufficient teacher training ambiguities, inconsistencies, and duplication. Further- and a lack of digital devices and connectivity have lim- more, adequate funding of devolved functions will be ited training delivery and skills attainment. essential for ensuring accessible, high-quality services at the county level. Expanding participatory gover- SYSTEMATIC COUNTRY nance and monitoring into the decentralized system The third and final identified pathway is DIAGNOSTIC would increase the efficiency of public spending. Cit- KENYA Improving Governance for Service Delivery. izens need to be given a greater voice with respect to Establishing effective institutions and systems to govern the pub- local service delivery by creating more extensive and 18 lic sector is a multifaceted task involving the interrelationship between national and county government institutions and state more meaningful participatory processes with respect to service delivery chains. If properly implemented, EXECUTIVE devolution promises to improve governance signifi- unforeseen natural disasters, health crises, and eco- SUMMARY cantly by ensuring that authorities are more directly nomic shocks. accountable to citizens. Increasing gender equality and diversity enhances productivity, improves development outcomes for the next generation, and Cutting across all three pathways are allows businesses and institutions to perform more effectively. foundational issues that should be considered in the implementation of any development Gender inequalities in jobs and assets reduce pro- initiative: sustainability, inclusivity, and digital ductivity and investment for the economy overall technologies. and generate large and lasting negative impacts on household incomes. Closing gender gaps in Kenya Macro stability is fundamental to Kenya’s growth prospects and by will require a comprehensive strategy with targets extension to poverty reduction. A durable consolidation of across sectors and will necessitate addressing social the fiscal stance is needed to re-create the necessary norms to enhance human capital by improving wom- fiscal space for the public sector to deliver on devel- en’s health, education, and skills. The effects and costs opment priorities. So as not to compromise future of gender-based violence on health and well-being growth, most of the moderation in expenditures will are also significant barriers to development, gender need to come from reining in recurrent expenditures equality, and women’s socioeconomic engagement. and improving the efficiency of spending. Interest ser- Recommendations include the consolidation of ongo- vice payments account for 33.8 percent of tax revenues ing efforts at the county level to strengthen capacity (versus 16.5 percent in 2012), and a fiscal consolidation for integrated, multi-sectoral service provision for sur- trajectory that achieves and sustains primary balances vivors, including support for the holistic provision of will help stem the rise in debt stocks and curtail debt care and for referral pathways for medical, psychoso- service payments. Other specific expenditure-limiting cial, and legal support. measures include SOE reforms to reduce their drain on fiscal resources and streamlining government agen- Taking advantage of these opportunities will require addressing cies where functions are being duplicated. Further stubborn bottlenecks that are preventing the digital economy public sector wage growth needs to be moderated and from achieving its full potential in driving growth, job creation, payroll audits completed. In parallel, measures should and service delivery. Solutions include having more inde- be taken in revenue management. Overly optimistic pendent, agile regulation of the telecommunications revenue projections have contributed to fiscal slip- market to ensure competition, investment, and afford- pages, and more realism is needed. Revenue leakages ability of services, as well as strategic public and pri- from exemptions granted on VAT (3.6 percent of GDP) vate investments in digital infrastructure networks and corporate income tax (1.8 percent of GDP) amount to increase reach and performance throughout the to more than 5.0 percent of GDP, suggesting that there country. Kenya’s increasing levels of connectivity and is significant scope for boosting revenue by closing wider adoption of digital technologies can also pro- tax exemptions. Nevertheless, in light of COVID-19, fis- vide a foundation for improving the efficiency and cal space will need to be re-created over the medium effectiveness of public service delivery. Processes can term, because in the near term the priority should be automated, improving the customer experience be to use fiscal policy to dampen the harmful effects and decreasing opportunities for corruption. However, of the pandemic on lives and livelihoods. However, as economic transactions, public services, and social efforts to improve the efficiency of expenditures can interaction increasingly go digital, it will be critical to already begin. ensure that rural populations and vulnerable groups are not left behind. Climate change poses a risk for the sustainable implementation of all three pathways, and interventions will need to be climate smart to ensure sustainable outcomes. Developing a capacity for The SCD—based on five filters—identifies seven adaptation and building resilience to climate shocks key priorities for Kenya to advance the twin goals. are essential components of future growth in Kenya. The broader use of natural capital in the country Specific policy interventions are prioritized by their impact on the means that Kenya must be particularly careful to think twin goals and on spatial equity. Constraints are specified sustainably and maximize its climate change readi- for each of the two strategies for achieving the twin ness, specifically in agriculture, fisheries, and tourism. goals. Given the numerous constraints identified, it is Beyond the importance of environmental resilience, important to prioritize the most critical reform actions addressing climate change will also create opportu- within each of the pathways that can accelerate attain- nities for economic growth. New public and private SYSTEMATIC ment of the twin goals. This SCD adapts the filtering COUNTRY investments in renewable energy can create jobs, and criteria provided in the World Bank SCD guidelines. DIAGNOSTIC climate-smart agriculture and landscape management The criteria used here are: (1) the impact of the spe- KENYA can increase productivity. Kenya will also need stron- cific reform on the twin goals, (2) the improvement of 19 ger crisis prevention measures to ensure the long- spatial equity, (3) the complementarity of the reform term stability of its development efforts in the face of action with other interventions, (4) the time horizon EXECUTIVE SUMMARY for the reform to have an impact, and finally (5) the initiatives should be reallocated to the county level feasibility of being able to carry out the reform action. as quickly as possible, and the efficiency of health care spending should be increased. Health care pri- Priority 1: Improving the Operating Environment for Firms. Sig- orities should be changed, with specific public policy nificant gains can be made by removing regulatory interventions to address the high rates of child and barriers, enhancing regulatory management systems, maternal mortality, as well as stunting and malnutri- promoting better market discipline mechanisms for tion. The productivity of health care workers needs to SOEs, and encouraging private sector solutions. It will be enhanced by establishing the right incentives and be important to increase access to finance for MSMEs payment mechanisms, reducing absenteeism, and by establishing an efficient credit guarantee scheme, ensuring a more balanced sharing of resources. leveraging financial technology and alternative data sources for MSME finance, building the capacity of Priority 5: Improving Access to Quality Education Services to SACCOs, and increasing the accessibility of capital Improve Learning Outcomes. The long-term strategy of the for early-stage enterprises. Inefficiencies in land mar- education system should focus on schooling for learn- kets should be addressed through better land record ing and addressing regional disparities that persist in management and property registration systems, Kenya. The substantial lack of equity in access should implementing the National Land Use Policy (2016), be addressed, especially for girls and residents of completing the National Spatial Plan, and leasing informal settlements. The quality of teaching needs unused public lands to private sector actors. to be improved through greater reliance on contract teachers to fill the more than 100,000 vacant positions, Priority 2: Opening Markets and Enhancing Competitiveness through better teacher professional development, and a stron- Infrastructure Upgrades. Infrastructure investment can ger monitoring and performance evaluation system. help transform urban centers into hubs of productivity and job creation by investing in water and sanitation Priority 6: Strengthening Anti-Corruption Mechanisms and Institu- infrastructure, leveraging public-private partnerships tions. Although punitive measures such as the arrest and (PPPs) to advance infrastructure development, and prosecution of individuals have an effect, a more sus- providing adequate maintenance budgets for new tainable approach would be to promote performance infrastructure. Geographic and economic integration and accountability for service delivery. Public services, can be enhanced by further developing the north- including permits and licenses, should be digitized; a eastern transport corridor and upgrading rural infra- digital land registry should be established; and public structure. Finally, infrastructure upgrades can enhance procurement procedures should be reformed. connectivity with regional and global markets through investment in regional trade corridors, the promotion Priority 7: Strengthening Devolution to Enhance Service Deliv- of regional private sector initiatives, improvements in ery. Participatory governance mechanisms should be railway planning, and development of a national avia- expanded, public expenditure should be made more tion policy. transparent, and the roles of national and county gov- ernments should be more clearly defined. Building the Priority 3: Enhancing Commercialization Opportunities across capacity of county governments will also be import- Agriculture Value Chains. Sector-specific restrictions that ant, including greater funding for county-level service limit private investment in agricultural value chains delivery and better human resources management. should be removed. Training on relevant standards and streamlining the issuance of relevant certificates Finally, progress in closing data and knowledge gaps needs to be would allow farmers to join domestic and global sustained. Although Kenya has made impressive prog- value chains. The government can also leverage exist- ress in closing essential data gaps, further efforts are ing cooperatives to help smallholder farmers benefit needed to increase the frequency of surveys, for exam- from value chain opportunities. Finally, new agricul- ple to close additional data gaps in the context of agri- tural coordination mechanisms, such as the National cultural data while creating a more integrated national Commodity Exchange, can create important synergies statistical system, including ministries and agencies as throughout the sector. well as counties. Priority 4: Improving Access to Quality Primary/Basic Health Care. Public spending on health care and select priority SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 20 1.  Country context 1.1 Geography and people: population, Kenya is home to groups who immigrated there during British colonial rule, including from India A land of great diversity and Pakistan during the 19th century. Reflecting its rich and diverse history, Kenya ranks at the 97th per- Kenya is a large country in East Africa with great geographic and centile for ethnic and linguistic diversity among its topographical diversity. The rich variety of Kenya’s regions peer lower-middle-income countries (box 1). This cul- includes the Indian Ocean coast, the Lake Victoria tural complexity has had implications for governance basin, the Rift Valley and associated highlands, and and economic development. the eastern plateau forelands. The country’s climactic diversity is also remarkable, including arid, semiarid, temperate, and tropical zones. 1.2 Ethnic fractionalization, Historically, Kenya has been a melting pot of diverse cultures and peo- social cohesion, and ple groups. There are three main African groups in Kenya: governance: The journey Bantu, Nilo-Saharan, and Afro-Asiatic. Bantu is by far so far the largest group, and its speakers are mainly concen- trated in the southern third of the country. The Swahili Political competition in Kenya has traditionally been divisive in language and culture developed as the Bantu-speaking terms of political party and ethnicity. Some regions are home peoples developed trade links with seafaring Arab set- to specific communities, and geographic inequalities tlers.1 Europeans first visited the region in 1498, and the are often seen through the lens of ethnicity. Histori- Portuguese and Omanis later fought for control of the cally, there has been intense competition for political Kenyan coast and the associated trade routes. power as groups and their elites seek to access existing positions and gain advantage by designing and imple- Kenya’s sociocultural complexity continued to grow into the mod- menting policies. This strategy of clientelism, in which ern era, and it is now one of the most ethnically and linguisti- elites exchange public resources and material goods cally diverse countries globally. In addition to the African SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 1 Nurse and Spear (1985). 21 1. COUNTRY CONTEXT Box 1. Ethnic fractionalization and development: Blessing or curse? Evidence of the effect of ethnic fractionalization on development is mixed. Some researchers have found that high levels of ethnic fractionalization have a negative impact on democracy and the rule of law, as elites seek to capture state resources for the benefit of the ethnic groups they represent. This rent-seeking behavior leads to inefficient economic policies and a weak provision of public goods.a High levels of ethnic diversity have also been linked to corruption, patronage and nepotism,b and conflict.c In Africa, the most common form of corruption entails distribution of rewards, jobs, contracts, and promotions on the basis of ethnicity (Kimenyi 2006). La Porta et al. (1999) suggest that, in ethnically heteroge- neous societies, groups that gain power have an incentive to use state institutions to improve their position in relation to those of other ethnic groups. They predict that greater heterogeneity will lead to more interventionist, less efficient institutions (institutions serve the redistributive interests of ruling groups), fewer public goods (to prevent strength- ening other groups), and less political freedom (to reduce the risk of losing power). Ethnic diversity is not always asso- ciated with poor performance;d greater diversity has been found to increase productivitye and trade,f and without a dominant group, political contestation is more competitive, increasing voice and accountability. The level of ethnic and linguistic heterogeneity in Kenya is greater than in comparator countries (figure B1.1, figure B1.2). There are at least five large groups (each more than 10 percent of the population), but none of these is large enough to dominate all others. Groups form alliances to compete in a “first past the post” electoral system in which a simple majority of votes wins an election outright. This system encourages elites to mobilize ethnic constituencies. Those who lose are largely excluded from power arrangements, and almost immediately they begin to establish new alliances in preparation for the next election. This has established an inconclusive state of elections as a feature of Kenya’s politics, with continued threats of political violence and general instability at election times. Figure B1.1. Ethnic fractionalization Figure B1.2. Language fractionalization by country by country 1.0 1.0 0.9 0.9 0.8 0.8 0.7 0.7 SSA average 0.6 0.6 SSA average 0.5 0.5 0.4 0.4 0.3 0.3 0.2 0.2 0.1 0.1 0 0 Kenya Indonesia Ghana Malaysia Aspirational peers Lower-middle-income Philippines Philippines Indonesia Regional peers Ghana Thailand Malaysia Aspirational peers Lower-middle-income Upper-middle-income Regional peers Thailand Upper-middle-income Vietnam Kenya South Africa Vietnam South Africa 20th percentile lower-middle-income 20th percentile lower-middle-income 80th percentile lower-middle-income 80th percentile lower-middle-income Source: Find My Friends using the Typology Dataset. Source: Find My Friends using the Typology Dataset. aEasterly and Levine (1997); Alesina et al. (2003). bAlesina, Baqir, and Easterly (2000). cCollier and Hoeffler (1998); Alesina and Drazen (1989). dAlesina and La Ferrara (2005). eOttaviano and Peri (2005); Sparber (2010). fGould (1994); Girma and Yu (2000). for electoral support, has in some instances resulted With challenges in checks and balances, state resources have some- in partisan policy making. An electoral process based times been used to create patron-client networks linking the executive on a “winner takes all” framework is even more volatile to ethnic elites. Until recently, these networks have been given that political parties in Kenya are founded on how development resources trickled down to the local SYSTEMATIC COUNTRY ethno-regional lines and are not institutionalized. Par- level.2 Historical data suggest that distribution of pub- DIAGNOSTIC ties are formed and dissolved quickly simply to ensure lic services such as education, health care facilities, and KENYA that a candidate has a party affiliation. infrastructure followed patterns of access to political 22 2 Kanyinga (2016). 1. COUNTRY power. This had the effect of widening disparities in Because these elected officials make decisions about CONTEXT development, which in turn accentuated narratives of the distribution of resources for the devolved func- exclusion and grievances about access to power. In 2007, tions at the county level, these power struggles now tensions arising from these disparities manifested them- have much higher stakes. Electoral competition at the selves in contested election results and severe political county level also tends to follow local divisions such violence. The violence ended after parties agreed to as subethnic lines and other cleavages. This has some- a roadmap on a new constitution to address the chal- times resulted in less accountability regarding the lenges of exclusion and disparities in development. use of resources as groups seek to outmaneuver one another to gain control of county resources. A new constitution was adopted in 2010 to address governance and development challenges by radically altering the structure of gov- The Taskforce on Building Bridges to Unity is the most recent ernment. It defines two levels of government—national attempt to investigate critical governance challenges. The task- and county—and establishes 47 county governments force investigated challenges and made recommen- with powers to foster self-governance, promote social dations in nine key areas: corruption, lack of national and economic development, and provide services to ethos, devolution, divisive elections, safety and secu- the people.3 The constitution delineates the func- rity, inclusivity, responsibilities and rights, shared tions of the two levels of government, with counties prosperity, and ethnic antagonism and competition. responsible for delivering health care, agricultural ser- The recommendations are likely to be implemented vices, early primary education, aspects of water ser- through further substantial constitutional, legal, and vices, and other services. The national government is administrative reforms. responsible for making policies on these sectors and setting standards for service delivery. The constitu- There has been notable improvement in Kenya’s governance per- tion also requires county governments to receive at formance since 2010. The World Bank’s Worldwide Gover- least 15 percent of national revenue for the purpose nance Indicators allow for a standardized comparison of delivering these services. Disbursement of funds is of governance metrics between countries. The scores therefore a constitutional obligation and is not subject for Kenya show that governance effectiveness, regu- to the discretion of the national government. latory control, and voice and accountability are rela- tively strong, in recent years remaining less than half The 2010 constitution has created new opportunities for change. It of one standard deviation below the mean for the establishes a clear separation of powers between the dataset (table 1). Political stability and controlling cor- three organs of government and gives greater inde- ruption have marginally improved but remain close to pendence to the judiciary and Parliament, establish- one standard deviation below the mean. The weaker ing new institutions4 to counterbalance the power of results for these indicators reflect the ongoing sym- the executive. The constitution safeguards the politi- biotic relationship between politics and corruption in cal participation of the people as a national value and Kenya. principle of governance. It requires the public to partic- ipate in making decisions on public matters, which has The governance environment in Kenya has changed substantially had the effect of creating more space for civic engage- in the last several years and continues to evolve in response to the ment at the local level. At the same time, the constitu- new rules of the game. Public participation has resulted in tion provides for a strong bill of rights, which enshrines citizens becoming more vigilant regarding delivery of the rights of citizens to receive social services. Margin- services, holding national and county governments alized and vulnerable groups are protected through to account on use of public resources, and question- provisions that require their inclusion at various levels ing how development project decisions are made, of government and in decision-making processes. although in some instances, public participation is conducted without adequate civic awareness and The devolved system of governance was in part a response to the therefore is regarded as an end rather than a means sense of exclusion felt by segments of Kenyan society, including of fostering accountability in public affairs. The new the unfair distribution of resources. In theory, the political judiciary has played an important role in magnifying decentralization reduces the political stakes of Kenya’s citizens’ voices. The courts have in many instances presidential elections by mitigating its “winner takes reversed decisions by the executive if such decisions all” character, although the national problem of ethnic are not arrived at through public participation. The competition has to some extent been devolved to the courts have also reinforced implementation of the Bill counties through electoral competition for the posts of Rights by demanding greater attention for promo- of governor and members of the county assembly.5 tion of socioeconomic rights. SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 23 3 Article 174 on objects of devolution; Government of Kenya (2010). 4 Constitutional commissions and independent bodies that assumed some administrative responsibilities initially vested in the executive. 5 Abdille and Abdi (2016). 1. COUNTRY CONTEXT Table 1. Kenya’s governance performance, 2009–20186 Indicator Estimate 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Voice and accountability –0.33 –0.22 –0.27 –0.29 –0.21 –0.15 –0.15 –0.12 –0.20 –0.36 Political stability—no violence –1.43 –1.17 –1.24 –1.32 –1.17 –1.28 –1.24 –1.35 –1.13 –1.16 Governance effectiveness –0.63 –0.56 –0.57 –0.52 –0.46 –0.33 –0.30 –0.32 –0.32 –0.41 Rule of law –1.01 –0.94 –0.90 –0.82 –0.71 –0.42 –0.49 –0.44 –0.41 –0.41 Control of corruption –1.06 –0.91 –0.95 –1.09 –1.03 –0.93 –1.01 –0.89 –0.95 –0.85 Regulatory control –0.15 –0.08 –0.21 –0.30 –0.30 –0.32 –0.31 –0.30 –0.23 –0.23 Source: Worldwide Governance Indicators. 1.3 Governance and Kenya was higher than in Botswana and China and similar to that in South Korea and Thailand. Nonethe- development outcomes less, almost six decades later in 2013, the per capita income level in Kenya is only one-fifth of Botswana’s, The 2017 World Development Report on Governance and the Law one-fourth of Thailand’s, and one-sixth of China’s (fig- shows that there is a clear positive correlation between aggregate ure 1). These governance challenges have undoubtedly measures of governance and per capita income. It explains that, limited the effectiveness of development strategies, when powerful groups with narrow interests have especially by contributing to misallocation of produc- undue influence on policy (capture) they can slow tive resources, which in turn has lowered productiv- economic growth, even in the context of large state ity growth—the main source of long-term economic capacity.7 Many academic studies and Government growth and differences in wealth between countries.8 of Kenya reports reflect how development outcomes could have been much better were it not for gover- Despite this long-term underperformance, development outcomes nance challenges such as corruption, weak public have improved since the first transition of power under multiparty accountability, and a culture of impunity. democratic elections. Since 2003, per capita GDP in Kenya has increased by more than $1,200, compared with an These governance challenges have limited Kenya’s ability to capi- increase of only some $300 in the first four decades talize on development potential and improve development per- of independence.9 Similarly, compared to the first four formance. At independence in 1963, per capita GDP in decades following independence in 1963, there have Figure 1. Since independence in 1963, Kenya’s per capita income has grown less than its peers 12,000 10,000 Increase in per capita income, USD 8,000 6,000 4,000 2,000 0 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Botswana China Kenya Thailand SYSTEMATIC COUNTRY DIAGNOSTIC 6 To make the Worldwide Governance Indicators comparable, an Unobserved Components Model (UCM) is used to construct a weighted average of the individual indicators KENYA for each data source for all countries. The composite measures of governance generated by the UCM are in units of a standard normal distribution, with mean zero, standard deviation of one, and running from approximately –2.5 to 2.5, with higher values corresponding to better governance. Details of the methodology can be found at https:// info.worldbank.org/governance/wgi/ 24 7 World Bank (2017b). 8 Hope (2014); Government of Kenya (2006). 9 The last time Kenya saw a similar pace of increase in per capita GDP was in the first seven years of independence. 1. COUNTRY been improvements since 2003 in other non-income Figure 2. Kenya’s poverty rate projected to CONTEXT measures of welfare, including access to education, 2030 based on current growth assumptions preventing maternal mortality, and infrastructure. 50 Poverty rates have also declined over the last decade, but none- 40 theless remain high by the standards of lower-middle-income countries. The share of the population living below 30 Percent the national poverty line 10 fell from 46.8 percent in 2005/06 to 36.1 percent in 2015/16 and was projected 20 –13 million Shortfall to drop to 33.5 percent in 2019, reflecting a modest 10 but sustained improvement in living standards over the decade. Because of the agricultural sector’s heavy 0 dependence on rainfall, poverty reduction acceler- 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 ated during years of good weather and slowed during years of drought. Meanwhile, Kenya’s poverty rate with Poverty rate respect to the international poverty line also declined, Simulated poverty rate falling from 43.7 percent in 2005/06 to 36.8 percent 2030 goal in 2015/16 and 33.4 percent in 2019, below the Sub-­ Source: Pape and Mejia-Mantilla (2018). Saharan Africa average and among the lowest levels in the East African Community.11 last decade, annual household consumption growth With current growth assumptions and unchanged policies, poverty was approximately 2.5 percent, whereas inequality will persist through 2030. The country’s moderately robust decreased annually by 1.25 percent. A combination GDP growth over the past decade has not generated of policies increasing annual household incomes and commensurate increases in household consumption. consumption growth, as well as reducing inequality, Each percentage point of GDP growth has been asso- will be needed to sustainably reduce poverty by 2030. ciated with only a 0.57 percentage point reduction in the extreme poverty rate. Kenya’s poverty elasticity of growth is thus below that of Tanzania, Ghana, and 1.4 SCD conceptual Uganda, and is weaker than would be expected given framework: Growth, inclusiveness, and the country’s per capita GDP. To eradicate extreme poverty by 2030, Kenya’s poverty rate (measured at US$1.90 in purchasing power parity dollars) would sustainability have to fall by 6.1 percentage points each year while the country’s decade average is just 1.6 percentage The conceptual framework for this Systematic Country Diagnostic points per year. If poverty reduction continues at its (SCD) is influenced by the findings of the recent Kenya Poverty and current pace, the poverty rate will still be near 24 per- Gender Assessment, which indicate that attainment of the World cent in 2030 (figure 2), or higher depending on the Bank’s twin goals hinges on achieving faster, more inclusive eco- effects of COVID-19. nomic growth. Hence the conceptual framework adopted for this SCD is organized around two main strategies: Accelerating poverty reduction will require faster, more inclusive (1) higher aggregate output and productivity growth economic growth coupled with targeted poverty-reduction policies. (2) and equity and inclusiveness (figure 3). The frame- Poverty reduction is a function of inclusive growth and work also recognizes that these two thematic areas development, its effect on household incomes and are interdependent and identifies common founda- consumption, and transfers within the population. tional factors that underpin the acceleration of the Growth is important to increase the overall resources twin goals in Kenya. Against this background, the next available to the economy, but growth also needs to two chapters will cover each of the key thematic areas be inclusive and pro-poor so that poor households while recognizing the role of governance and institu- benefit from it. This can be achieved through higher tions as necessary. Given the identified constraints, wages, which allow greater household consumption, the fourth chapter identifies pathways that can be rather than higher returns on capital, the benefits of taken to accelerate attainment of the twin goals, while which accrue more to the non-poor. Furthermore, the fifth prioritizes the identified pathways. The report transfers within the population can reduce inequality concludes with identification of remaining knowledge and poverty. Despite high annual growth rates in the and data gaps. SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 10 11 Kenya’s national poverty line is defined as consumption necessary to reach a minimum caloric intake of 2,250 kcal per person per day, including a nonfood allowance. For example, Tanzania’s poverty rate declined from 34.4 percent in 2007 to 26.4 percent in 2018, and Rwanda’s from 60 percent in 2007 to 34 percent in 2017. 25 1. COUNTRY CONTEXT Figure 3. Kenya Systematic Country Diagnostic conceptual framework Strategies for achieving the twin goals Higher aggregate output Equity and and productivity growth inclusiveness Constraints Constraints Pathways Pathway Pathway Pathway Filters Priorities Priorities Priorities Foundational issues SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 26 2. Critical factors driving output and productivity growth 2.1 Growth experience: growth has rebounded to an average of 5.4 percent and remained resilient during and in the aftermath From economic slump of the global financial crisis,13 although the COVID-19 to robust growth global pandemic poses a significant threat to near- term growth (box 2). Despite performing better than The Kenyan economy has experienced robust, resilient growth the Sub-Saharan African average, Kenya’s growth over the past decade and a half. Kenya’s post-independence is below that of a number of regional and structural economic growth has gone through three broadly dis- peers (figure 6). The interrelated factors of governance, tinct phases: buoyant growth, economic slump, and structural reforms, and productivity growth have been robust rebound (figure 4). With 7.1 percent annual important drivers of performance. These factors are GDP growth from 1963 to 1980, the immediate post-­ further explored in this chapter. independence period represents the most buoyant growth phase thus far. It was also a period devoid of The recent recovery in Kenya’s GDP growth performance has the frequent political or election-related disturbances played an outsized role in reducing poverty. The World Bank’s that marred the next two phases (figure 5). Growth fell recent Kenya Poverty and Gender Assessment 14 shows to an average of 2.9 percent from 1981 to 2003, lead- that GDP growth (and not the redistribution effect) ing to a decline in per capita GDP.12 Since 2004, GDP accounted for some 60 percent of the decadal decline SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 27 12 Per capita GDP fell from $443 in 1980 to $220 by 1993 and increased to $390 by 2002. 13 If we exclude 2008, when the effect of the postelection violence was most severe, economic growth averaged 5.8 percent between 2004 and 2018. 14 Pape and Mejia-Mantilla (2018). 2. CRITICAL FACTORS Figure 4. Annual GDP growth Figure 5. Average GDP growth by period DRIVING 25 7.5 OUTPUT AND PRODUCTIVITY 20 6.5 GROWTH 5.5 15 4.5 10 3.5 5 2.5 1.5 0 0.5 –5 0 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 –0.5 Political crises or election year 1963–81 1982–2003 2004–2018 GDP growth (annual %) Source: World Bank. Period average growth Source: World Bank. Box 2. Effect of COVID-19 global pandemic on near-term gross domestic product growth Global supply chains are being disrupted, with the availability of intermediate and capital goods decreasing as a result of shutdowns in source countries as well as transport disruptions. Kenya’s monthly imports have begun to contract markedly. Goods exports (horticulture, tea, coffee) are coming under pressure. Flower exports have been hit hard because of significant decline in demand in Europe and lack of freight capacity. Travel restrictions have effectively brought tourism to a halt (international and domestic), leading to large losses in a crucial sector. As job losses mount in primary locations of the Kenyan diaspora (United Kingdom, United States, Middle East), a slowdown in remittance inflows is expected. Policies that have been needed to contain the spread of the virus (social distancing, home confinement, travel restric- tions, school closures, bar and restaurant closures, suspension of public gatherings, nightly curfew) are significantly constraining domestic demand. As a result, households have lost jobs or are unable to participate in economic activi- ties, including many poor households that depend on daily wages. Incomes have been lost or are significantly reduced, limiting personal consumption—the largest component of aggregate demand. Furthermore, even for those who are still employed, it is expected that, because of the heightened economic uncertainty, their precautionary savings rate will increase, further dampening aggregate demand. Similarly, as with households, given the collapse in economic activity and the prevailing uncertainty, investment demand from firms is expected to plummet until the crisis clears. Negative feedback loops are exacerbating the situation, as firms that depend on cash flows lack liquidity to fulfill com- mitments and could close because of bankruptcy. The economic outcome in the near term will ultimately hinge on how the COVID-19 pandemic evolves internationally and within Kenya, along with policy actions and the responses of households and firms, although in a baseline scenario that assumes economic activity is disrupted for only two months, gross domestic product (GDP) growth for 2020 is pro- jected to be 1.5 percent, down from a pre-COVID projection of 5.6 percent. However, in a worse scenario under which disruptions to economic activity persist for longer than two months, economic activity could contract by 1 percent or more. Both scenarios represent the weakest economic growth performance of the Kenyan economy in close to a decade and the first time in a decade that per capita income levels are projected to decline. Source: World Bank (2020b). in poverty (2005/06–2015/16) and an outsized 75 per- growth should help contribute toward an acceleration cent of the decline in rural poverty (figure 7). Excluding of poverty reduction in Kenya. This chapter analyzes the top 20 percent of urban households from the sam- the drivers of Kenya’s recent growth performance and SYSTEMATIC ple,15 the contribution of growth to poverty reduction identifies constraints on higher growth. COUNTRY rises to 91.7 percent. Hence the acceleration of GDP DIAGNOSTIC KENYA 28 15 The 2015/16 Kenya Integrated Household Budget Survey had an irregularly high level of nonresponse among households in Nairobi, which probably caused the survey to capture the upper end of the consumption distribution inaccurately. Removing the richest urban households from the analysis partially mitigates problems in analysis. 2. CRITICAL Figure 6. Annual GDP growth for Kenya Figure 7. Growth has been a key driver of FACTORS and peers (%) poverty reduction in Kenya over the past DRIVING decade OUTPUT AND PRODUCTIVITY 9 0 7.9 GROWTH 8 –10 7.1 6.8 7 –20 6 5.4 4.8 5.0 5.3 –30 5 4.7 4.3 4.4 –40 4 3.5 3.7 Percent 2.9 3.3 –50 3 2.0 –60 2 1 –70 0 –80 Structural peers SSA Regional peers Aspirational peers Kenya SSA Kenya Structural peers Regional peers Aspirational peers SSA Aspirational peers Kenya Structural peers Regional peers –90 –100 National (all) Rural National (excluding top 20% of urban households) 1963–1980 1981–2003 2004–2018 Distribution Growth Source: World Bank. Source: Pape and Mejia-Mantilla (2018). 2.2 Drivers of Kenya’s least to the increase in GDP growth since 2003—a sit- uation similar to those of Kenya’s regional peers (fig- growth experience ure 9). The industrial sector’s contribution has also increased, although growth of its nonmanufacturing 2.2.1.  Supply- and demand-side subsector (e.g., construction, which has benefited drivers of growth from an increase in public investment) has been the main determinant. These trends in sectoral contribu- On the supply side, the recent recovery in growth has been broad- tions since 2003 have persisted throughout the devo- based but driven primarily by the services sector. All sectors lution era (post-2012), with the main difference being have contributed to the upswing in economic growth acceleration in the growth of the services sector. of the Kenyan economy since 2003 (figure 8). This broad-based improvement in the economy suggests The agricultural sector has made relatively weak contributions that the changes in policies, institutions, and invest- to growth, and climate change makes this sector even more ments in the post-2003 era have been supportive of precarious. Weather patterns tend to be the stron- economic activity across sectors. Nonetheless, the ser- gest determinant of agricultural output, given that vices sector has dominated this turnaround, account- only 2 percent of arable land in Kenya is irrigated. ing for some three-quarters of the increase in GDP Although average annual rainfall is likely to increase growth, with the agricultural sector contributing the because of climate change, the variability of rainfall is Figure 8. Decomposition of Kenya’s Figure 9. Contribution to growth in value added by growth in value added by major country, 2004–2017 sector 6 12 5.3 10.4 5 10 8 7.8 4 Percentage points Percentage points 5.2 6.7 3.3 6.3 6.4 6.3 5.9 3 6 5.6 5.3 5.0 2.0 4.7 3.4 3.3 3.0 2 4 2.2 3.9 3.8 2.9 3.3 2.6 1.1 1.1 3.4 2 1.5 2.1 1 1.5 2.4 2.6 0.3 3.0 2.0 1.1 2.1 1.8 1.3 0.9 1.5 0.6 1.2 0.9 0.7 0.8 0.3 0.6 0.3 0.9 0.4 SYSTEMATIC 0 0 ETH RWA TZA UG BGD VNM LKA IDN MYS KEN ZAF COUNTRY 1991–2003 2004–2017 DIAGNOSTIC KENYA Agriculture Industry 29 Services Total growth Agriculture Industry Services Total growth Source: World Bank. Source: World Bank. 2. CRITICAL FACTORS Figure 10. Contribution to Kenya’s GDP Figure 11. Public debt, 2010–2019 DRIVING growth OUTPUT AND 8 12 70 PRODUCTIVITY GROWTH 1.3 1.5 60 6 10 Percentage points 1.0 0.9 Average 7.9 50 4 8 4.7 40 0.5 4.5 2 6 Average 5.1 2.3 30 0 –0.3 –0.2 4 –1.5 20 –2 2 10 1963–1980 1981–2003 2004–2017 0 0 Net exports Investment FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Government consumption Private consumption GDP growth Fiscal deficit Total public debt (gross) (RHS) Source: World Bank. Source: World Bank. expected to become more significant for agricultural 2013/14 and 2017/18, compared with an average of production. 16 Up to 45 percent yield reductions are 23.4 percent in the preceding four years. expected for maize, rice, and soybean by 2100. Simi- larly, up to 40 percent yield losses are expected for the The public sector is however unlikely to remain a driver of growth crucial commodity crops of tea and coffee, driven by in the future, given a significant narrowing of the fiscal space. the reduction in areas suitable for cultivation due to The expansionary fiscal stance has been coupled temperature increase. In parallel, it is estimated that with the underperformance in revenues (falling the cost of climate change for fisheries and aquacul- from 18.1 percent of GDP in FY13/14 to 16.1 percent ture will be 3 percent of GDP per annum by 2030 and in FY18/19), resulting in a rapid buildup of the debt possibly 5 percent by 2050. stock from approximately 39 percent of GDP in 2012 to 62.3 percent in FY19/20. As a result, fiscal pressures On the demand side, an increase in domestic demand has led to a in Kenya are building, with debt service accounting for rebound in GDP growth, although the contribution from net exports 33.8 percent of tax revenues, compared with 16.5 per- has been small. Increases in private consumption and cent in 2012 and 23.6 percent in 2017.17 Kenya’s risk investment were the main drivers of the increase in of external debt distress has consequently increased domestic demand (figure 10). The increase in private from low to high. Debt stock levels are higher in Kenya consumption is consistent with the decline in poverty than in regional, low-income, and aspirational peers rates. In contrast, the drag from net exports widened (figure 12). The debt-driven, public investment–led during this period, because the increase in imports (in growth model seems to have reached its limit. part due to greater capital expenditures from public investments) was relatively significant compared to 2.2.2.  Growth accounting: the subdued increase in exports. The productivity challenge Increased government spending has been a driver of domestic Factor accumulation has been the main driver in the recent pickup in demand and economic growth in recent years. Since 2012, gov- growth. Although labor force growth continues to be an ernment expenditure has been on an expansionary important driver, most of the increase in GDP growth path, driven by the establishment of institutions to in recent decades has come from capital deepening support the devolved system of government and ris- (figure 13). Reflecting still-high population growth but ing recurrent expenditures (wages, pensions, interest increasingly favorable demographics as younger peo- service payments; figure 11). Greater infrastructure ple reach working age, the expansion of the labor force spending has also played a role, including the comple- continues to be the single largest contributor to GDP tion of 472 kilometers of the standard gauge railway, growth (averaging approximately 2.3 percentage points adding 3,300 kilometers to the paved road network, per annum since 2004). This nonetheless represented expansion of the Jomo Kenyatta International Airport a decline in the contribution of labor to GDP growth. arrival and departure terminals, and acquisition of More than compensating for this decline has been a sig- rail-mounted gantry cranes for the port of Mombasa. nificant rise in the contribution of capital stock to GDP SYSTEMATIC COUNTRY Overall, total government expenditure increased to an growth by some 1.8 percentage points, which has in turn DIAGNOSTIC average of 26.6 percent of GDP in the years between contributed to an improvement in labor productivity. KENYA 30 16 17 Bryan, King, and Ward (2011). Kenya National Treasury and Planning (2018). 2. CRITICAL Figure 12. Fiscal balance, percent of average tax revenues (2015–2017) FACTORS 10 DRIVING OUTPUT AND 0 PRODUCTIVITY GROWTH –10 –20 –30 –40 SSA average –50 –60 –70 Thailand Philippines Malaysia Aspirational peers Indonesia Vietnam Regional peers Kenya Ghana Upper-middle-income South Africa Lower-middle-income 20th percentile lower-middle-income 80th percentile lower-middle-income Source: Find My Friends using the IMF Financial Access Survey and Global Financial Development. Although the contribution of total factor productivity (TFP) to GDP This higher TFP growth in the post-2003 period has growth in Kenya is rising, it significantly lags that of comparators. accelerated in the post-2013 devolution era. Never- TFP measures the portion of output not explained by theless, TFP growth in Kenya lags that of several other the amount of inputs used in production, representing countries in the subregion (figure 14) such as Rwanda efficiency gains such as improvements in technology (2.4 percentage points) and of aspirational peers such and labor force skills. TFP made a positive contribution as Malaysia (1.8 percentage points). Furthermore, one to growth during the 1980s, but this was cancelled of the effects of the COVID-19 crisis, especially if it out by a significant decline in the TFP contribution in persists for a long time, is that it is likely to undercut the following decade. During the post-2003 growth the potential output of the Kenyan economy (box 3), recovery phase, TFP’s contribution to GDP growth has making it even more important to understand the pre- averaged some 0.9 percentage points. This return to vailing constraints on productivity growth. Section 2.3 positive productivity growth has been one of the driv- examines in more detail some of the constraints on ers of the improved aggregate growth performance. productivity growth in Kenya. Figure 13. The contribution to growth from Figure 14. . . . nonetheless, TFP growth’s TFP has risen in recent years . . . contribution in Kenya is lower than its peers, 2004–2017. 6 4.0 3.5 3.4 5 0.9 3.0 2.8 2.8 2.7 4 Percentage points 2.5 2.4 2.3 3 2.0 1.8 1.8 2 1.5 1.2 2.7 1.0 0.9 1 2.2 0.5 0.2 SYSTEMATIC 0.4 0 –0.2 0 COUNTRY LKA VNM IDN BGD RWA TZA MYS UG KEN ZAF DIAGNOSTIC –1 KENYA 1981–2003 2004–2017 31 Capital stock Labor Total factor productivity Total factor productivity growth Source: World Bank. Source: World Bank. 2. CRITICAL FACTORS DRIVING Box 3. Effect of the economic crisis on potential gross domestic product OUTPUT AND PRODUCTIVITY Long-lasting recessions can undermine not just near-term growth, but also the growth potential of the economy. In GROWTH other words, recessions can cause a highly persistent loss in aggregate national output.a First, a crisis can reduce poten- tial output in the short and medium term by decreasing investment. The ensuing slower capital accumulation can also impact the obsolescence of some capital vintages. Second, credit constraints impair the system of capital allocation. Third, entrenched rigidities (e.g., in labor or product markets) limit the level and growth of total factor productiv- ity over the medium to long term by hindering the ability of the economy to rapidly adjust to the economic shock. Fourth, research and development spending tends to be procyclical, and lower research and development spending and innovation during a recession could undermine productivity growth.b Fifth, long periods of recession could lead to permanent destruction of human capital, often engendered by the “hysteresis effect,” in which workers who lose their jobs find it difficult to rejoin the labor market.c Although much of the research on this topic has been conducted in Organisation for Economic Co-operation and Development (OECD) economies, several of the channels by which potential gross domestic product growth can be reduced are relevant to the Kenyan situation—in particular, concerning capital accumulation, including physical capi- tal from the public and private sectors, as well as potential erosion of the human capital base. aHaltmaier (2012). bEuropean Commission (2009). cBall (2015). 2.2.3.  Structural reforms, The single most important determinant of changes in per capita GDP growth in Kenya over the long term has been the pace of struc- productivity, and governance tural reforms. In the 1980s and 1990s, when growth was Policies, institutions, investments, and exogenous factors influence at its weakest, the contribution of structural reforms long-term growth of an economy. Although growth account- was barely positive—in the 2000s their contribution ing helps explain the sources of growth, it does not quadrupled as compared to the abysmally low contri- explain what the causal drivers of growth are. Eco- bution in the two preceding decades (figure 15). These nomic growth literature groups the drivers of long-run results are not surprising because the economic litera- growth into four broad categories: structural policies ture points to the positive causal relationship between and institutions, stabilization policies, external con- structural reforms and productivity growth.19 ditions, and transitional dynamics. 18 This report uses an endogenous growth model following the work of The slow pace of structural reforms in Kenya in the 1980s and 1990s Loayza, Fajnzylber, and Calderon (2005) and Araujo was detrimental for development outcomes. By the 1980s, the et al. (2014) to determine the contribution of these Kenyan economy had been reoriented so that the factors to Kenya’s long-run per capita GDP growth state controlled several critical markets in a way that performance. The ensuing discussion will focus on it had not during the decade immediately following the determinants that policy can influence (mainly independence. These included a pegged exchange structural and stabilization policies) because exter- rate and the licensing of foreign exchange transac- nal conditions and transitional dynamics are exoge- tions, import licenses, interest rate controls, selective nously determined for most small, open economies. controls on bank lending, and direct price controls “Structural reforms” in this analysis refers to changes (especially of agricultural goods). Furthermore, gov- in government policies, practices, and institutions that ernment consumption spending also rose rapidly can help create an enabling environment for growth relative to economic activity as reflected in a bloated and job creation. This can include changes in the public sector. Although reforms were instituted, they domains of public education, financial development, were only partial, with many stop-and-go efforts and trade openness, government fiscal burden, and infra- limited changes to economic governance. The cost of structure investment. These reforms are expected to the slower pace of structural reforms or lack thereof in improve productivity and the efficiency of factors of the 1980s and 1990s, combined with a deepening of production, increasing the long-run growth potential governance challenges such as corruption and weak- of the economy. (See Appendix A for details.) ening of the rule of law, contributed to the economic SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 18 Transitional convergence is measured by the one-year lag of GDP per capita. Structural policies and institutions are measured by using as proxy indicators the combined 32 effect from schooling, financial development, trade openness, government burden, and telecommunication infrastructure. Stabilization policies are proxied by the combined effect of inflation, real exchange rate, and a dummy for financial crisis. External conditions are proxied by export price index and terms of trade growth. 19 Bordon, Ebeke, and Shirono (2018); Christiansen, Schindler, and Tressel (2013); Bouis et al. (2012); Bourlès et al. (2010a); Nicoletti and Scarpetta (2003); Syverson (2011). 2. CRITICAL Figure 15. Drivers of growth in Kenya, 1985– Figure 16. Contribution of structural reforms to FACTORS 2015 (change in log of GDP per capita) growth, 1985–2015 (change in log of GDP per DRIVING capita) OUTPUT AND PRODUCTIVITY 0.14 0.12 GROWTH 0.07 0.09 0.02 0.04 –0.03 –0.08 –0.01 –0.13 –0.06 –0.18 –0.11 –0.23 –0.28 –0.16 1985–2000 2005–2015 1985–2000 2005–2015 Trade openness Schooling Stabilization policies External conditions Financial development Government burden Transitional convergence Structural reforms Infrastructure Source: Authors’ calculations from Brueckner (2019) endogenous growth model. slump from 1981 to 2003, as reflected in the decline in reforms to the level of its best-performing aspira- per capita GDP, the increase in poverty, 20 rising crime tional peers, per capita GDP growth would increase rates, a deterioration in health outcomes, a decline in by 12.7 percent per annum, with 80 percent of that school enrollment, and failing infrastructure. increase coming from structural policies, approxi- mately 6 percent from stabilization policies, and the The first democratic change in power to an opposition party since remainder from transitional convergence. Reflecting independence occurred in 2003 and opened up some political space the importance of adopting best-practice structural to break from the entrenched behaviors of the past and accelerate reforms, the benefit to Kenya would drop by more the pace of structural reforms. Governments since 2003 have than half were Kenya to calibrate its structural reforms increased the pace of structural reforms, including to those of the average of its aspirational peers. Fur- through restoring macro stability, efforts to strengthen ther reflecting the importance of sustaining favorable and establish governance institutions, rehabilitating structural reforms, per capita GDP growth would have and expanding physical infrastructure, investing in declined if progress in structural reforms had been human capital, and addressing cumbersome busi- similar to that in Malaysia, the worst performer in the ness regulations (section 2.3). Improvements in struc- group of aspirational peers (figure 17). The continued tural reforms since the 2000s are consistent with the and steady increase in TFP growth in recent years sug- pickup in productivity growth, strong acceleration gests that ongoing structural reforms are supporting in per capita GDP, and progress in poverty reduction the increase in growth (figure 18). Nonetheless, TFP (Chapter 3). Estimates from the endogenous growth growth in Kenya being weaker than in several of its model for Kenya show that improvements to infra- aspirational peers suggests that much room to accel- structure, human capital, fiscal discipline (government erate the pace of structural reforms remains. consumption burden), financial sector development, and trade openness have contributed the most to the In summarizing the first half of this chapter, four key observations improvements in per capita GDP growth (figure 16). can be made. First, although Kenya’s growth performance has recovered to relatively robust levels in recent Notwithstanding this progress, the contribution of structural decades, there is room for improvement. Second, reforms to per capita GDP growth in Kenya still lags that of its aspi- given the narrowing of the fiscal space, the extent to rational peers, suggesting that there is further room for accelerat- which the public sector can continue to drive growth ing structural reforms. Although the increase in structural has been significantly curtailed, hence the need to reforms from the 2000s has arrested the deterioration spur more dynamism in private investment. Third, in economic performance that characterized the 1980s although the contribution of total factor productivity and 1990s, governance challenges persist (section 1.2), to growth is rising, it remains low, with factor accumu- and room remains to engender even higher productiv- lation being the main driver of growth in recent years. ity growth by accelerating structural reforms. Simula- Fourth, although structural reforms have increased tions using the endogenous growth model show that since the mid-2000s (in contrast to the slow pace in structural (in particular) and stabilization policies are the 1980s and 1990s) and have helped increase pro- SYSTEMATIC critical elements for attainment of this vision. Over ductivity growth, their contribution to growth in COUNTRY the next 10 years, were Kenya to advance its structural Kenya lags that of peers. Structural reforms being the DIAGNOSTIC KENYA 20 Data from Kenyan authorities indicate that poverty is estimated to have risen from 11 million, or 48 percent of the population, in 1990 to 17 million, or 56 percent of the population, in 2001. 33 2. CRITICAL FACTORS Figure 17. Impact of structural reforms on Figure 18. Per capita income growth trends DRIVING economic growth of Kenya and selected for Kenya if it adopted the best (scenario 1), OUTPUT AND peers (change in log of GDP per capita) average (scenario 2), and worst (scenario 3) of PRODUCTIVITY structural reforms among peers GROWTH 0.60 40,000 0.50 0.40 30,000 0.30 GDP per capita 0.20 20,000 0.10 0 10,000 –0.10 –0.20 0 Malaysia Thailand Kenya Philippines Indonesia Bangladesh Sri Lanka Vietnam 2017 2022 2027 2032 2037 2042 2047 Year 1985–2000 2005–2015 Scenario 1 Scenario 2 Scenario 3 Source: Authors’ computations based on endogenous growth model in Brueckner (2019). single most important determinant of growth over the long term suggests that there is room to accelerate the 2.3  Constraints on pace of the structural reform agenda. Given the seis- productivity growth in Kenya mic change in governance since 2012, the positive results of recent higher growth, the increase in total Sustained increases in productivity are critical for achievement of factor productivity, and the increase in the pace of the twin goals. Paul Krugman famously said “productivity structural reforms have been more pronounced in the isn’t everything, but, in the long run, it is almost every- devolution era than before, supporting the increase in thing.” Long-term increases in earnings in industry or growth, although fiscal challenges have become much agriculture—the source of employment and liveli- greater in the devolution era than they were in the hoods for many of the poor—can be achieved only by pre-devolution era. increasing worker or farmer productivity. 21 To analyze the drivers of productivity growth in Kenya, this SCD Understanding the constraints on productivity growth in the Ken- adopts the conceptual framework presented in Cuso- yan economy is critical to accelerating future growth. The growth lito and Maloney (2018). At the core of their framework diagnostic undertaken in the first half of this chap- is that productivity growth comes from three main ter showed that there is room to accelerate growth sources: reallocation of factors of production across through productivity increases. The second half of firms and farms from less to more productive ones; this chapter will focus on the specific constraints on improved within-firm and -farm performance; and productivity growth in Kenya. This is important not greater dynamism, which allows for entry of more pro- only because productivity increases will boost growth, ductive firms and exit of less productive firms. which has proven to be the most important driver of poverty reduction in Kenya, but also because, in an Productivity increases within firms and farms have predominantly era of fiscal consolidation in which the contribution driven the recent increase in productivity growth, with the con- to growth from government spending is expected to tribution from dynamic reallocation being minimal. The contri- wane, it is important to maximize growth from avail- bution of productivity increases from the reallocation able limited resources. With Kenya’s productivity of factors of production, and the dynamic entry of growth lagging that of peers, this makes the case for more productive firms represents less than 5 percent accelerating productivity even more urgent. Further- of the recent increase in total factor productivity in more, with the potential of the COVID-19 pandemic to Kenya (figure 19). This is lower than in other coun- undermine potential GDP growth, understanding the tries (figure 20), indicating that Schumpeter’s creative constraints on productivity growth is even more criti- destruction process, which historically has accounted cal to better inform the policies, institutional reforms, for long-term prosperity, is remarkably weak in Kenya. SYSTEMATIC and investments that will help rebuild the economy In other words, productivity growth is largely com- COUNTRY DIAGNOSTIC during the post-COVID-19 recovery. ing from incumbents within the same sector, with KENYA 34 21 Cusolito and Maloney (2018). 2. CRITICAL Figure 19. Within sector improvements have Figure 20. Contributions to productivity FACTORS been the predominant driver of productivity growth by country and by source DRIVING growth in Kenya OUTPUT AND PRODUCTIVITY 1.0 1.0 GROWTH 0.8 0.8 Contribution to physical total factor productivty growth 0.6 0.6 0.4 0.4 0.2 0.2 0 0 –0.2 –0.2 –0.4 Chile (1996–2006) China (2000–2007) Colombia (1993–2012) India (2000–2008) Ethiopia (2000–2007) Malaysia (2005–2010) –0.6 –0.8 –1.0 1991–2002 2003–2017 Within Between Net entry Within Between Net entry Source: Cusolito and Maloney (2018). Source: World Bank, using Shapely Decomposition. little room for new players, a phenomenon that could The significant narrowing of fiscal space is thus lim- reflect challenges due to barriers to entry. iting the ability of the state to finance critical public goods needed to support inclusive growth, including The recent International Finance Corporation (IFC) Country Private in health care, water and sanitation, and education, as Sector Diagnostic report provides some insights into some of the well as to provide more resources for devolved units constraints affecting the business environment in Kenya.22 These and development expenditures. The fact that reve- constraints can be categorized as those that affect the nues have continued to underperform and that most macroeconomic environment (e.g., the crowding out of the rigid expenditures are in recurrent expenditures of private investment due to the expansionary fiscal makes the situation more challenging. stance) and those of a microeconomic nature that affect the investment climate (e.g., regulatory burden, The fiscal measures taken to mitigate the economic effects of the entry barriers, corruption, a large presence of state- COVID-19 pandemic, although necessary, have exacerbated fiscal owned enterprises and state-linked enterprises, high pressures. With rapid accumulation of debt in recent levels of informality). years, large deficits, rigidities in government expen- ditures, and persistent shortfalls in revenue perfor- mance, Kenya entered the COVID-19 pandemic with 2.3.1.  Macroeconomic constraints significantly depleted fiscal space. In recognition of on productivity growth this, the government had set an ambitious fiscal con- Fiscal pressures are the greatest threat to macroeconomic stability, solidation target to help rebuild fiscal buffers. Given which is essential for creating an economic environment that fos- the important countercyclical role that fiscal pol- ters productivity. Fiscal space has narrowed significantly icy needs to play and the severity of the economic in recent years, becoming one of the greatest threats shock, the government has provided some relief to to macro stability and by extension to the productiv- households and businesses by reducing tax rates ity of the economy. Debt to GDP ratios have surged and increasing spending in the health sector and on from 39 percent of GDP in 2013 to 62 percent of GDP social safety nets. The combination of these measures in 2019, with the composition of that debt shifting is expected to have widened the deficit by some 1.6 toward more expensive commercial sources. This has percent of GDP, further delaying the urgently needed increased debt servicing costs, which rose from 2.1 fiscal consolidation. Furthermore, reflecting an already percent of GDP in 2012 to 4.0 percent of GDP by 2019. challenging fiscal situation and its exacerbation as a Furthermore, the recent increase in external commer- result of COVID-19, the most recent debt sustainabil- SYSTEMATIC ity analysis found that Kenya’s risk of debt distress had COUNTRY cial lending has increased the vulnerability of the econ- DIAGNOSTIC omy, given the vagaries of global financial markets. risen from moderate to high. KENYA 22 IFC (2019). 35 2. CRITICAL FACTORS DRIVING Box 4. Productivity differentials and resource misallocation across sectors in Kenya OUTPUT AND PRODUCTIVITY Manufacturing productivity in Kenya is low and lags services productivity. Across the entire distribution, productivity for manufactur- GROWTH ing is lower relative to services (figure B4.1). This is consistent with the much stronger contribution of services sector growth over the past two decades to overall aggregate growth, as compared to the contribution from manufacturing. Figure B4.1. Manufacturing productivity is lower relative to services Aggregate kernel density Aggregate kernel density 0.35 0.35 0.30 0.30 0.25 0.25 0.20 0.20 Density Density 0.15 0.15 0.10 0.10 0.05 0.05 0 0 0 5 10 12 14 16 18 20 0 5 10 15 Log of VA/L Log of TFP est. Aggregate Manufacturing Services Aggregate Manufacturing Services Source: Cusolito and Cirera, 2016. Note: The kernel represents the productivity distribution function and shows the degree of dispersion in productivity across firms. Log of VA/L is labor productivity measured as the value-added of labor, while TFP is the proportion of output not explained by the contribution of the factors of production (labor and capital). The misallocation of resources in the manufacturing sector is more prevalent than in the services sector, contributing to lower productivity in manu- facturing. The kernel function shows wider dispersion in productivity across firms in manufacturing than in services, with the left tail of productivity distribution (where the less efficient firms reside) much thicker for manufacturing than for services. This indicates the potential for the existence of policies that favor survival of inefficient firms in the manufac- turing sector more than in the services sector, which suggests that resource misallocation is greater in manufacturing than in services. In other words, high-productivity firms are not able to attract the scale of resources (labor and capital) needed to enable them to optimize output. Given the potential for the manufacturing sector to be a job creator (as also reflected in the Government of Kenya’s “Big Four Agenda”), greater resource misallocation in the sector indicates less than optimal output, and by extension the ability of the sector to create decent jobs that can help decrease poverty in Kenya. Productivity dispersion and resource misallocation are much larger in the Kenyan manufacturing sector than in other countries. A compari- son of dispersions in total factor productivity (TFP) with those of other countries such as China and India or other African countries such as Ethiopia and Ghana shows a much larger dispersion of technical efficiency in Kenya than in the other countries for quantity TFP and revenue TFP,a which indicates that distortions are pervasive in the man- ufacturing sector in Kenya. Reflecting the higher levels of distortions in Kenya, the study finds that a more optimal allocation of labor and capital across firms could lead to productivity and output increases of 162 percent in Kenya, compared with 66.6 percent in Ethiopia and 75.5 percent in Ghana. This indicates potential significant benefits to output growth, job creation, and poverty reduction resulting from removal of barriers to optimal resource allocation in manufacturing. Significant misallocation of resources in Kenya’s agricultural sector in part explains the low levels of productivity in the sector, even compared with other Sub-Saharan African economies. A recent study of select Sub-Saharan African economies showed that the difference in agricultural productivity between countries is not because of differences in agronomic conditions but rather due to differences in policies and institutions that misallocate resources between farms.b A scenario in which policies are put in place to allow for the optimization of crop selection shows that the yield for all crops increases significantly, although the magnitude of the increase in yields for Kenya is much higher than in comparator countries, suggesting that the degree of distortion in Kenya is higher than in the select Sub-Saharan African countries. In that scenario, under condi- tions of low rains, it is estimated that aggregate agricultural yields in Kenya will increase by 275 percent, compared with SYSTEMATIC 125 percent in Ethiopia and 25 percent in the Democratic Republic of Congo. The extent of distortion in Kenya is even COUNTRY starker when the scenario is simulated under conditions of high rainfall, under which, thanks to optimization of crop DIAGNOSTIC selection, output increases more than 900 percent. KENYA 36 2. CRITICAL FACTORS Many policies and institutions contribute to low agricultural productivity in Kenya. Yields of maize (1,628 kg/ha in 2015), Kenya’s main DRIVING staple, are lower than in neighboring Ethiopia and Uganda, and are even lower than levels achieved two decades ago OUTPUT AND (1,918 kg/ha in 1994). Similarly, yields of Kenya’s export crops, such as coffee and pyrethrum, have fallen to levels of PRODUCTIVITY two or three decades ago. Insufficient use of good-quality inputs (seeds, breeds, fertilizer, irrigation), decreasing aver- GROWTH age farm size, inadequate credit, and slow uptake of modern production technologies (mechanization, greenhouses, information and communications technology) limit agricultural productivity. Despite government subsidies, average fertilizer use in Kenya is still only 30 kg/ha, whereas at the peak of the green revolution in Asia, fertilizer use averaged more than 100 kg/ha.c Other causes of low productivity include pest and disease outbreaks (fall armyworm, Rift Valley fever), poor soil health (acidity due to excessive use of nitrogen fertilizer), poor delivery of extension services, inade- quate investment in infrastructure, climate shocks, and low farm labor productivity. These poor outcomes are in part due to certain institutional arrangements and policy interventions by government that have adversely impacted pro- ductivity in the sector. These include policy distortions from interventions in specific agricultural input and output markets, the outsized presence of government state-owned enterprises in certain markets, bureaucratic licensing requirements, and insufficient investment in or support of development of public goods most needed for agriculture (e.g., research and development, irrigation, extension services). Government domination of certain agricultural subsectors (e.g., fer- tilizer, seeds, grains) has made access to inputs erratic and opened opportunities for rent seeking. The extent of resource misallocation in the Kenyan economy indicates the need to advance the structural reform agenda. Review of misallo- cation in Kenya reveals significant distortions in the economy (especially in manufacturing and agriculture) that are impeding optimal allocation of resources in the economy and thereby limiting the overall productivity of factors of production. These results are consistent with the earlier growth analysis that found TFP growth to be low in Kenya, even if it is rising. aCirera, Fattal Jaef, and Maemir (2017). bWorld Bank (2019a). Boosting Productivity Growth in Africa. cDavid and Otsuka (1994). The expansionary fiscal stance in recent years, coupled with the to historically high interest rates, which in turn has earlier imposition of caps on interest rates, contributed to crowding crowded out private sector investment, with implica- out private investment and curtailing productivity growth. Unlike tions for gross fixed capital formation, which is lower the solid contribution to growth from the public sec- in Kenya than among aspirational peers (figure 22). tor, the contribution from private investment has been In September 2016, the government capped interest negative in recent years, with the four-year moving rates that banks can charge at 4 percentage points average declining from 1.3 percent of GDP in 2013 to above the base rate set by the Central Bank of Kenya. negative 0.7 percent in 2017 (figure 21). Given that Given the binding nature of interest rate caps, this much public investment in Kenya has been financed policy change had the unintended consequence of through increased debt, including from the domes- excluding riskier borrowers, many of whom are small tic market, the increased borrowing has contributed and medium enterprises (SMEs). The removal of caps Figure 21. Private investment contribution Figure 22. Gross capital formation (% of GDP) to GDP growth has declined 2 30 28.1 26.0 26.2 24.9 24.5 25 Four-year moving average (%) 20.6 20 18.3 18.0 17.0 1 15.0 15.3 15 13.0 10 0 5 0 Regional peers Structural peers Aspirational peers Kenya Regional peers Structural peers Aspirational peers Kenya Regional peers Structural peers Aspirational peers Kenya –1 SYSTEMATIC 2012 2013 2014 2015 2016 2017e COUNTRY DIAGNOSTIC Government investment KENYA Private gross fixed investment 1990–1999 2000–2009 2010–2017 Source: Kenya National Bureau of Statistics and World Bank. Source: World Bank. 37 2. CRITICAL FACTORS in November 2019 is, however, expected to ease these investment. The existence of these sub-sectoral-level DRIVING credit constraints, although COVID-19 is likely to slow restrictions undermines the effect of the remarkable OUTPUT AND the speed of recovery. efforts Kenya has made to improve its position in the PRODUCTIVITY Ease of Doing Business rankings. Nonetheless, reforms GROWTH to improve the establishment (e.g., the starting a busi- 2.3.2.  Microeconomic constraints ness indicator) or operations (e.g., the accessing credit on productivity growth or registering a property indicator) of a business can be The business regulatory environment needs to be improved, with undermined at the sectoral level if, in the first instance, investors continuing to complain that it is complex, costly, and the private sector faces restrictions to entry or, when unpredictable. Kenya has attracted an average of only in operation, private sector participants face restric- 1.2 percent of GDP in foreign direct investment flows tions on expansion because of regulations that protect in recent years, one of the lowest in Sub-Saharan incumbents, including SOEs. In a post-COVID environ- Africa, which has averaged 4.7 percent of GDP, and ment, when many businesses will need to restart, it is significantly lower than other non-resource-rich will be important that the barriers to entry be lowered countries such as Ethiopia and Rwanda, which have and the regulatory environment levelled to enable the attracted flows in excess of 3.3 percent of GDP. In part most productive businesses to thrive. Table 2 summa- this reflects the numerous restrictive regulations at the rizes some areas of restrictions observed in the recent sectoral level that serve as barriers to entry or invari- Country Private Sector Diagnostic.23 ably protect incumbents, inevitably hindering private Table 2. Sector-specific competition restrictions Sector Subsector Competition restrictions Burdensome regulations and government intervention prevent equal access. Import licenses, Staple grains quotas and tariffs, influence through the National Cereal and Produce Board in the maize sector, and information exchange among competitors distort the value chain. Incomplete regulatory framework prevents effective entry of private processors and protects Pyrethrum Pyrethrum Processing Company of Kenya—an SOE. Agriculture Unreasonably high regulatory requirements affect entry and prevent equal access, including Tea minimum hectarage requirements and restrictions on where factories source leaves. Sugar Nontariff barriers (quotas, mandatory import permits, inefficient SOEs) restrict open entry. Government interventions affect entry and prevent equal access of SOEs and private Seeds companies. Lack of transparent regulatory framework for pro-competitive spectrum allocation affects entry Telecom and prevents equal access for potential providers of broadband services. Electronic communications Mobile payment Limited interoperability between mobile payment operators and neutral access to systems clearinghouses limits ability of smaller players to grow. There are concerns about regulatory neutrality given government participation and delays in the Electricity Generation implementation of an open market for large electricity consumers. Legal and Mandatory minimum prices and restrictions on participation by foreigners, advertising, and Professional architectural partnerships across professions limit entry and business strategy options and increase costs of services services services for businesses. Insurance and Restrictions on foreign equity participation, regulation of insurance premiums, and information- Insurance brokerage services sharing practices facilitate collusion and increase costs for business. There are regulatory issues related to licensing of new players, ownership restrictions even Passenger Air transport within the East African Community common market, and underdeveloped framework of slot transportation allocation. Restrictive trade rules (tariffs, quotas, permits) on inputs such as steel and wood products Construction Inputs result in high prices for developers. SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 38 23 IFC (2019). 2. CRITICAL The large presence of legacy SOEs is an important constraint on SOEs, links between competing firms through partial FACTORS productivity growth. Kenyan businesses face high lev- government shareholding, and a lack of competitive DRIVING els of government intervention in areas where the neutrality given limited de facto separation of reg- OUTPUT AND PRODUCTIVITY private sector has a significant presence and where ulatory and commercial activities in sectors such as GROWTH government service provision should therefore be electricity, air transport, telecommunications, and unnecessary. Businesses face immense regulatory agriculture are still crowding out the private sector requirements for entering new markets, and Kenya (particularly new investors) (box 5). lacks effective rules to facilitate entry, contestability, and effective domestic competition, a situation that The interlinkages between government and business affect devel- has dampened investment. Direct competition from opment outcomes. Although the constitution and the Box 5. Productivity gains and fiscal savings from reforms to state-owned enterprises The large presence of state-owned enterprises (SOEs) in sectors where private participation is viable is a hindrance to competition and productivity growth. Kenya scores higher than the OECD average and other middle-income countries on degree of state intervention (figure B5.1). The country registers SOEs in at least 17.0 sectors compared with an average of 15.4 in OECD countries, including in sectors where there is active private sector participation such as retail, accommodations, manufacturing, banking, insurance, and agri-processing. In enabling sectors that provide essential inputs to the rest of the economy (electricity, transport, finance, telecommunications, education) and where natural monopolies and SOEs are import- ant, effectiveness in achieving policy goals in terms of affordability and access to quality services is limited, affecting costs for enterprises in traded sectors. SOEs also place a significant burden on fiscal accounts, running deficits particu- larly in agriculture, health, and communications and with debt—particularly for railways and electricity—amounting to 7 percent of GDP in 2016. Figure B5.1. Economy-wide product market regulation score 3.5 3.10 3.0 2.56 2.5 BTI: 0.69 2.0 Score (0:6) 1.5 BTE: 0.93 1.13 1.0 0.5 State control: 0.94 0 Top 5 average OECD average Chile El Salvador Costa Rica Turkey Bulgaria Romania Peru Colombia Mexico Nicaragua Israel South Africa Russia Dominican Rep. Jamaica Brazil Kenya China Honduras India Source: OECD PMR database and OECD-World Bank Group PMR database. Note: The Product Market Regulation indicators database measures the degree to which policies promote or inhibit competition in areas of the product market in which competition is viable. The scale is from 0 to 6, from least to most restrictive of competition. Mechanisms to hold SOEs accountable for their output are weak. SOEs are the primary vehicle for overseeing, delivering, and imple- menting large-scale projects and services, although their governance and administrative arrangements often do not support efficient discharge of these responsibilities. SOEs fall outside the standard budgeting, financial reporting, and performance management protocols of the government (line ministries). Appointments to leadership positions in SYSTEMATIC certain instances reflect political patronage, as opposed to merit-based appointment. Efforts to merge parastatals in COUNTRY crucial sectors and to integrate related laws, among others, have had limited success (e.g., reforms in the agriculture DIAGNOSTIC KENYA sector). The delay in transfer of SOEs to counties has meant that the national government retains a share of budget allocations intended for financing those SOEs (even when it is clear that they are performing county government func- tions), which has created overlaps in funding for similar activities between national and county governments. 39 2. CRITICAL FACTORS enabling legal framework prohibit government offi- corruption are commendable and should improve the DRIVING cials from drawing income from sources other than operating environment for firms and farms. One study OUTPUT AND remuneration for their state jobs, some government found that, were Kenya to reduce its corruption to the PRODUCTIVITY officials have large private sector interests and influ- level of Ghana (i.e., by one-fifth of a standard devia- GROWTH ence public procurement and government priorities tion), it would improve the average input- and out- through proxy companies. This has systematically put-oriented efficiencies of Kenyan manufacturers by undermined the accountability relationships between 3 to 4 percentage points. 25 It must be ensured that pri- the legislative and executive arms of the government. vate interests do not compromise decisions of public Government domination of certain subsectors (e.g., officers, as this decreases public confidence in service agriculture) has crowded out the private sector and delivery. made access to inputs erratic, overly bureaucratic, and vulnerable to rent seeking. Governance challenges are not restricted to the public sector; corporate governance practices have emerged as a concern. In Corruption is a significant problem for businesses, because it hin- the recent past, several privately owned enterprises, ders productivity and undercuts the potential impact of other including large supermarket chains and banks, have structural reform efforts. The recent World Bank Enterprise gone bankrupt because of weak corporate gover- Survey showed that, in almost every dimension of cor- nance. In some instances, weak accountability mech- ruption involving business interactions with public anisms allowed powerful corporate elites to misuse officials, Kenya ranks worse than average (figure 23). their clients’ funds or those of minority shareholder Furthermore, the interlinkages between politics and investors. Because some of these institutions were business harm the business environment. For instance, large formal sector employers of systemic importance, even though the constitution and enabling legal this has had spillover effects on related businesses; led framework prohibit it, prominent government officials to the loss of important skilled jobs; dampened confi- and politicians have large private sector interests and dence; and in the case of the banking sector, subdued continue to use their positions to influence public private sector credit growth. procurement and business regulation decisions. Cor- ruption increases transaction costs for businesses and, Access to affordable, appropriate finance is a major challenge for perhaps more significantly, deters potentially more MSMEs in Kenya. Although removal of caps on interest productive new entrants from entering the Kenyan rates has increased availability of credit to the pri- market because they recognize that the game is rigged vate sector, current levels (9.0 percent year-on-year in favor of those willing to pay bribes or who are more growth in April 2020) remain well below the 10-year politically connected.24 Ongoing efforts to combat average of 19 percent. The interest rate cap introduced Figure 23. Kenya underperforms most countries in many dimensions of corruption Experiencing at least one bribe payment request Identifying the courts 45 Where a gift or informal system as a major payment was requested in 40 constraint public transactions 35 30 Expected to give gifts or an Identifying corruption as a informal payment in major constraint 25 meetings with tax officials 20 15 Expected to give gifts to 10 Expected to give gifts to public officials "to get things 5 secure government contract done" 0 Value of gift expected to Expected to give gifts to get secure a government a water connection contract (% of contract) Expected to give gifts to get Expected to give gifts to get an electrical connection an operating license Expected to give gifts to get Expected to give gifts to get a construction permit an import license SYSTEMATIC Kenya All countries COUNTRY DIAGNOSTIC Source: World Bank Enterprise Survey; https://www.enterprisesurveys.org/ KENYA 40 24 This is consistent with the observation that productivity growth from reallocation of resources and dynamic entry and exit in Kenya has been much lower than in most countries. 25 Faruq, Webb, and Yi (2013). 2. CRITICAL in 2016 hit MSMEs the hardest because commercial complex picture of violence, which takes various forms, FACTORS banks, no longer able to implement risk-based pricing, including militia activity and criminality in urban areas, DRIVING shifted their lending away from borrower segments communal violence in the Rift Valley and elsewhere, OUTPUT AND PRODUCTIVITY considered to be riskier. Not surprisingly, although and the confluence of separatism and Islamist mobili- GROWTH large blue chip Kenyan companies are able to access zation in the Coast province. For enterprises in urban finance, start-ups and high-growth SMEs struggle to areas, instability affects business by increasing secu- access growth-­ o riented financing and risk capital. In rity costs. For enterprises in the northwest, where live- part reflecting an environment that is more risk averse stock rearing is the dominant economic activity, cattle toward MSMEs, MSME lending as a share of total lend- rustling is a deterrent to greater investment. Insecurity ing from banks declined from 23.4 percent in 2013 to stemming from violent extremism and instability spill- 15.8 percent in 2018. Reflecting these challenges, a ing over from Somalia also impede establishment of recent survey showed that some 71.9 percent of MSME enterprises in the northeast. The northwest and north- sources of capital were the owners’ resources, com- east are among the poorest, least-developed regions pared with 5.6 percent from banks. Given the impor- in Kenya. Improving security in these areas will be tance of MSMEs as the main employer (80 percent of good for overall investment and growth, with poten- the workforce) and a significant contributor to GDP tially significant reduction of poverty. (33.8 percent), MSMEs must be supported in accessing finance. 2.3.3.  Challenges in human The COVID-19 pandemic has heightened the need to address the capital development and better finance challenges facing MSMEs. There is an increase in development outcomes for women risk averseness in lending to MSMEs as a result of the Investments in human capital will be critical to boost productiv- present economic crisis, in Kenya and elsewhere. Fur- ity, sustain robust growth, and reduce poverty. Accelerating thermore, given the liquidity challenges firms face, if growth and boosting productivity require coun- their credit needs are not soon met, many firms could tries to invest in assets that will generate income in be forced to close, undermining the potential pro- the future.27 Investments in human capital boost ductive capacity of the economy. A recent study sim- the current and future capacity of the workforce and ulating a scenario of extreme economic stress found help reduce a country’s dependence on other forms that median survival time across industries ranged of capital, notably nonrenewable natural resources. from 8 weeks to 19 weeks, whereas on average, firms Conversely, poor child health, chronic malnutrition, have sufficient liquidity to survive from 12 weeks to and lack of proper stimulation impede development 38 weeks.26 of children’s physical and cognitive capacity and can reduce lifelong income by up to 50 percent.28 Kenya’s MSMEs are not only constrained by challenges stem- ming from access to finance but also from the overall ecosystem. In addition to access to affordable and appropriate Despite progress, poor health outcomes are finance, access to markets, firm capabilities, technol- contributing to a loss of nearly half of Kenya’s ogy adoption, and innovation absorption are a major human capital. challenge for Kenyan MSMEs. The 2018 Enterprise Sur- Health indicators have improved significantly in Kenya in recent vey in Kenya and consultations with firms under the years. Mortality in children under the age of five Kenya Digital Economy for Africa diagnostic identified declined from 114.6 deaths per 1,000 live births in cumbersome business license and permit processes 2003 to 52 in 2014 (figure 24), and the child stunting and perceived high tax rates as major constraints. In rate has dropped to one of the lowest levels in the addition, the current regulatory environment, infor- region, falling from 35.6 percent in 2003 to less than mation asymmetry, and the institutional framework 26 percent in 2014.29 The expansion of low-cost, highly render the ecosystem inconducive to effective, effi- effective technologies (e.g., mosquito nets), along cient support of entrepreneurs and MSMEs. Kenya is with a decline in fertility (from 4.6 children per woman experiencing lagging productivity. SMEs have diffi- in 2009 to 3.9 children in 2014), have improved health culties increasing their productivity because of poor outcomes. Life expectancy also significantly increased managerial practices, limited technology adoption, (by six years) over the same period. and information failures regarding how to upgrade. Despite these important gains, crucial health outcomes are a chal- Although Kenya is more peaceful than several of its neighbors, vio- lenge. Rates of premature death of adults are high, with lence and insecurity are a concern for businesses. Kenya has a 14 percent of women and 18 percent of men dying SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 26 Bosio and Ramalho (2020). 41 27 Lange, Woden, and Carey (2018). 28 World Bank (2018). 29 Government of Kenya (2015). 2. CRITICAL FACTORS Figure 24. Under-five mortality rate (deaths per 1,000 live births) by quintile, mother’s DRIVING educational attainment, and location, 2003–2014 OUTPUT AND 180 PRODUCTIVITY GROWTH 150 120 90 60 30 0 Total Bottom Bottom Top Primary Secondary Rural Urban 20% 40% 20% and lower and higher By quintile of wealth index By mother’s highest By location level of educational attainment 2003 2008/09 2014 Source: Pape and Mejia-Mantilla (2018). between the ages of 15 and 50;30 14 percent of deaths had she had access to a complete, quality education of women in that age group are due to complications and lived in optimal health. 35 Despite having a low in childbirth, and maternal mortality is very high, at HCI in absolute terms, Kenya performs better than the 362 per 100,000 live births. 31 Neonatal mortality in average of other countries in the region (40 percent) 2014 was 22 per 1,000 live births, and under-5 mor- and in its income group (less than 50 percent). Because tality was 52 per 1,000 live births. Of those surviving, Kenya performs relatively well in education, health more than one in four children under 5 were stunted. 32 outcomes are the main force reducing its HCI ranking, Although the adolescent birth rate in Kenya is lower including not only the cost of medical treatment itself, than the regional average for east and southern Africa but also labor absenteeism, chronic disability, and pre- (80.5 versus 92 births per 1,000 girls under the age of mature death. 18), early pregnancy remains a significant health chal- lenge. Early pregnancy is associated with higher risk Although enrollment rates in Kenya are high, of maternal mortality and complications during child- learning outcomes are low. birth, as well as being a major factor in girls dropping out of secondary school.33 Although Kenya’s education results are relatively high on HCI mea- surements, learning outcomes are low in basic education, and there Climate-related threats to health will continue to escalate, com- are wide regional disparities. For 2017, Kenyan children pounding these challenges. Approximately 13 million to were on average expected to complete 10.7 years of 20 million Kenyans are at risk of malaria, and the risk of schooling, compared with 7.8 for Tanzania and 6.5 for malaria and other vector-borne diseases is projected Rwanda. Despite this impressive result, when adjusted to increase as climate change facilitates the movement for learning outcomes, Kenya’s children can expect to of malaria transmission up the highlands. The num- attain the equivalent of only 7.8 years of schooling ber of Kenyans at risk could increase to 89 percent by (4.8 for Tanzania, 3.7 for Rwanda). The 2014 Monitor- 2050.34 ing Learner Achievement assessment at Form 2 (equiv- alent of grade 10) found that almost 90 percent of Poor health outcomes contribute to a loss of nearly half of Ken- students did not reach minimum competency in alge- ya’s human capital. The World Bank Human Capital Index bra and geometry and that approximately 30 percent (HCI) seeks to measure in absolute terms productivity did not reach minimum competency in measurement, lost because of inadequate investment in education numbers, and statistics. and health care. According to this metric, a child born today in Kenya will be only 52 percent as productive Although assessments of education systems often focus on enroll- throughout her lifetime as would have been possible ment and attainment, what matters for long-run prosperity are SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 30 Government of Kenya (2015). 31 Ibid. 32 Ibid. 42 33 Pape and Mejia-Mantilla (2018). 34 Government of Kenya (2018). 35 World Bank (2018). 2. CRITICAL a population’s cognitive skills, and what matters for immediate been well executed, and coordination is weak. Over- FACTORS productivity is the level of skills of the adult population.36 Weak lapping mandates and a “silos” approach to policies DRIVING learning outcomes can have a substantial effect on limits their effective implementation and the enforce- OUTPUT AND PRODUCTIVITY skills and productivity into adulthood; 65 percent of ment of standards. The new institutional arrangement GROWTH workers in Kenya performed at level 1 or below on has resulted in conflicts over roles and responsibilities. the Skills Toward Employment and Productivity (STEP) These conflicts have spilled over to affect services, reading proficiency test, indicating rudimentary read- for example with the interruption of teaching due to ing skills. 37 Almost 60 percent of 19- to 20-year-olds recurrent labor disputes between teachers and the with an upper secondary education scored below national government. The intermittent disbursement the basic literacy level, compared with 40 percent in of funds by the national government and changes in Ghana and 3 percent in Vietnam. 38 This represents a policy leaders and staff have interrupted implemen- huge challenge for productivity because almost 1 mil- tation of sector policies. Limited reporting on govern- lion youth enter the workforce every year and need ment and nongovernment spending also affects the support to build their human capital at work. An anal- sector. The various systems established in the sector ysis of the STEP employer survey shows that Kenyan do not capture data that would increase accountabil- firms face skills gaps,39 which are likely to increase ity and assist in making strategic decisions. For exam- given that the skills and task content of jobs are likely ple, the National Integrated Education Management to change more often with accelerating technological Information System and the Technical and Vocational change. Because proliferation of skills in the work- Education and Training Management Information Sys- force will be essential for increasing productivity and tem do not capture data on use of on- and off-budget growth, Kenya will need to address this weakness in finances. There is a lack of accountability of schools learning outcomes not only during education, but also to communities because schools do not provide ade- for the millions of adults, especially youth, whose skills quate financial and nonfinancial information to the shortages affect productivity. public. Other than requirements for head teachers to display funds received on public notice boards, A number of foundational and emerging governance constraints no information is shared about how resources are limit human capital development and are particularly apparent in allocated and subsequently spent. The school audit the health care and education sectors. The devolution of the directorate audits schools, but the directorate is insuf- health care sector has helped address the challenge ficiently staffed to support this function. of regional disparities in access to quality services, but conflicts over roles and responsibilities between Access to safely managed water, sanitation, and hygiene (WASH) national and county governments have emerged. For services is a major impediment to development of human capital. example, responsibility for procuring and adminis- Overall service coverage as of 2017 was approximately tering vaccines is unclear, which could lead to the 62 percent for water and 51 percent for sanitation. reemergence of communicable diseases. Persistent Approximately 10 percent of Kenyans practice open labor disputes (between both levels of government defecation. Kenya’s Ministry of Health estimates that and county medical personnel) and absenteeism have 75 percent of the country’s disease burden can be also denied people access to health services. Lack of attributed to inadequate sanitation practices and transparency and unreliability of funding to the sector unsafe drinking water. A cholera outbreak that lasted has also hampered delivery of health care services. Lit- from 2014 to 2016 affected 16,840 people in 30 coun- tle information is available regarding transfer of funds ties and killed 256.41 It is likely that poor access to from the Ministry of Health, National Health Insurance WASH services is creating a drag on the Kenyan econ- Fund, and county health facilities. Development part- omy by reducing human capital through premature ner support has been an important source of financing death, reduced working hours and productivity while in the health care sector, especially funding of vertical ill, and the cost of medical treatment. Poor sanitation and intervention-based programs, although the archi- is also linked to childhood stunting, which can affect tecture required to transfer those funds (e.g., condi- educational attainment and long-term productivity. tional grants) within a devolved government structure is still lacking. 2.3.4  Constraints on productivity Whereas education is only partially devolved,40 the same gover- from inadequacy of physical nance constraints apply. Although national government capital policies and plans are well developed, they have not SYSTEMATIC COUNTRY 36 Hanushek and Woessmann (2015). DIAGNOSTIC 37 World Bank. (2013a). KENYA 38 World Bank (2019e). 39 Sánchez Puerta, de Silva, and Rizvi (2018). 43 40 The national government is responsible for the provision of education from the primary level, and the county governments are responsible for early childhood education and village polytechnics. 41 UNICEF (2016). 2. CRITICAL FACTORS Transport infrastructure is critical to boosting productivity. and higher electricity costs in Kenya. Electricity costs DRIVING Low-quality road networks raise logistical and trans- in Kenya were $0.22/kWh in 2015, compared to $0.16/ OUTPUT AND action costs, which reduce market access and the kWh in Uganda, $0.11/kWh in South Africa or $0.17/ PRODUCTIVITY mobility of factors of production, all of which have a KWh in Ethiopia. Not surprisingly, firms in Kenya often GROWTH detrimental impact on firm and farm productivity and cite the high cost of electricity as a factor contribut- competitiveness.42 Improved road networks can influ- ing to a high-cost operating environment. Beyond ence the entry decision and entry size of firms.43 After high costs, the lack of adequate investments in the years of underinvestment, there have been significant transmission and distribution network has led to over- improvements to infrastructure in recent years, includ- loaded lines, with frequent system breakdowns and ing the road network, railways, and an airport expan- supply interruptions, which hinders productivity.48 sion. Nonetheless, significant challenges remain, impeding the operating environment and hindering Kenya’s information and communications technology (ICT) sector productivity. For one, only 44 percent of the road net- is one of the most dynamic in Sub-Saharan Africa, but more needs work is in good or fair condition. In addition, the urban to be done to increase broadband access. Major gains in com- transportation system is increasingly experiencing munication are evident in the significant increase in significant traffic congestion, which limits productiv- the penetration rate for mobile subscriptions, cur- ity and economic growth. For instance, in Nairobi, the rently 91.9 percent. Some 70.5 percent of households economic nerve center, it is estimated that the value in Kenya have mobile money subscriptions, one of of time lost to travel is approximately $4 million per the highest rates globally. Despite progress, access to workday.44 Finally, inefficient urban transportation broadband Internet is limited, and costs are high, limit- infrastructure has led to high transportation costs, ing the broader effect that ICT can have on enhancing accounting for some 30 percent of household incomes productivity. Only 46 percent of citizens had access to in remote suburbs. broadband connectivity at the end of 2018,49 and it is prohibitively expensive in many communities outside Electricity access has been significantly expanded in recent years, of Nairobi and Mombasa because of the dominance of yet almost half of Kenya’s population still lacks access to grid elec- Safaricom and the absence of infrastructure-sharing tricity. Power generation in the country increased from regulations. Despite investments through the National 1,768 MW in 2013 to 2,712 MW as of February 2019, Optical Fiber Broadband Infrastructure, a digital divide with access to electricity relatively high at 75 percent.45 remains in which broadband has not reached most Access to grid electricity however, is only 53.5 percent, parts of rural Kenya and last-mile connectivity is a while the remaining 21.5 percent of the population challenge. only has access to basic lighting using off-grid solu- tions. Furthermore, access to grid electricity in the 14 Demographic trends and urbanization will continue to put pressure underserved counties in Kenya is only 20.9 percent,46 on water and sanitary infrastructure, which if not addressed will highlighting significant geographic disparity in access. challenge productivity growth. Labor productivity is gener- Grid electricity is fundamental for economic transfor- ally higher in urban than in rural areas, and urbanization mation and boosting productivity, and access to energy has historically been strongly correlated with eco- raises the ability of poorer households to allocate their nomic growth. However, Kenya’s urban infrastructure resources for market production, especially among development is not keeping pace with demand. Water women in rural areas. 47 Despite impressive growth in demand exceeds supply by more than 150,000 cubic connection in recent years, inadequate investment in meters per day in Nairobi and 100,000 cubic meters per the transmission and distribution network is affecting day in Mombasa. Only approximately 18 percent of the the availability, quality, and cost of electricity. Inade- total urban population has access to a sewer system, quacies in the transmission grid have prevented the with 70 percent relying on septic tanks and pit latrines country from accessing cheaper electricity generated and the rest having no access to sanitation services at elsewhere. Geothermal energy, which is the least-cost all. In addition, existing wastewater treatment systems base-load renewable energy resource, generated at operate at very low efficiencies (about 16 percent of Olkaria fields, cannot be transmitted to the Western, design capacity for 15 plants assessed in 2010), lead- North Rift, and South Rift parts of Kenya because of ing to the discharge of untreated effluents. No urban lack of transmission capacity. This has led to the use area in the country has a properly engineered sanitary of costly alternatives (oil-fired plants, gas turbines) landfill, and most solid waste is dumped in open dump sites or other undesignated areas or burned. SYSTEMATIC COUNTRY 42 Escribano, Guasch, and Pena (2010). DIAGNOSTIC 43 Shiferaw et al. (2015). KENYA 44 World Bank (2016a). 45 Data from the 2019 Multi-tier Framework (MTF) survey report of the Energy Sector Management Assistance Program. 46 Ibid. 44 47 Dinkelman (2011); Khandker (1996); Roddis (2000). 48 Reinikka and Svensson (1999); Ackah, Asuming, and Abudu (2018). 49 Kenya Communications Authority. 2. CRITICAL 2.3.5.  Constraints on productivity Ninety-eight percent of Kenya’s arable land is rainfed, FACTORS and only 13 percent of the identified irrigation poten- DRIVING from inadequacy of use of natural tial has been developed. One-third of the population OUTPUT AND capital lacks access to safe water and two-thirds to improved PRODUCTIVITY GROWTH The economic literature shows that renewable natural resources are sanitation services. Major economic hubs such as Nai- a unique asset that, if managed sustainably, can produce benefits in robi and Mombasa are on water rationing annually. It perpetuity, in contrast to nonrenewable resources. For countries is estimated that Kenya could face a 31 percent gap like Kenya that depend greatly on renewable assets, between water demand and a practically available maintaining or increasing the productivity of these water supply by 2030.53 This inadequacy of water natural resources and managing them sustainably is resource development and management of water and critical for long-term growth. sanitation services is having an enormous impact on the economy, human capital development, and the Misallocation of land and inefficiencies in land markets decrease environment. For example, the estimated economic productivity. Land is one of Kenya’s most important costs of poor sanitation are $324 million per year.54 natural capital assets, but a dearth of information, numerous restrictive laws, bureaucratic inefficiencies, Lack of water storage capacity and water management infra- political interference, speculation on land prices, inse- structure leaves Kenya’s population vulnerable to frequent cli- cure and unclear land tenure arrangements, and lack mate shocks. The country’s high climatic and hydrologic of innovative market mechanisms impede land market variability, compounded by widespread catchment efficiency.50 Investors hesitate to buy land for produc- degradation, results in frequent droughts and floods. tive purposes because of the opacity of records and Furthermore, long-term climate projections show a the risks related to corruption in the land administra- trend toward more extreme weather patterns that will tion and registration process. Only a fraction of land exacerbate climate risks and water constraints. 55 The transactions are documented, and given the weak climate vulnerability of the economy and society is to state of the formal system, many people turn to infor- a large extent attributable to inadequate water infra- mal land markets, creating additional tenure insecu- structure investment and coverage of different water rity.51 Absence of a properly functioning land market services. Water storage capacity in Kenya is low, at little also significantly limits development projects, with the more than 100 m3 per person, compared with 700 m3 cost of land often consuming a disproportionate share per person in South Africa. Such low storage capacity of a government project budget in cases in which can provide only limited regulation of the highly vari- many homes and businesses must be displaced. able river flows in most rivers, making water supplies unreliable.56 Globally, there appears to be a relation- Appropriate development and management of Kenya’s scarce water ship between a country’s Human Development Index resources will be critical if the country is to meet its growth tar- (HDI) and per capita water storage, with countries gets. Kenya faces major challenges in physical water with high HDIs (greater than 0.85) tending to have scarcity (insufficient water availability with great 2,500 m3 to 3,000 m3 of storage per capita.57 ­K enya’s geographic and temporal variability) and economic low (according to global standards) HDI of 0.579 con- water scarcity (lack of development and manage- firms this relationship, underlining a link between ment infrastructure). Kenya has annual renewable vulnerability to climate risk and human development. freshwater resources per capita of only 526 m3 (with Hydrological variability limits economic and human 54 percent in transboundary basins),52 well below the development. Economic growth will require invest- accepted “water poor” threshold of 1,000 m3 per capita ing in strategic water storage and water management per year. With rapid population growth, this number infrastructure (including irrigation) to address hydro- is expected to decrease even further. Despite these logical variability and improve climate resilience. pressing needs, less than 15 percent of the nation’s water resources have been developed so far because There is an urgent need to address the decline in Kenya’s wildlife of inadequate investment in water infrastructure. biomass. Nature-based tourism has done much to shape Insufficient access to water is a binding constraint on the development fortunes of Kenya and is deeply inte- economic growth and is reflected in the large gaps in grated into the economy. Tourism is one of the main achieving the sustainable development goals (SDGs). sources of foreign exchange (and hence a contributor 50 The National Land Commission (2019) Report identifies complex, bureaucratic processes associated with land acquisition (e.g., requirement for Land Control Board consent for agricultural land), disagreements over compulsory acquisition, cancellation of titles over irregular ownership, legislative barriers, and institutional conflicts between the SYSTEMATIC National Land Commission and the Ministry of Lands as critical governance constraints. COUNTRY 51 World Bank (2016a). DIAGNOSTIC 52 Ministry of Environment, Water and Natural Resources (2013). KENYA 53 Water Resources Group (2015). 54 World Bank (2015a). 45 55 World Bank (2013b). 56 Ibid. 57 Ibid. 2. CRITICAL FACTORS to the shilling’s stability) and has important backward climate change makes rainfall more erratic, infrastruc- DRIVING and forward linkages to many parts of the economy. ture needs will expand and pressures on wildlife and OUTPUT AND However, wildlife populations are in decline, with a natural habitats will intensify and spread throughout PRODUCTIVITY loss of some 60 percent of wildlife biomass over the the country. There is thus an urgent need to change GROWTH past three decades.58 Reasons for this decline include course to reverse the decline in Kenya’s wildlife. interconnected pressures typically linked to habi- tat conversion—factors such as population growth, The newly discovered petroleum reserves, which are a nonrenew- expansion of arable agriculture, fencing, poaching, and able resource, will need to be well managed to support sustainable intrusive infrastructure. The recent World Bank report, development. Kenya joined the league of oil exporters When Good Conservation Becomes Good Economics, 59 in 2019 on a test basis, exporting its first truckload of finds that construction of new roads has caused and crude petroleum. The oil was produced in the South accelerated much of this loss. This trade-off is espe- Lokichar Basin in Turkana from a deposit discovered cially important in the northern part of Kenya, where in 2012. Kenya’s commercially recoverable oil deposits there are few economic opportunities. A recent study are limited and are estimated at approximately 560 mil- showed that every dollar invested in conservation and lion barrels, a number that has been lowered from wildlife tourism could generate benefits ranging from previous estimates of 1.3 billion barrels. An 870-km $3 to $20. However, as Kenya’s population grows and pipeline is expected to be constructed from Turkana Box 6. Effect of COVID-19 pandemic on Kenya’s water services providers Provision of safe, uninterrupted water services is critical to the COVID-19 pandemic response, yet Kenya’s public water service providers often struggle to provide a reliable water supply to the 13 million people they serve. Worse, the pandemic is placing enormous financial constraints on providers. The additional pressure stems from lower revenues (collections are becoming increasingly difficult for many providers as their customers lose their livelihoods because of the pandemic), increased costs (particularly for labor and inputs such as chemicals), and the need to expand services quickly, particularly in low-income communities. In March 2020, the government issued directives to all water service providers to provide free water to informal settlements and vulnerable groups and to suspend water disconnections. These measures, although intended to prevent the spread of the virus, have harmed the financial situation of water service providers. Data collected from 71 of the 88 providers in Kenya show that revenues dropped 40 percent between February and May 2020, and the situation is likely to deteriorate in the coming months (figure B6.1). Figure B6.1. Cash flow projections (data from Figure B6.2. Cash flow projection 71 water service providers) for Nanyuki water service provider 25 0.30 20 0.25 0.20 USD million USD million 15 0.15 10 0.10 5 0.05 0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Revenues Total costs Revenues Total costs Water service providers that depend on large commercial consumers (e.g., flower farms, hotels) are the most affected, because many of the commercial establishments have closed or shrunk operations (e.g., Nanyuki Water Service Pro- vider, figure B6.2). If this fall in revenue continues, 13 million Kenyans will face the risk of service disruptions caused by providers’ inability to cover operation and maintenance costs, such as chemicals for water treatment, staff wages, electricity, and spare parts. Moreover, the crisis may have lasting effects on the financial sustainability of providers and thus amplify existing access and service gaps. The Government of Kenya is considering providing short-term liquidity support to water service providers while at the same time addressing longstanding water service provider financial SYSTEMATIC COUNTRY performance challenges. DIAGNOSTIC KENYA 46 58 World Bank (2019d). 59 Ibid. 2. CRITICAL to Lamu to aid in the transport of oil, but this is still Droughts can destroy livelihoods and erode the ability FACTORS several years away, so peak oil production is unlikely to of communities to cope with difficult economic cir- DRIVING occur in the short to medium term. Nonetheless, given cumstances. In Kenya, each drought event affects an OUTPUT AND PRODUCTIVITY the nonrenewable nature of the resource, the Govern- average of 4.8 million people. The droughts of 2014 GROWTH ment of Kenya needs to decide on a few critical mat- to 2018 had an enormous effect on agricultural pro- ters, including how policy makers should allocate the duction; in 2017 alone, 3.4 million Kenyans were clas- additional resources, how much of the revenue should sified as food insecure and in need of humanitarian be saved, and what institutional mechanisms need to assistance.61 It is estimated that the economic cost of be adopted. Under the petroleum bill, the central gov- floods and droughts creates a long-term fiscal liability ernment receives 75 percent of oil proceeds, county of 2 percent to 2.8 percent of GDP each year.62 governments receive 20 percent, and Turkana County receives 5 percent. There is increasing evidence that climate change could severely limit economic growth and reverse development gains. Climate change also threatens to make economic growth less 2.3.6.  Constraints on productivity predictable and less stable, as demonstrated by the and growth due to climate change increasing uncertainty in rainfall patterns and shifts Kenya’s climate has changed and is still changing. Surface tem- in seasonality that are already decreasing agriculture peratures across Africa have increased by 0.5°C to 2°C productivity. On the upper end, recent modeling for over the past 100 years. Higher temperatures have Kenya places the reduction in GDP growth at approx- been observed in all seasons but particularly from imately 2.3 percentage points with current warming, March to May. Rainfall patterns have also changed. The doubling to 4.7 percent with 2°C warming (as early long rainy season has become shorter and drier, and as 2030).63 Some estimates place future GDP losses the short rainy season has become longer and wetter, considerably higher. Other studies suggest that the with overall annual rainfall being low. During this cen- effect of numerous climate-related factors is under- tury, temperatures in the African continent are likely to estimated, including water resources, transportation, rise more quickly than in other land areas, particularly migration, violent conflict, and energy supply.64 Pro- in more arid regions.60 active, anticipatory strategies to consider the effects of a changing climate on economies and engines of Climate change has already imposed constraints on Kenya’s econ- growth must be holistic and use a range of policy and omy, and these impacts will intensify in the coming decades. action-oriented solutions to get ahead of the curve. Climate change will reduce crop and livestock pro- duction, as well as that of coastal fisheries, lowering Rural livelihoods are particularly at risk from climate change. The aggregate growth and productivity. Threats to the live- climate-sensitive nature of rural livelihoods and the lihoods of rural populations will strain the social fabric, dependence of the rural economy on climate-sensitive making inclusiveness more challenging and ultimately sectors, combined with vulnerabilities of crucial geo- endangering the sustainability of growth. The Notre graphic areas, indicate that climate is a powerful eco- Dame Global Adaptation Initiative (ND-GAIN) ranked nomic binding constraint. Climate change will reduce Kenya 152 out of 192 countries for readiness to adapt crop and livestock production and affect coastal fish- to climate change. Without proper consideration, the eries, resulting in lower aggregate growth and pro- damage from climate extremes and changing weather ductivity. The effects on rural populations through patterns could undermine major planning initiatives, their livelihoods (in multiple counties but especially such as Kenya’s Vision 2030 and the Big Four agenda. the poorest and most impoverished in the north and northeast) and undermining the social fabric will chal- Climate change and catastrophic weather events have disastrous lenge inclusiveness and ultimately the sustainability of consequences for lives and livelihoods. The increased fre- growth. quency of extreme weather events has accentuated the damage from changing temperature regimes Kenya’s Arid and Semi-Arid Lands (ASALs) are particularly vul- and rainfall patterns in Kenya. Floods often lead to nerable to the long-term effect of climate change. More than an upsurge in mosquito-borne diseases, as well as 80 percent of Kenya’s land area is classified as arid and cholera outbreaks, because of the mixing of waste- semiarid and is considered to be at risk of desertifica- water and drinking water. Forty-three flood disas- tion. People in these areas face greater competition ters were recorded in Kenya between 1990 and 2015, for resources, and populations are increasing in part with each event affecting 68,000 people on average. because of migration from the densely populated SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 60 United Nations Intergovernmental Panel on Climate Change (2014). 61 Government of Kenya (2017). 47 62 Mogaka et al. (2005). 63 Abidoye and Odusola (2015). 64 See for example SIPRI, “Climate-Related Security Risks: Towards an Integrated Approach” (2016). 2. CRITICAL FACTORS highlands. The economy of the ASAL regions depends Nationally Determined Contribution goals, which DRIVING on climate-sensitive activities, because these areas include having 10 percent of the land area under for- OUTPUT AND support more than 70 percent of the national livestock est cover by 2030. PRODUCTIVITY population and 90 percent of the wildlife that is the GROWTH mainstay of the country’s tourism sector.65 Rangelands The vulnerability of Kenya’s coastline could have far-reaching are predominantly located in ASAL regions, and a rap- economic consequences. An estimated 267,000 Kenyans idly increasing livestock population has led to wide- will be at risk of coastal flooding by 2030 because of spread overgrazing. Frequent wildfires largely due to sea level rise; an increase of 30 centimeters would be climate change, charcoal burning, and pastoral prac- capable of submerging Mombasa and 17 percent of tices exacerbate rangeland degradation.66 coastal areas. 68 Kenya’s coastline boasts the largest seaport in East Africa and supports tourism and fish- Land degradation in Kenya is severe. Kenya is losing 1.1 per- ing industries.69 Coastal areas are expected to become cent or 50,000 hectares of forest cover annually, more vulnerable to sea level rise and coastal erosion, and the closed-canopy forest that covered approxi- which could compromise important coastal assets mately 12 percent of the land area has been reduced such as the port of Mombasa and other infrastructure, to 1.7 percent of its original size. 67 Recent efforts including in the transportation and energy sectors. to restore forest cover are reflected in the country’s SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 65 Huho, Ngaira, and Ogindo (2011). 66 Sankaran, Ratnam, and Hanan (2008). 48 67 Kenya Ministry of Livestock Development (2010). 68 Xinhua (2014). 69 Niang et al. (2014). 3. Critical drivers of inclusiveness in Kenya 3.1  Trends in poverty From 2005/06 to 2015/16, consumption grew significantly in house- holds in the bottom 40 percent. An important indicator of and shared prosperity progress toward the goal of boosting shared prosper- ity is annualized consumption growth for households Poverty rates in Kenya declined over the last decade but remain high in the bottom 40 percent of the consumption distri- by the standards of lower-middle-income countries. The share bution. In Kenya, this was 2.9 percent per year from of the population living below the national poverty 2005/06 to 2015/16, with especially strong gains in line70 fell from 46.8 percent in 2005/06 to 36.1 percent rural households. Moreover, consumption growth in 2015/16 and was projected to fall to 33.5 percent in the poorest households of this cohort outpaced in 2019, reflecting modest but sustained improve- growth in the others, with annualized growth rates of ment in living standards over the decade (figure 25a). approximately 3 percent to 4 percent. Kenya has also Because of the agricultural sector’s heavy dependence been more successful in boosting shared prosperity on rainfall, poverty reduction slowed during years of than its regional peers, albeit measured over a longer drought. Meanwhile, Kenya’s poverty rate with respect timeframe (figure 25b). to the international poverty line (US$1.90 a day, in 2011 purchasing power parity dollars) also declined, Pro-poor growth has caused income inequality to decline. The falling from 43.7 percent in 2005/06 to 36.8 percent Gini index fell from 0.45 in 2005/06 to 0.39 in 2015/16, in 2015/16 and 33.4 percent in 2019, although the indicating that Kenya made considerable progress in COVID-19 pandemic is likely to reverse the trend of reducing inequality. This decline in inequality primarily SYSTEMATIC poverty reduction (box 7). reflects overall growth in the national economy rather COUNTRY DIAGNOSTIC KENYA 70 Kenya’s national poverty line is defined as consumption necessary to reach a minimum caloric intake of 2,250 kcal per person per day, including a nonfood allowance. This translates into KES 3,252 per person per month for urban households and KES 5,995 for rural households. 49 3. CRITICAL DRIVERS OF Figure 25. Recent trends in poverty, inequality, and shared prosperity INCLUSIVENESS The poverty headcount rate measured at the national poverty a)  Shared prosperity, as measured by changes in real per capita b)  IN KENYA line consumption among the bottom 40 percent 60 2.86 3 50.5 Annualized growth in per capita real survey mean 46.8 2 consumption, bottom 50 Proportion of the population 38.8 1 0.31 0.35 36.1 40% (%) 40 32.1 29.4 0 30 –1 –2 –1.34 20 –2.2 –3 10 2006–2016 2013–2016 2010–2014 2012–2016 2010–2015 Kenya Rwanda Uganda South Africa Ethiopia 0 National Rural Urban 2005/06 2015/16 Source: Pape and Mejia-Mantilla (2018). than changes in the distribution of resources. Despite 50 percent in 2005/06 to 38.8 percent in 2015/16, improvement in these indicators in recent years, reflecting a decline in the rural poor population from inequality in Kenya remains moderate by regional 14.3 million to 12.6 million. Meanwhile, poverty rates standards. In addition, the effect of the COVID-19 pan- in urban areas stagnated; the observed 2.7 percent- demic may attenuate the decline in inequality or even age-point drop in the urban headcount poverty rate lead to increases in inequality (box 7). is not statistically significant. Importantly, the urban poor population increased over this time, both in Improvements in rural areas drove the recent decline in poverty absolute terms and as a share of the total poor popu- rates. The poverty rate in rural Kenya fell from about lation. An increase in food prices over the period may Box 7. Expected distributional effects of COVID-19 Human capital will be affected, especially in the context of limited health care availability and school closures. With case numbers and hospi- talization needs increasing, health care systems are expected to reach capacity quickly, probably resulting in shortages of hospital beds, intensive care beds, medications, and protective gear. Public hospitals are more likely to be exposed to these shortages, especially at the onset of the crisis, so the poor, who cannot afford private health care, will be most affected. The prolonged closure of schools will affect learning outcomes, with long-term effects on human capital, especially for the poorest households and those that rely on school meal programs. In addition to direct health effects, international and domestic mobility restrictions such as lockdowns can have serious distributional effects. Travel restrictions, especially on international travel, have reduced tourism, creating income shocks for workers in the hos- pitality and air transportation industries. In addition, severe mobility restrictions in Kenya to reduce COVID-19 trans- mission are likely to decrease aggregate demand and employment, which would lower wage income. A 30 percent reduction in monthly wage income for individuals in vulnerable sectors would result in a projected poverty headcount of 39 percent, an increase of 7 percentage points.71 The effect is larger for urban households, which are more likely to rely on wages and earnings from self-employment. For instance, it is estimated that the same size reduction in monthly wage income in urban households would increase urban poverty by 12 percentage points. The economic effects on other countries also affect Kenya by decreasing remittances. Remittances are under pressure because of damage to the economies where the Kenyan diaspora is working. Kenya recorded remittances of $2.9 billion in 2019 (2.9 per- cent of GDP). Most remittances come from the United Kingdom (34 percent, in the latest data, 2017) and the United States (30 percent). A decrease in remittances decreases household incomes and pushes vulnerable households into poverty. It is estimated that remittance flows into lower-middle-income countries will fall approximately 20 percent in 2020.a, 72 Such a reduction in both international and domestic remittances would increase estimated poverty in Kenya SYSTEMATIC COUNTRY by 2 percentage points, with a larger effect on rural poverty (figure B7.1). DIAGNOSTIC KENYA 50 71 Vulnerable sectors are defined as tea, coffee, horticulture, tourism, retail, transport, construction, other services, and light manufacturing. 72 World Bank (2020a). 3. CRITICAL DRIVERS OF Figure B7.1. Projected poverty headcount rates by scenario (low impact, medium impact, INCLUSIVENESS high impact) IN KENYA 60 50 40 Percent 30 20 10 0 Illness Wage changes Illness Remittance Food prices Combined Wage changes Remittance Food prices Combined Illness Wage changes Remittance Food prices Combined Low Medium High Original poverty headcount COVID-19 may increase the projected poverty headcount of a given area by up to 16 percentage points, depending on severity. The channels of effects from COVID-19 include loss of income due to illness, changes in wage earnings, reduction in remittances, and increases in food prices of highly import-dependent food items. When combined, these channels may increase the projected poverty headcount by 4 percentage points to 16 percentage points, depending on severity (figure B7.1). The effect is larger on urban households, often equalizing urban and rural poverty rates in the same sublocation. The most-affected sublocations tend to be in Nairobi and surrounding counties (figure B7.2). Figure B7.2. Projected poverty change by sublocation Low-impact scenario Medium-impact scenario High-impact scenario Projected poverty Projected poverty Projected poverty % change % change % change (.1,.15) (.2,.3) (.25,.35) (.05,.1) (.1,.2) (.15,.25) (.04,.05) (.075,.1) (.1,.15) (.03,.04) (.05,.075) (.05,.1) (.02,.03) (.025,.05) (0,.05) (.01,.02) (0,.025) (–.05,0) (0,.01) (–.05,0) (–.1,–.05) (–.025,0) (–.1,.–.05) (–.05,–.025) aWorld Bank (2020a). have contributed to these trends, because rising food have no education than the heads of wealthier house- prices tend to harm urban consumers while benefiting holds. Poor households also tend to be larger and have rural producers. higher dependency ratios than wealthier households, and these demographic factors are known to hinder Despite recent progress in poverty reduction, demographic charac- poverty reduction. Compared to wealthier house- SYSTEMATIC teristics, low levels of human capital, and limited access to basic ser- holds, poor households are less likely to have access to COUNTRY DIAGNOSTIC vices continue to constrain poor households. The heads of poor safe drinking water (65.6 percent versus 80.4 percent), KENYA households are on average older and more likely to improved sanitation (47.8 percent versus 72.2 percent), 51 3. CRITICAL DRIVERS OF and other basic services.73 Efforts to expand cover- crop losses from preventable causes, such as crop INCLUSIVENESS age of basic services will be vital to continued prog- diseases or pests, than they were in 2005/06.75 The IN KENYA ress in reducing poverty and improving nonmonetary inability of poor households to cope with adverse well-being. These efforts have become even more rel- shocks and their limited financial resilience has severe evant with the COVID-19 pandemic. long-term implications, because reduced spending on food, education, and health care can dramatically slow Despite falling poverty rates, more than half of Kenya’s population human capital accumulation. is vulnerable to falling into poverty in the near term. Vulnerabil- ity rates fell faster in rural than in urban areas, but the Poverty exacerbates exposure to climate change. Poor people rural vulnerability rate (56 percent) still significantly are more exposed to floods, drought, and high tem- exceeds the urban rate (42 percent; figure 26a).74 peratures than the rest of the population in Africa Nationwide, more than one-third of nonpoor Kenyans because of greater vulnerability of assets and liveli- are classified as vulnerable. Vulnerability is most com- hoods, less ability to cope with and recover from disas- mon in households that derive most of their income ters, and the effects of risk on saving and investment from agriculture and those with low levels of educa- behavior.76 Recurrence of acute climate shocks and tion. Vulnerability rates are closely correlated with chronic climate effects in poor and vulnerable areas poverty rates and are highest in northern and north- can quickly erase development gains and push entire eastern Kenya (figure 26b). households and communities into a spiral of poverty, with intergenerational consequences. Poor and vulnerable households that experience shocks often resort to coping strategies that adversely affect their future well-being; The Kenyan government has expanded its social protection programs, agricultural households are especially susceptible to such shocks. but their coverage and scale remain limited. The authorities The overall prevalence of economic and agricultural increased spending on social protection to approxi- shocks declined between 2005/06 and 2015/16, but mately 0.27 percent of GDP in 2015, still well below the frequency of some shocks affecting agricultural the average of 1.6 percent for lower-middle-income households increased. For example, agricultural countries. Although Kenya’s social protection schemes households were far more likely in 2015/16 to report are generally well targeted, these programs are small, Figure 26. Poverty and vulnerability in Kenya Poverty and vulnerability rates, urban and rural a)  b) Vulnerability rates by county 80 73 70 68 60 56 Percentage of population 52 51 50 50 47 42 40 39 36 34 29 30 20 10 0 Poor Vulnerable Poor Vulnerable Poor Vulnerable Total Urban Rural 2005/06 2015/16 Vulnerability rate Source: Pape and Mejia-Mantilla (2018). >90% 80.1% to 90% 75.1% to 80% 70.1% to 75% 65.1% to 70% 60.1% to 65% 50.1% to 60% SYSTEMATIC 35.1% to 50% COUNTRY 10% to 35% DIAGNOSTIC KENYA 73 Pape and Mejia-Mantilla (2018). 52 74 Ibid. 75 Ibid. 76 Hallegatte et al. (2016). 3. CRITICAL and their geographic coverage is limited.77 The COVID- independence governments only exacerbated post-­ DRIVERS OF 19 global pandemic has underscored the need for a the economic disparities.79 INCLUSIVENESS comprehensive social registry and more efficient ways IN KENYA to reach various vulnerable groups quickly. It is com- The effect of growth on poverty reduction is less than in peer coun- mendable that the government has made available tries. Kenya has experienced moderate GDP growth in an additional KES 10 billion to the elderly, orphans, the last decade, but this has not translated into a major and other vulnerable members of society through increase in household consumption. The country’s cash transfers, but this is well below the level of need, elasticity of poverty reduction to economic growth is and proper identification and targeting of those most only 0.57, weaker than expected for its level of GDP affected by the COVID-19 pandemic is a challenge. per capita and lower than regional peers Tanzania, Ghana, and Uganda. To accelerate the pace of poverty reduction, Kenya will need to generate more-inclusive 3.2  Drivers of monetary economic growth coupled with a sharper focus on tar- measures of inclusiveness geted poverty-reducing policies. Kenya continues to face considerable inequality of jobs between Poverty rates vary widely according to region and are most severe regions and population groups. The overall employment rate in historically underserved counties. The poverty indicators in Kenya has risen substantially, from 60 percent of are far worse in the counties that constitute the North the working-age population in 2005 to 76 percent in and Northeastern Development Initiative (NEDI), 2015.80 Nonetheless, many challenges persist in the which includes all counties in the former Northeastern labor market, including a growing job deficit affecting Province. The monetary poverty rate in these counties at-risk groups, a large gap in job creation between the is 68 percent, almost twice the national average of formal and informal sector, and low productivity and 36.1 percent (figure 27a). The gap between NEDI and quality of jobs. In Kenya, only 6 percent of total employ- non-NEDI counties is even more striking when con- ment is in the formal nonagricultural sector, versus sidering rates of extreme poverty (31.8 percent and 49 percent in informal nonagricultural employment. 6.1 percent, respectively; figure 27b). Nonpoor house- The remaining 45 percent of workers are employed in holds in these areas are also closer to the poverty agriculture, a low-productivity sector with high rates line, and vulnerability rates 78 in all the NEDI counties of underemployment. The Government of Kenya offers far exceed those of the central counties. These dis- programs that provide technical and entrepreneurship parities have origins in the colonial period in Kenya, skills and programs to facilitate job matching. Govern- when the administration developed only areas suited ment expenditures on job programs have gradually to the settler economy. The policies of successive Figure 27. Regional patterns in poverty indicators a) Absolute poverty rates by province b) Extreme poverty rates by province 90 80 74.0 76.2 70.0 80 70 68.0 57.6 Proportion of the population 70 49.6 Proportion of the population 44.6 60 54.2 50.6 60 47.2 50 45.0 44.2 42.5 40.5 41.4 50 31.8 36.7 26.7 40 31.8 31.1 24.0 32.6 40 23.3 22.7 21.3 24.3 20.2 30 19.6 16.7 30 16.9 12.1 13.6 11.1 20 20 6.0 6.6 6.1 6.1 2.9 10 2.8 10 0.6 0 0 Coast North Eastern Eastern Central Rift Valley Western Nyanza Nairobi Non-NEDI NEDI Coast North Eastern Eastern Central Rift Valley Western Nyanza Nairobi Non-NEDI NEDI SYSTEMATIC 2005/06 2015/16 2005/06 2015/16 COUNTRY Source: Kenya Poverty and Gender Assessment, 2018. DIAGNOSTIC KENYA 77 Pape and Mejia-Mantilla (2018). 53 78 Households are considered to be vulnerable if their predicted probability of being below the poverty line at any time within the next 2 years is greater than 50 percent. 79 Government of Kenya (1965); and later, the 1983 District Focus for Rural Development. 80 World Bank (2019b), based on data from the Kenya Integrated Household Budget Survey 2005/06 and 2015/16. 3. CRITICAL DRIVERS OF increased since 2014 but still represent only a very small human development and has limited access to infra- INCLUSIVENESS share of GDP at 0.1 percent. Two of the largest funds— structure and essential services. These challenges are IN KENYA the Youth Enterprise Development Fund and the Uwezo discussed below. fund—which provide loans to women and youth, have disbursed funds to more than 2 million individuals since The rural population in Kenya faces considerable spatial exclusion their inception in 2007 and 2014, respectively, but there with respect to gains from development. Residents of these is lack of evidence on their results.81 areas rely heavily on subsistence agriculture, and arid conditions and frequent droughts mean that output Kenya is urbanizing, and inequality in urban areas is rising. In from crops and livestock is unreliable. The sector also 2005, 21.7 percent of the population was living in cit- continues to implement policies and laws that act at ies; this is projected to reach 30.3 percent by 2025. 82 cross-purposes. Rural areas in Kenya have not been Fifty-six percent of the country’s urban population lives fully included in development initiatives, leaving them in slums, a rate similar to neighboring Tanzania and with limited infrastructure. Total fertility rates remain Uganda.83 In Nairobi, poverty is highly concentrated in much higher in rural areas, reaching 6.4 in the North these informal settlements, with nearly 33 percent of Eastern region compared to 2.7 in Nairobi.88 The rela- slum residents being poor, compared with 9 percent of tionship between politics and agriculture in Kenya is those living outside slum areas.84 The mean per capita a symbiotic one (especially in the most agriculturally monthly consumption of slum residents (KES 10,377) productive areas), which has often meant that poli- is nearly 40 percent below that of non-slum residents cies are developed and implemented to serve political (KES 16,688), and slum residents face severe deficien- interests and that political unrest affects agriculture cies in housing quality, access to services, and envi- most. The combination of geographic isolation, a lack ronmental safety. Many slums are on the outskirts of of resources, and sociodemographic factors creates the city center, limiting access to opportunities for significant barriers to full inclusion of rural areas in employment and income.85 Average job accessibility Kenya’s development. is particularly low in Nairobi because workers can only reach 24 percent of jobs in 1 hour using a minibus, 3.3.1. Health less than half the share accessible by people in greater Dakar, Senegal. 86 The lack of resources and economic There are considerable inequities between geographical areas opportunities creates a geographic poverty trap for and between socioeconomic groups. Across almost all age people living in urban informal settlements. In addi- groups, the poor are less likely to use health care ser- tion, the COVID-19 pandemic will be felt most severely vices. Moreover, the poor often have to travel greater among people in urban, informal settlements as their distances to access health care. Rural persons in the density can contribute to contagion, and the limited bottom two quintiles must travel on average 31 km access to health care and sanitation will likely exacer- to reach a health care facility staffed with a doctor, bate direct health impacts. whereas urban persons in the same quintiles must travel only 2 km.89 The distribution of health care facilities and services in many ways still reflects the 3.3  Drivers of nonmonetary racial and structural inequalities that characterized measures of inclusiveness Kenya during the colonial period—settlement areas for colonial administrators, white farmers, and Indi- ans had adequate health services, whereas areas Progress in several dimensions of nonmonetary poverty accom- where the African native population lived lacked ade- panied reductions in monetary poverty. Kenya’s HDI, which quate health care facilities. At the national level, the aggregates education, income, and life-expectancy frequency of outpatient services fell from 3.1 annual indicators, rose from 0.45 in 2002 to 0.58 in 2018. 87 visits per capita in 2013 to 2.5 in 2018, in line with This is relatively strong given the country’s consider- improvements in the overall health outlook for the able poverty headcount and places Kenya ahead of all country. Disparities between rich and poor nonethe- other countries in the East African Community. Kenya less remained significant, with annual hospital admis- nonetheless faces pronounced inequality of opportu- sions among the poorest quintile only half the level nity according to international standards. The popula- of the wealthiest quintile (28 versus 56 admissions per tion faces considerable challenges in several areas of SYSTEMATIC 81 World Bank (2019b). COUNTRY 82 UN-Habitat (2016). DIAGNOSTIC 83 Ibid. KENYA 84 Pape and Mejia-Mantilla (2018). 85 Mutisya and Yarime (2014). 86 Pape and Mejia-Mantilla (2018). 54 87 UNDP (n.d.). 88 Government of Kenya (2015). 89 Ibid. 3. CRITICAL 1,000 population). 90 The effect of these discrepancies rate among households in the top income quintile, DRIVERS OF on access to health care can be clearly seen in relative almost twice the rate of the bottom quintile. Moreover, INCLUSIVENESS health outcomes. For example, a child born in the pri- net secondary enrollment rates in urban areas exceed IN KENYA marily rural Nyanza region is almost twice as likely to rates in rural areas by almost 20 percentage points. die before the age of five as a child born in the Central Dropout rates are higher, especially in marginalized region (82 versus 42 deaths per 1,000 live births).91 areas of the country and large urban areas, indicat- ing that marginal areas (e.g., Mandera, Wajir, Turkana, High costs limit access to health care for the poor and perpetuate Garissa) and poor urban areas (e.g., in Nairobi) have cycles of poverty. Twenty-six percent of total health care additional challenges, including sparse population expenditures come in the form of out-of-pocket pay- settlements and poor infrastructure. ments by households. 92 In 2018, average annual out- of-pocket payments were KES 2,470. Most of these The COVID-19 pandemic is exacerbating these inequalities. The payments are made directly from household income recent closure of schools due to COVID-19 has also and savings, because 82 percent of women and 79 per- brought to the fore the inequalities of opportunities in cent of men do not have any health insurance. 93 Unin- education. The Ministry of Education has moved rap- sured health care costs can push households into idly to provide some distance learning through radio poverty or deepen a poverty trap. and television, and some schools are providing lesson material online. Nonetheless, many poor students, Uneven distribution of human resources is a critical challenge for especially those in rural areas, are being deprived of health care provision. Sixteen percent of Kenya’s doctors the same learning opportunities because of lack of serve the rural population. Although the capital is access to electricity and Internet services. This lack of home to only 10 percent of the population and only learning during the COVID-19 pandemic thus affects 4.5 percent of the country’s poor, approximately poorer pupils the most and undermines the forma- 15 percent of all health care workers and 39.1 percent of tion of their human capital and their potential future doctors serve there.94 High absenteeism, lack of com- opportunities to escape poverty. Furthermore, some petency, and low productivity combine to weaken ser- 15,000 poor and vulnerable students benefit from vice delivery even further. The use of human resources school meals across Kenya. Often this is the only reg- in health care is both inadequate and inequitable, and ular meal these students receive, and school closures major gains can be made by improving productivity have affected these programs. and effective allocation. The ongoing COVID-19 pan- demic is likely to put to test the Kenyan health care Economically disadvantaged counties lack resources and conse- system at all levels. Private hospitals and health care quently have worse learning outcomes. Poorer counties and ­centers—those that the poor cannot afford—are likely informal settlements in cities tend to have fewer sec- to be in a better position to cope than public facilities, ondary schools than primary schools, forcing students thereby further exacerbating inequities in access to to travel farther to pursue a secondary education. A quality health care. large number of teaching positions, especially in math- ematics and science, are vacant in poorer counties, and many teachers lack adequate content knowledge 3.3.2. Education and pedagogical skills. The effect of these resource Geographic and socioeconomic disparities in basic education enroll- gaps can be seen in test results. Fewer than 5 percent ment continue to pose a challenge. Estimates from the Kenya of students in the lagging counties—Kwale, Tana River, Integrated Household Budget Survey 2015/16 show Lamu, Marsabit, Garissa, Wajir—could demonstrate that primary NERs (Net Enrollment Rates) vary from minimum competency in numerical skills, compared 42 percent in Garissa County to 96.8 percent in Nyeri with 53 percent in Baringo and 57 percent in Trans County. Meanwhile, the 2014 Kenya Demographic and Nzoia.95 Health Survey showed that the primary NER is approx- imately 90 percent for children in the top household Gender disparities in school participation also tend to be concen- income quintile and 75 percent in the bottom quin- trated in the most educationally disadvantaged counties, mainly tile. The regional gap is also clear, with close to 9 out in the North Eastern and Coast regions. Girls face extra con- 10 children in urban areas likely to be enrolled in grade straints because of social expectations, for example six compared to only 7 out of 10 children in rural areas. to take on household responsibilities and domestic The gap in secondary school enrollment is even more chores, and in economically disadvantaged areas they striking, with a 56 percent net secondary enrollment tend to marry and have children early.96 Additional SYSTEMATIC COUNTRY 90 Government of Kenya (2015). DIAGNOSTIC 91 Ibid. KENYA 92 Kenya National Health Accounts FY 2015/16. 93 Government of Kenya (2015). 55 94 Gayle and Pimhidzai (2013). 95 World Bank (2017a). 96 Ibid. 3. CRITICAL DRIVERS OF barriers to girls’ school participation and retention 3.3.3. Water INCLUSIVENESS include poverty and high school fees, poor infrastruc- IN KENYA ture and long distances to schools, insecure learning There are considerable regional inequalities in water and sanitation environments, and increased exposure to violence infrastructure. Although 86.7 percent of households in and sexual harassment or abuse. A recent study of urban areas have access to an improved water source, 17 schools in Kajiado and Nairobi found that at least only 61.8 of those in rural areas do.101 This gap is 35 percent of girls had experienced sexual harassment equally evident for sanitation services, with 50.8 per- in the last year, and 25 percent had experienced some cent of rural households using unimproved sanitation, form of sexual assault.97 compared to a much lower 13.2 percent of households in urban areas.102 Performance on the abovementioned Low transition rates into secondary among the poor most likely sanitation indicators is weaker than would be expected result from financial constraints. Although primary educa- given Kenya’s status as a lower-middle-­income country. tion is universally affordable, secondary education is often prohibitively expensive despite the introduc- Providing equitable access to water, sanitation, and hygiene ser- tion of tuition-free secondary education in 2008. 98 On vices in all counties is a huge challenge for Kenya. There are average, the share of household expenditure for one 10 counties in which at least 80 percent of households child that is spent on his or her education is 75 per- have access to water from an improved source, and cent, compared to only 11 percent in Ethiopia and 11 counties where this number is less than 50 per- 23 percent in Malawi.99 Secondary education is much cent. 103 In four counties, access to sanitation services more expensive than primary education, and in the is almost universal, whereas in nearly half of the coun- Kenya Integrated Household Budget Survey data, high ties (21 counties), more than 50 percent of households costs were the leading reason respondents cited for do not have access to improved sanitation services.104 nonattendance. 100 Some 12 percent of the population is still practicing open defecation, and the open defecation rate in Inequality of opportunity in education is most evident at the ter- 15 counties is more than 50 percent, a number incom- tiary level. Given that the inadequately skilled labor patible with the country’s middle-income country force is a major constraint for the productive sector, ambition. Many large, poor communities in informal tertiary education performance must be improved settlements have access to neither water nor sanita- through closer links to industry. As a first step, it will tion services. Given the guidelines to maintain social be important to reform the legal framework and poli- distancing and wash hands regularly, this has made cies that govern tertiary institutions to reorient them people living in slum conditions even more suscepti- toward performance-based financing models, which ble to rapid spread of the virus if there is an outbreak, include core elements of equity, quality, and rele- although as of May 2020, the spread appears to be vance. Kenya’s higher education enrollment rate is contained. 11.7 percent, slightly higher than the regional average of 9.3 percent. Nevertheless, there are huge disparities Lack of access to safely managed water and sanitation services in access according to economic status. Enrollment is is a major impediment to the development of human capital. negligible among young adults from households in the Inadequate water, sanitation, and hygiene services lowest two income quintiles but close to 45 percent for severely reduces human capital through premature those in the top quintile. Enrollment in universities is death, reduced working hours and productivity while growing rapidly, but it comes at the expense of qual- ill, the cost of medical treatment, and lost time seek- ity. For instance, the number of academics teaching ing access to sanitation facilities. Kenya’s Ministry of at public universities grew only 13 percent between Health estimates that inadequate sanitation practices 2011 and 2018, whereas student numbers quintupled. and unsafe drinking water are the sources of 75 percent In addition, pedagogical practices continue to be very of the country’s disease burden. A cholera outbreak traditional in many higher education institutions, with that lasted from 2014 to 2016 affected 16,840 peo- overreliance on rote learning and outdated curricula ple in 30 counties and killed 256.105 Poor sanitation is that tends to be excessively theoretical. also linked to stunting, which can affect educational SYSTEMATIC 97 Baseline Survey Results and Feasibility of Tablet-Based Data Collection in Urban Nairobi and Rural Kajiado Ujamaa, Africa and Johns Hopkins University, 2019. COUNTRY 98 Matata (2016). DIAGNOSTIC 99 Bashir et al. (2018). KENYA 100 Pape and Mejia-Mantilla (2018). 101 Kenya National Bureau of Statistics (2018). 102 Ibid. 56 103 Ibid. 104 Ibid. 105 UNICEF (2016). 3. CRITICAL attainment and long-term productivity; 29.9 percent Women in Kenya face significant reproductive health risks. Kenya’s DRIVERS OF of children in Kenya are moderately stunted, with maternal mortality ratio has declined to 362 deaths INCLUSIVENESS stunting rates ranging widely between counties, from per 100,000 live births, 111 still very high but below IN KENYA 8.9 percent in Garissa to 47.6 percent in Mandera.106 the Sub-Saharan Africa average of 547 per 100,000. Where proper sanitation is lacking, women and girls are Kenyan women face an extremely high (1 in 42) life- often more at risk of waterborne disease, because they time risk of dying from complications from pregnancy have a greater burden of domestic work and greater or childbirth. Although total fertility has declined responsibilities in caring for the sick. In addition, inad- nationally from 4.9 births to 3.9 births per woman, in equate access to water and sanitation in schools affects some regions, it can be much higher—for example in education outcomes, especially for girls. Inadequate Wajir (7.8) and West Pokot (7.2). Early childbearing is water supply and sanitation thus has lasting effects on a significant challenge, with implications for maternal human capital, and disproportionally on the poor. mortality and complications during childbirth. Nearly one-quarter of women in Kenya give birth by age 18 and nearly half by age 20.112 Many factors contribute 3.4  Gender and inclusion to early childbirth, including poverty and educational attainment; 33 percent of girls aged 15 to 19 with no Poverty disproportionately affects Kenyan women. As in other education have begun childbearing, and teenagers African countries, Kenyan women aged 25 to 60 are from the poorest households are more likely to have more likely to live in poor households than men, with begun childbearing (26 percent) than those from the the gap reaching almost 10 percentage points for wealthiest (10 percent).113 Additional factors include those aged 30 to 34.107 The poverty gap is particu- peer influence, early sexual debut, lack of compre- larly striking between men and women who have lost hensive sex education, lack of access to or use of con- their spouses—38 percent for widows compared with traception, lack of parental counseling and guidance 25 percent for widowers. Although mobile phone pen- reinforced by cultural taboos that inhibit discussion of etration is high, women are less likely to use mobile sexual health, coercive sexual relations, and uneven Internet (with a gender gap of 39 percent) and less power relationships between men and women.114 likely to use the mobile phone-based money transfer service M-Pesa (16 percent gender gap), which is a sig- Pervasive social norms that ascribe disproportionate responsi- nificant constraint on women’s economic opportuni- bility for domestic work to women contribute to disparities in ties and productivity.108 access to economic opportunities, especially in the northeast. In 2015/16, Kenya’s female labor force participation rate Social factors stemming from traditional gender roles and atti- was 71 percent for the core working-age population tudes about advancement of women in the public sphere limit ­ ( 15–64 years), compared with 77 percent for men. the participation of women in politics and community leadership. Female labor force participation in Kenya exceeds the Large gender gaps are evident in business profits, average of Sub-Saharan Africa (63 percent) but is lower driven primarily by sectoral segregation. For example, than in peer countries such as Ethiopia (77 percent) and women with little or no education have high earnings Tanzania (80 percent). 115 Adult literacy rates for women in the construction sector, but they account for a tiny are lower than for men in every county, with illiteracy share of the sector. 109 Research on “crossover” female almost twice as high nationally for women aged 15 entrepreneurs working in these more-profitable, and older (18 percent) as for men aged 15 and older male-dominated sectors suggests that women’s inter- (10 percent). In part because of the area’s emphasis on sectoral mobility and financial returns can be increased traditional gender roles, women in northeastern Kenya through exposure to these trades through social net- spend an especially large amount of time engaged in work role models.110 In addition to these observed unpaid household labor, and in some areas, female social inequalities, gender differences remain codified labor force participation is less than 20 percent. In line in law, with the Law of Succession Act explicitly distin- with international experience, mean monthly earnings guishing male from female surviving spouses. for male workers are 30 percent higher than for female 106 Kenya National Bureau of Statistics (2018). 107 Pape and Mejia-Mantilla (2018). SYSTEMATIC 108 Connected Women (2019). COUNTRY 109 Pape and Mejia-Mantilla (2018). DIAGNOSTIC 110 Alibhai et al. (2017). KENYA 111 Government of Kenya (2015). 112 Ibid. 57 113 World Bank (2018). 114 Yakubu and Salisu (2018). 115 Pape and Mejia-Mantilla (2018). 3. CRITICAL DRIVERS OF workers.116 Limiting the participation of women in women having experienced some form of physical or INCLUSIVENESS the productive economy is not only a factor in gender sexual violence in their current or most recent inti- IN KENYA inequality, but also hinders economic development on mate relationship. 119 Child marriage can increase the a national scale. risk of intimate partner violence, and child marriage is widespread, with 23 percent of women aged 20 to 24 The prevalence of gender-based violence (GBV) is a significant reporting that their first marriage was before the age and persistent development challenge in Kenya. Forty-five of 18.120 GBV also creates significant economic costs percent of women have experienced some form of in out-of-pocket medical expenditures, lost produc- physical violence, and 14 percent have experienced tivity, and forgone income. A World Bank study of five some form of sexual violence. 117 Experiences of GBV countries indicated that intimate partner violence can not only affect the health and well-being of survivors, cost up to 4 percent of GDP. 121 Female genital cutting but also have intergenerational effects; witnessing or also remains a common practice, with 21 percent of experiencing GBV as a child in the home is a strong women aged 15 to 29 reporting having been circum- predictor of future experience of GBV for girls and cised, although the proportion varies according to perpetration of violence for boys. 118 Intimate partner ethnic group and religion. 122 violence is particularly prevalent, with 39 percent of Box 8. Vulnerable and excluded groups As of December 2019, Kenya was hosting 489,747 refugees and asylum seekers. The majority were from Somalia (264,265), South Sudan (121,553), the Democratic Republic of Congo (43,576), and Ethiopia (28,416);a 217,151 reside in the Dadaab refugee camp (Garissa County), 193,684 in Kakuma refugee camp (Turkana County), and 78,912 in urban areas. The refugee hosting areas are in the NEDI region, which has the highest poverty rates in the country and has historically experi- enced significant deficits in service delivery, infrastructure creation, and economic opportunities. Although the social and economic effects of refugees on Kenyan hosts has been positive overall, it has also raised challenges that need to be addressed, including greater competition for basic social services, degradation of the physical environment, limited livelihood opportunities, and decreasing water availability.b The results of a recent survey of the socioeconomic condi- tion of refugees in the Kalobeyei settlement in Turkana County show that the host community and refugees are among the worst off in Kenya in terms of poverty and associated socioeconomic indicators.c According to the most recent statistics, 2.8 percent of the Kenyan population reported a disability, with rural areas having a higher proportion (3.3 per- cent, versus 2.0 percent for urban areas).d Physical, visual, and hearing disabilities were the most prevalent types reported. At the national level, 54.7 percent of persons with a disability reported difficulties engaging in economic activity, with a higher proportion reported in rural than urban areas. Earlier data suggest that only 26 percent of persons with disabil- ities use assistive devices and support services and face challenges in actively participating in family and social activi- ties because of stigma and prejudice.e Special attention is therefore required to include this group in the development process. The well-being of the population in the NEDI counties lags considerably behind that of the rest of Kenya, affecting women and girls in particular.f In the NEDI counties, 68 percent of the population lives in poverty, compared with 36.1 percent at the national level. Moreover, these counties saw little progress in poverty reduction between 2005/06 and 2015/16, with a reduction in headcount rate of 1.1 percent annually, compared with 3 percent in non-NEDI counties. Poor households in the NEDI counties also lie far below the poverty line, meaning that the effort needed to lift households out of poverty in these areas will be considerable. Female-headed households in NEDI counties have higher poverty rates than in the rest of Kenya, and women have lower participation in the labor market. Educational enrollment rates are much lower for these counties, particularly in secondary education, with stark gaps between girls and boys. In terms of health care services, the NEDI counties have less access to health care and lower uptake rates, particularly in terms of number of children treated for illness, vaccination rates, and childbirth attended by a skilled provider. For example, vaccination rates vary from more than 90 percent in the Central region to about 44 percent in Mandera in the northeast and only 36 percent in West Pokot. Limited access to health care coupled with extremely high fertility rates results in the highest maternal mortality of the country. In addition, coverage of improved sanitation services and electricity and to a lesser extent access to improved water services is lower. Although the government has implemented some measures to improve the connectivity and overall well-being of the population in these areas, a substantive, sustained, cross-sectorial effort is required in the medium term. SYSTEMATIC COUNTRY DIAGNOSTIC 116 Pape and Mejia-Mantilla (2018); the mean reflects unconditional earnings (cash and in-kind) of wage earners and is not normalized for working hours. KENYA 117 Government of Kenya (2015). 118 Ehrensaft et al. (2003); Gómez and Speizer (2010). 119 Ibid. 58 120 UNICEF global databases, 2018, based on Demographic and Health Surveys (DHS), Multiple Indicator Cluster Surveys (MICS) and other nationally representative surveys. 121 Klugman et al. (2014). 122 Government of Kenya (2015). 3. CRITICAL DRIVERS OF Approximately half of Kenya’s population is younger than 18, and more than three-quarters is younger than 35, with unemployment or underem- INCLUSIVENESS ployment being a crucial challenge for young men and women. Between 2015 and 2025, 9 million individuals are expected to enter IN KENYA the labor force.g To absorb this “youth bulge,” Kenya needs to create an average of 900,000 jobs every year. However, job creation has failed to keep pace with new entrants, and in recent years, sufficient employment opportunities have not been added for the new workforce. Women, youth, and individuals with little education are excluded from good jobs. Youth unemployment and inactivity have decreased significantly over the past 10 years, but youth unemploy- ment remains much higher than for the total workforce. For instance, in Nairobi, 18 percent of youth are unemployed, compared with 10 percent of the total working age population. In Mandera, 22 percent of youth and 6 percent of the total working age population are unemployed.h Furthermore, the figures on employment may underestimate the proportion of youth who work in low-productivity jobs.i Youth are more likely to work in sectors and occupations that have lower productivity and command lower earnings. In urban Kenya, almost 80 percent of employed people aged 15 to 24 have an informal job (unpaid, self-employed, wage worker without social security), versus 70 percent or less for the rest of the population.j The population of Kenya also includes several vulnerable and marginalized groups that experience systemic discrimination. The World Bank Environmental and Social Framework, specifically Environmental and Social Standards 7, characterizes marginal- ­ ized communities as exclusively distinct social and cultural groups possessing identifiable characteristics in varying degrees, such as self-identification of members, collective attachment to a distinct geographical habitat, a culture that is distinct or separate from that of mainstream society, and a distinct language. The constitution of Kenya (2010) identifies marginalized communities as: “A group of people who, because of laws and practices before, on or after the effective date of the Constitution of Kenya (2010), were or are disadvantaged by discrimination on one or more of the grounds in Article 27(4).” Although these definitions help identify historically disadvantaged communities in Kenya, the contemporary causes of marginalization under devolution have created new forms of marginalized communities and groups in Kenya, constituting a significant population that would benefit from affirmative action and targeted development support based on their poverty situation and hardship due to their circumstances and exacerbated by other factors such as climate change. The culturally-based marginalization of indigenous women and youth can also be observed, notably in underdeveloped counties. aData taken from UNHCR Kenya monthly operational updates, accessed 10 February 2020; available online at https://www.unhcr.org/ke/wp-content/uploads/ sites/2/2020/01/Kenya-Infographics-31-December-2019.pdf bSanghi, Onder, and Vemuru (2016). cIn World Bank and UNHCR (forthcoming) “Understanding the Socio-Economic Conditions of Refugees in Kalobeyei, Kenya.” dKenya National Bureau of Statistics (2018). eKenya National Coordinating Agency for Population and Development and Kenya National Bureau of Statistics (2008). fPape and Mejia-Mantilla (2018). gWorld Bank (2016b). hPape and Mejia-Mantilla (2018). iFares, Montenegro, and Orazem (2006). jWorld Bank (2016b). SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 59 Pathways to reduce 4.  poverty and boost shared prosperity This Systematic Country Diagnostic has outlined a number of con- a range of binding conditions and sustainability con- straints impeding Kenya’s progress toward growth and shared cerns. In each of the three pathways, specific, effective prosperity. Potential gains in productivity and economic interventions in the public and private spheres can be output are being limited by subdued private invest- identified that will help Kenya move toward achieving ment, a weak business environment, and an expan- the twin goals. These individual actions will be consid- sionary fiscal stance. In parallel, poverty reduction and ered and prioritized in the next chapter. shared prosperity are being held back by geographic and socioeconomic inequities in wealth, health, and In addition, several foundational challenges affect all of the iden- education, as well as gender disparities including tified pathways. Concerns about sustainability, inclusive- high rates of GBV. These long-standing structural chal- ness, and digital transformation must be taken into lenges have however been exacerbated by the recent account if the three pathways are to have a lasting COVID-19 pandemic. impact. Given the long timeframe of the challenges that Kenya is facing, it is crucial to consider the sus- Three pathways have been identified that may help Kenya escape tainability of current trajectories of economic and from these constraints. The development pathways that social development. Critical sustainability questions can best help Kenya pursue the goals of economic include fiscal stewardship, effects of climate change, growth and shared prosperity can be determined by and the country’s undeveloped capacity for social risk considering the most binding constraints (figure 28). management. Challenges regarding inclusiveness also The analysis in this SCD points to three critical path- affect all of the pathways, including gender inequal- SYSTEMATIC COUNTRY ways: (1) boosting productivity and job creation, ity and the special concerns of marginalized groups. DIAGNOSTIC (2) reducing inequality of opportunities by advancing Finally, all of these pathways must also account for KENYA human capital, and (3) improving governance for ser- global digital transformation and the unique oppor- vice delivery. No single pathway targets a specific con- tunities it can offer for social change and expansive 60 straint or category of constraints, but each addresses economic growth. 4. PATHWAYS Figure 28. Identified strategies, constraints, and pathways TO REDUCE POVERTY AND Strategies for achieving the twin goals BOOST SHARED PROSPERITY Higher aggregate output Equity and and productivity growth inclusiveness Constraints Constraints • Subdued growth in private • MSMEs lacking access to finance, • Regional disparities in monetary • Inadequate coverage of social investment and FDI and facing cumbersome poverty protection programs • Low and declining agricultural processes and high tax rates • Gender disparities in education, • Higher dependency ratios among productivity (inadequate inputs) • Weak learning outcomes in basic health, and labor market poor households • Weak productivity in education participation • Weak access to safe water and manufacturing • Restricted national electrical grid • Widespread physical and sexual improved sanitation for the poor • Expansionary fiscal stance • Climate change reducing crop and violence against women • Limited access to broadband crowding out private investment livestock productivity • Geographic and socioeconomic Internet in rural areas • Barriers to entry and direct • Increased impact of flooding and disparities in access to health care • Household coping strategies competition from SOEs droughts • Geographic and socioeconomic adversely affecting future • Complex, costly, and • Land degradation and disparities in school enrollment well-being unpredictable business regulatory deforestation • Low transition rates into • Lack of social risk management environment secondary among the poor measures and procedures • High levels of corruption • High vulnerability rates Pathways Reducing inequality of Boosting productivity Improving governance for opportunities through and job creation service delivery advancing human capital 4.1  Boosting productivity a policy agenda that will accelerate attainment of the World Bank’s twin goals in Kenya (figure 29). The and job creation framework rests on two pillars: (1) the need to cata- lyze private investment, and (2) the creation of more Productivity and structural reforms are needed across a range of productive workers and entrepreneurs. The JET frame- sectors to encourage the dynamism of the private sector, which is work is used as a sub-framework within the SCD con- necessary for economic growth and job creation. The govern- ceptual framework to deepen the pathway discussion ment needs to address core structural obstacles to and show how increased growth and the inclusiveness economic growth, such as infrastructure deficiencies, of that growth can accelerate achievement of the twin skill shortages, and supply chain inefficiencies, as goals by boosting private investment and creating well as cross-cutting constraints, such as the lack of jobs. Specific initiatives that address both pillars of the an enabling environment, insufficient competition, JET framework are discussed below. and informality. Given that agriculture accounts for roughly half of Kenya’s GDP and employs more than 4.1.1.  Fostering macroeconomic half of its workforce, 123 removing barriers in the sec- tor will be critical for poverty reduction and boosting stability and fiscal sustainability shared prosperity. Productivity in private sector jobs Re-creating fiscal space over the medium term is necessary to create will also be essential for economic growth and poverty an enabling environment to boost private investment. As noted in alleviation. This relationship is well documented; no Chapter 2, the single largest threat to macro stability is country in modern economic history has experienced from the burgeoning fiscal challenge. Re-creating fiscal rapid poverty decline without a dynamic, vibrant pri- space is important, not only because it safeguards macro vate sector. stability—which is a necessary though not sufficient condition for robust growth—but also because fiscal To guide the discussion regarding investment and job creation, the consolidation will contribute to crowding in the private framework of the 19th International Development Agency (IDA) sector, the main engine and driver of productive jobs. replenishment’s (IDA 19) Special Theme on Jobs and Economic Trans- In the near term, using fiscal policy on a countercyclical formation (JET) is adapted for Kenya. 124 The constraints iden- basis to mitigate the effects of COVID-19 on lives, liveli- SYSTEMATIC tified in the diagnostic portion of this SCD are placed hoods, and the broader economy is important, but over COUNTRY within the IDA 19 JET framework to help conceptualize the medium term, as COVID-19 recedes, it will be critical DIAGNOSTIC KENYA 123 Wankuru et al. (2019). 124 World Bank (2019c). 61 4. PATHWAYS TO REDUCE Figure 29. 19th Replenishment of the International Development Agency Jobs and Economic POVERTY AND Transformation Framework BOOST SHARED PROSPERITY Jobs and sustainable, inclusive growth Job-creating Economic More productive workers private investment transformation and entrepreneurs Creating and connecting Building capabilities and connecting to markets workers to jobs Source: “Jobs and Economic Transformation (JET)—Drivers, Policy Implications and World Bank Group Support” prepared by the World Bank Group for the October 19, 2019 Development Committee Meeting. for the depleted fiscal buffers to be rebuilt. Returning to relation to optimistic targets, boosting domestic rev- the medium-term fiscal consolidation pathway, as out- enue mobilization, and increasing the efficiency of lined in the government’s fiscal framework, will ensure public investment management. (For specific policy fiscal and debt sustainability and safeguard macroeco- priorities, see box 9.) Fiscal consolidation measures can nomic stability. Measures to support fiscal consolida- be pursued over the medium term, and even though tion could include controlling expenditures (especially an expansionary fiscal stance is warranted because of recurrent), projecting more realistic revenues to avert COVID-19, reforms to improve the efficiency of spend- fiscal slippages due to revenue underperformance in ing can be undertaken in the near term. Box 9. Policy priorities to support medium-term fiscal consolidation Expenditure Measures • Moderate aggregate expenditure growth to support the realization of a primary surplus • On recurrent spending: a. Cap growth in allowances and benefits b. Clean up public sector payrolls and integrate public sector payroll systems for effective controls and accountability c. Accelerate procurement reforms, including transparency requirements contained in Executive Order #2, 2018, the stand-alone E-procurement system and its integration with Integrated Financial Management Information System, and linkage with all ministries, the state department and agencies; and strengthen capacity of state investigative institutions to prosecute fraud and corruption to help ensure value for money in public procurement d. Reduce as much as possible the proliferation of government regulatory entities with overlapping mandates and duplication of functions e. Accelerate the SOE rationalization agenda to plug losses to the exchequer and to increase overall economic efficiency f. Address growth in unfunded pension liabilities in the short term by enacting parametric reforms to the existing defined benefit scheme and over the medium to long term through the proposed shift to a system of defined contributions • On development spending: a. Review the inventory of at least 1,600 ongoing projects—some of which have been drawing funds from the exchequer for over 10 years and yet remain less than 50 percent complete—and close projects that are not advancing b. For new projects, establish a system of commitment control that strictly prevents any government ministry or agency from entering into contractual obligations with fiscal implications without prior approval from the National Treasury and Attorney General c. Require that new projects go through the readiness checklist before being included in the budget, to help SYSTEMATIC improve execution rates COUNTRY DIAGNOSTIC d. Pay all pending bills to contractors and require that all state agencies pay new bills no more than three months KENYA after the prescribed payment date e. Address bottlenecks in the effective functioning of the Public-Private Partnership Act (PPP) to mobilize private 62 capital for public infrastructure projects (e.g., clarity on tolling regime) 4. PATHWAYS TO REDUCE Revenue Measures POVERTY AND • Apply conservative revenue projections in the national budget to avoid fiscal slippages and susceptibility to ad hoc BOOST SHARED PROSPERITY expenditure rationalization when revenues underperform • Enact the Income Tax Bill, which seeks to rationalize corporate income taxes • Rationalize value-added tax (VAT) exemptions • Establish a governance architecture that provides a transparent mechanism for the award of tax exemptions • Publish detailed information on tax expenditures • Streamline the multiplicity of taxes and improve the predictability of the tax regime Debt-Related Measures • Maximize use of concessional resources by increasing absorption rate of donor-financed projects • Replace more expensive debt (domestic or international) with cheaper options • Lengthen the maturity duration of debt, by issuing longer dated bonds (domestic or international) • Diversify funding sources, which can include issuing niche bonds (e.g., green bonds, sukuk bonds, diaspora bonds) • Accelerate the placement of Kenya shilling bonds in offshore markets to reduce vulnerability of debt to foreign exchange fluctuations of the borrower. To strengthen credit reporting in 4.1.2.  Improving access Kenya, the Central Bank is working with banks on to finance for MSMEs increasing the quality of their consumer data and Access to finance is one of the major constraints on the growth of harmonizing credit scores, as well as working with the MSME sector—an important engine of growth for the Kenyan the Government of Kenya to develop a national economy. Some of the specific constraints on lending to credit information sharing policy. MSMEs must be addressed, in particular after COVID, • Alternative data for MSME finance. Financial institutions in when many firms could be in need of significant credit Kenya struggle to find up-to-date information and to restart their operations. Specific interventions could data on MSMEs, which affects their ability to make include the following. data-driven business decisions. Market players are encouraged to identify ways to leverage financial • Operational, efficient national credit guarantee scheme. Kenya technology to better allow for the use of alterna- could establish a national credit guarantee scheme tive sources of data and advanced data analytics that considers the need to: (1) build MSMEs’ capac- that will enhance access to markets and finance for ity to absorb finance by improving financial literacy MSMEs. and managerial capabilities, (2) build the financial • Application of the movable collateral registry to MSME product data of MSMEs, which is critical in credit appraisals, development. MSMEs could leverage the recent estab- (3) bridge the payment gap for MSMEs by procure- lishment of an electronic movable property registry ment entities such as government payments, and to increase their access to credit from lenders. (4) identify skilled and committed employees with • Build capacity of Savings and Credit Cooperative Societies (SAC- experience in MSME lending. COs) for better intermediation of MSMEs. SACCOs in Kenya • Credit delivery models for young entrepreneurs. Given that operate in a cash-constrained environment, which youth are likely to form the bulk of the new labor is a result of a variety of management, policy, and force, the design of credit extension policies must product design-related challenges. Capacity build- consider the unique situation of youth. Following ing and liquidity support could be provided to traditional approaches that require sizeable col- SACCOs to help them provide products suitable for lateral and lengthy track records will not work for MSMEs and to lend based on data and cash flow young entrepreneurs. To harness the creativity and rather than deposits. ingenuity of youth, new credit delivery models are • More generous lines of credit provided by development partners needed. This could include reserving a portion of and dedicated to bank financing of MSMEs. The government the credit guarantee scheme for entrepreneurs of Kenya could expand its existing schemes to pro- younger than 35, combining existing youth funds vide longer-term loans to MSMEs. into one fund for greater impact, staging business • Support of responsible financial innovation. Given chal- competitions for youth-led start-ups, and coupling lenges in tracking over-indebtedness and multiple SYSTEMATIC provision of credit with mentoring opportunities. borrowing (overlapping loans from multiple lend- COUNTRY ers), as well as gaps in financial consumer protec- DIAGNOSTIC • Universal adoption of credit scores in credit pricing.  Credit KENYA reporting can have a sizable effect on the ability of tion legal frameworks, the Government of Kenya banks to differentiate between risky borrowers and could strengthen regulatory frameworks and super- offer financing that is priced according to the risk visory practices to support financial innovation, 63 4. PATHWAYS TO REDUCE sustaining trust and confidence, maintaining finan- (around 40 percent), there is a critical need for action. POVERTY AND cial stability, and responding to potential risks. Reducing barriers to entry in specific sectors would BOOST SHARED allow new entrants, including youth, with new ideas PROSPERITY to drive competition and increase productivity. Fur- 4.1.3.  Removing regulatory hurdles thermore, a level playing field should enable existing Regulatory restrictions and distortions in the economy should be firms in a sector to compete more freely and thus allow eliminated or reduced as much as possible to unleash competitive for resources to move to the most productive firms. forces and boost potential GDP growth. Although structural This will in turn give them the opportunity to expand reforms have improved growth performance, there is employment, since an unlevel playing field allows for room to address some of the deeper regulatory chal- the survival of less efficient firms with limited capacity lenges limiting the growth potential of the economy. to sustainably increase employment. The effects of COVID-19 on the economy and the like- lihood that many businesses will need to restart after Finally, reforms to SOEs could help equalize access while reducing a complete shutdown make this reform agenda even the drain on the exchequer. To allow the private sector to more important. For this to occur, barriers to entry and nurture the development of certain markets it will be competition must be removed, protective trade poli- important to limit government intervention and the cies and practices must be changed, and SOEs must role of SOEs to situations in which the private sector be reformed. is unable to operate. Reforms of SOEs have been long overdue since the publication of the 2013 report of Regulatory reforms should be enacted to reduce or remove rules the Presidential Taskforce on Parastatal Reforms, but restricting market entry. The removal of regulatory barri- not much reform has taken place. Indeed, reforms of ers and government interventions that restrict market SOEs will require better governance, including the entry and competition would help create business implementation of reforms incorporating merit-based opportunities, increase competition, lower prices, and appointments, as well as streamlining and automating create jobs. One study conservatively estimated that public financial management processes between SOEs lifting regulatory barriers in the services sector alone and the central government. Stricter market discipline could result in an increase in GDP growth of at least mechanisms will also be necessary to ensure competi- 0.39 percentage points per year. 125 Furthermore, areas tive neutrality and to help crowd in the private sector. where licenses are needed (e.g., for health, safety, and environmental reasons) could benefit from better reg- 4.1.4.  Addressing inefficiencies ulatory management systems to minimize discretion in the awarding of licenses. in the land market and land use Land market distortions will need to be remedied, because land is Removing protective trade barriers and suppressing anticompeti- an important factor of production and one of the most important tive practices would allow for greater competition. Fostering a assets of the poor. Better functioning land markets can more competitive economy would help lower prices, increase access to credit for households and SMEs. To boost innovation, and improve quality, all of which address the adverse impacts of unplanned land use, are ultimately beneficial for consumer welfare and the government could accelerate a number of reform productivity growth. Trade policy is one area that can efforts that have already commenced. prevent competitive forces from acting as a strong driver of efficiency gains in an economy. For certain • Digitization of land records. Accelerating the digitiza- products, Kenya has tariff rates that are higher than its tion of land records and implementing the National most-favored-nation bound tariff rates. For instance, Land Information Management System has been a in 2017, under the East African Community waiver focus of the Government of Kenya for the past few regime, Kenya applied tariff rates that were higher years. The government must pay greater attention than the East African Community common external to the core challenge of the integrity of records, tariff regime in some 48 tariff lines (e.g., iron and steel). specifically reducing the risk of fraud and dupli- Furthermore, most-favored-nation bound tariff rates cate entry. The use of block chain technology is a are very high for some commodities (e.g., 100 per- potential solution. Alteration of records has been cent for sugar), and for some commodities mixed the main factor in the loss of trust in Kenya’s land duties and tariff quotas apply, thereby further limiting records, and compared to paper block chain tech- competition. nology makes it more difficult for records to be altered without detection. Addressing regulatory barriers to entry and business expansion, as • Implementation of National Land Use Policy. This would SYSTEMATIC COUNTRY well as leveling the playing field, will be important prerequisites address the challenges of uncoordinated land use DIAGNOSTIC for addressing the youth unemployment challenge. With unem- and ensure that the selection and adoption of land KENYA ployment high and youth unemployment even higher use options meet the economic and social needs 64 125 World Bank (2015b). 4. PATHWAYS of Kenyans, while safeguarding future resources. and limited infrastructure and service delivery. Kenya’s TO REDUCE Although the National Land Use Policy was population of 50 million will almost double by 2050, POVERTY AND adopted in 2016, further action is needed to ensure reaching 90 million, and Nairobi’s population of 5 mil- BOOST SHARED PROSPERITY that optimal land use is coordinated at the national lion is projected to almost triple over the same period. level. Implementing the existing policy will ensure more appropriate, coordinated zoning of land for 4.1.5.  Addressing the infrastructure specific uses. • Completion of National Spatial Plan (2015–2045). 126 This challenge plan was developed to increase the efficiency of There is a need to continue to address the country’s significant public investment spending and to guide private infrastructure challenges. Measures to improve transporta- investment decisions in industry and services. tion infrastructure could include: County spatial plans derived from the National Spatial Plan (according to the requirement) need • Prioritizing transportation networks. Given limited to be completed in the 47 counties to ensure the resources, new transportation infrastructure should expected gains from the large-scale coordination focus on networks that directly support productive of sector development toward the goals outlined in activity, improve connectivity between markets Kenya’s Vision 2030. Implementation of the Kenya (e.g., linking rural production to urban markets), National Spatial Data Infrastructure (NSDI) will and promote regional transportation network link- increase access to and use of geospatial data to ages. More generally, there is a need to focus lim- support a variety of policy decisions. ited resources on improving the quality rather than • Increase in commercial use of idle public land. Underused increasing the quantity of the network, in addition parcels of publicly held land (e.g., national, county, to improving transportation safety, comfort, and parastatal) of significant size and appropriate reliability. productive capacity should be identified. These • Addressing gaps in the legal and regulatory framework for lands should be leased for agricultural production transportation infrastructure development. The strength- (including commercial agriculture), agroprocess- ening and consolidation of the legal and regulatory ing, and other businesses. framework is indispensable for the establishment of adequate technical, institutional, financial, and The challenge of urbanization can be transformed into an oppor- socio-environmental conditions for the conces- tunity for productivity growth. Although agglomeration sioning and operation of separated bus corridors, effects create economic opportunities, urbanization feeder routes, and rail commuter services. This and population growth increase pressure on exist- includes re-regulation of matatu services (privately ing urban infrastructure, including traffic congestion, owned minibuses) and careful consideration of water shortages, and high housing costs, which if affordable public service obligations for bus rapid not addressed can limit potential productivity ben- transit and commuter rail service providers. efits from urbanization. The growth of African cities • Addressing bottlenecks in the effective functioning of the into economically efficient, productive environments Public-Private Partnership Act to mobilize private capital for ­ requires functioning land markets, financing for pub- public infrastructure projects. This would include clarity lic investments, and effective urban planning.127 The on tolling policy, tolling revenue, and the location of 2016 World Bank Kenya Urbanization Review recom- the seat of arbitration hearings. It would also serve mends that urban and rural planning offices be fully to address concerns that investors have raised about established at the county level and that county exec- the letter of support issued by the government. utives’ capacity in participatory planning be increased • Developing a comprehensive urban traffic and transportation through training.128 Model legislation should be strategy. Developing such a strategy should start developed for zoning by-laws, development controls, with the consolidation of various urban traffic and and decision-making and approval processes. transportation policies. The urban transportation strategy must prioritize mass public transportation The potential integration of low-carbon technologies and green and intermediate means of transportation and pro- mobility into planning for sustainable growth and development is a vide guidance to the Nairobi Metropolitan Trans- major opportunity. Two-thirds of the urban space needed port Authority in formulating short-, medium-, and by 2050 has yet to be built in Sub-Saharan Africa. Based long-term actions. on ongoing projects (2010 to 2020), 75 percent of this • Developing and implementing mobility programs in major growth will take place in settlements and cities with towns. This would involve integrated public transpor- fewer than 1 million people. These will tend to have tation, road, rail, and non-motorized transportation SYSTEMATIC weak governance structures, high levels of poverty, COUNTRY DIAGNOSTIC KENYA 126 The National Spatial Plan (2015–2045) provides a coordinating framework for sectoral planning, particularly infrastructure for basic services, industrialization, and eco- nomic prosperity. It is intended as an input into the Medium Term Plans (MTPs), thus addressing the disconnect between physical and economic planning. Lower-level plans, 65 including county spatial plans, are prepared based on the National Spatial Plan. 127 Lall, Henderson, and Venables (2017). 128 World Bank (2016a). 4. PATHWAYS TO REDUCE networks. It should also include affordable, safe geothermal in power generation has displaced energy POVERTY AND (gender-responsive) public transportation services from thermal plants, significantly reducing fuel costs BOOST SHARED in all main urban areas. These mobility programs passed through to end-users. A geothermal develop- PROSPERITY would improve traffic management and introduce ment strategy has been elaborated with World Bank integrated transportation services for major urban support laying out the options to develop geother- centers. mal-based power generation by leveraging private • Developing a national aviation policy for Kenya. Such a plan sector participation. Public funding will be needed would contribute to enhancing aviation security, to de-risk upstream geothermal development (explo- modernizing the passenger terminal facilities at ration and appraisal of reserves) to allow for private Jomo Kenyatta International Airport (JKIA), and investment downstream (power generation using strengthening the Kenya Airports Authority. It geothermal). KenGen, the generation company man- would also help sustain JKIA’s recently attained sta- aging 70 percent of total installed generation capacity tus of Category 1 under U.S. aviation rules, which of Kenya, is exploring the public-private partnership permits direct flights to and from the United States. model for geothermal development. In addition, com- • Creating greater vertical and horizontal integration in freight petitively procured intermittent renewables (solar shipping. There is a need to improve the coordination and wind) will reduce the cost of generation from and infrastructure of all modes of freight transporta- clean energy sources. There are significant opportuni- tion, including increasing efficiency at major ports ties for further development of clean energy to meet and in last-mile rail distribution. Freight demand future energy needs in Kenya without straining public models need to be developed that account for the resources. economic geography of Kenya and disaggregated freight flow patterns to maximize the utility of the Adopting new technologies such as battery storage would allow for planned standard gauge railway and inform deci- integration of different types of renewable energy into a more sus- sions on last-mile connectivity. tainable national energy strategy. Use of disruptive technol- ogies such as battery storage can provide Kenya with There is a critical need to increase water development and manage- opportunities to use intermittent renewables (solar ment infrastructure while also investing in new water technologies. and wind) to complement hydro and geothermal in The National Water Master Plan prioritizes construc- meeting future energy needs. With technological tion of 59 large storage dams and 17,860 small dams advances, battery storage can become a cost-effective by 2030. In practice, there has been little investment, way to store solar energy during the day to meet peak and of the few dams that exist, some 2,500 small to demand in the evening, reducing the need for costly medium storage dams require strengthening for pub- peak generation from thermal. Exploring this option lic safety and sustainability. Hence there is an urgent would also help limit the extent of additional capacity need to increase investment in strategic water storage, needed from intermittent renewables. The suitability productive watershed management, interbasin trans- of such technology needs to be explored in greater fers, water delivery works, last-mile connectivity to detail, with a careful analysis of load dispatch data to potable water distribution systems, farmer-led irriga- ensure that the most cost-effective generation options tion schemes, and water conservation and adaptation are used and supply costs are kept low. infrastructure, in addition to investment in nonstruc- tural measures (e.g., land use regulations, flood fore- 4.1.6.  Enhancing worker casting, disaster preparedness). Such investments are required to meet the fast-growing water demand in capabilities through integrated urban centers, as well as in rural areas and marginal- interventions on skills ized regions such as the northern and northeastern development, self-employment, areas to help achieve water and food security. Invest- and entrepreneurship ing in water storage and management infrastructure could unleash the huge untapped irrigation poten- To enhance worker skills, multifaceted interventions will be tial to double or triple agricultural productivity and needed to fill skills gaps, improve labor market information sys- increase farm income while enhancing climate resil- tems, and support self-employment and entrepreneurship. Low- ience in rural communities. skilled workers, especially youth, will need integrated employment programs to allow them to contribute Advancing the continued development of geothermal energy would to the economy more effectively. A metanalysis of afford Kenya a unique opportunity to reduce the costs of power gen- 113 youth employment programs indicated that active eration while increasing its share of renewable energy. Geother- labor market programs work better when they include SYSTEMATIC multiple interventions, in particular when they com- COUNTRY mal currently contributes more than 45 percent of total DIAGNOSTIC energy generated, making Kenya a global leader in the bine interventions that cover supply- and demand- KENYA use of this renewable resource. The increasing share of side constraints.129 Training programs can work if 66 129 Kluve et al. (2019). 4. PATHWAYS combined with socio-emotional and technical skills includes a specific focus on gender constraints,136 TO REDUCE training and support for business creation. Investing as well as mentorship interventions, has yielded POVERTY AND in a broad set of skills, including nonroutine cognitive, promising results for female entrepreneurs’ profits BOOST SHARED PROSPERITY digital, and socio-emotional skills, will be essential for and welfare.137 Kenya’s Ninaweza program is offer- increasing worker productivity and will be an import- ing socio-emotional skills and ICT training to young ant driver of inclusion. women living in informal settlements in Nairobi. The program has led to a 14 percent increase in the like- To address the challenge of youth unemployment, it is important lihood of obtaining a job, higher earnings, and more that the education system be reoriented to focus on job market self-confident participants.138 needs, with a particular focus on skills acquisition and not merely on passing exams. On the labor supply side, demand-driven On the demand side, support for entrepreneurship also needs to training that responds to labor market needs can be combine access to start-up financing with entrepreneurship train- successful, as evidenced by the Kenya Youth Empow- ing, coaching, and teaching of personal initiative. Youth entre- erment Program, in which private sector employers preneurship schemes seem to have more positive co-led and implemented training. Classroom-based results in developing countries than in developed training combined with skills and on-the-job training countries.139 Because youth face constraints in terms has proved to be broadly effective in raising employ- of financing and business knowledge, there is a need ment, earnings, and job quality. 130 The Kenya Youth to provide them with both. The government is cur- Empowerment Program, which included three months rently implementing a large-scale impact evaluation of classroom-based technical training and internships with a combination of start-up grants and business in firms for young adults, increased employment by training. 15 percent for male participants and also increased hours worked per week. 131 A critical feature of the pro- Movement of trained workers into growing sectors and occupations gram is that private sector employers led the techni- must be facilitated by improving labor market information systems cal training, ensuring that the training was catering to and the use of job-matching platforms. Productivity gains also job-specific demand in the labor market. accrue as workers move into more productive sectors, firms, and occupations or increase the amount of time One set of cross-cutting skills that deserves particular attention is spent on higher-productivity tasks. Workers will only socio-emotional skills, which are in high demand from employers in know of growing sectors in time if the government col- Kenya, in particular conscientiousness and teamwork. According lects better labor market information and the use of to the Kenya 2016/17 STEP Employer Survey, consci- online job matching platforms is expanded. entiousness is the most important skill that employers consider when deciding to retain workers, followed 4.1.7.  Enhancing capabilities by numeracy, and teamwork. When describing the skill intensity of jobs, employers focus on transver- by leveraging digital technologies sal skills—reading and writing, numeracy, communi- and fostering innovation cation, conscientiousness—over technical skills.132 With 10.8 percent average annual growth since 2016, the ICT sec- Demand for such transversal skills is likely to increase tor has been an important source of economic dynamism and job with automation and technology. 133 On the worker creation. More importantly, development of the ICT side, findings from the 2013 STEP Household Survey sector has significant spillover benefits into nearly indicate that openness (including creativity and flex- every other sector of the economy, creating opportu- ibility) and conscientiousness (thoroughness and effi- nities to adopt more efficient digital-centric business ciency) are correlated with higher earnings. 134 models and practices in the agricultural, health care, manufacturing, and services sectors. Recent World Investing in socio-emotional skills, among other types of skills, can Bank research 140 suggests that digital transformation yield important benefits for women in particular. Recent evi- in Sub-Saharan African countries can increase growth dence from Togo found large increases in profits for by nearly 2 percentage points per year and reduce women who received personal initiative training to poverty by 1 percentage point per year. This effect help them think like entrepreneurs. 135 Evidence from can be doubled if paired with larger investments in Kenya, meanwhile, shows that business training that human capital. The COVID-19 pandemic has further 130 Johanson (2020). 131 Honorati (2015). Because of high attrition of female participants in the endline survey, an equivalent increase in employment for women is not found to be significantly different from 0. 132 Sánchez Puerta, de Silva, and Rizvi (2018). The STEP Methodology defines “conscientiousness” in a worker as “does a thorough job, is hard-working, does things efficiently.” SYSTEMATIC 133 Sánchez Puerta, de Silva, and Rizvi (2018). COUNTRY 134 World Bank (2016b). DIAGNOSTIC 135 Campos et al. (2017). KENYA 136 McKenzie and Puerto (2019). 137 O’Neil, Brooks, and Hopkins (2018). 67 138 Alvares de Azevedo, Davis, and Charles (2013). 139 Kluve et al. (2019). 140 Calderon et al. (2019). 4. PATHWAYS TO REDUCE highlighted for firms the importance of maintaining hub for global digital business process outsourcing. POVERTY AND a digital presence. Given social distancing guidelines, The potential for growth is immense, given that a BOOST SHARED even if there were a market for a firm’s products, it mere 7,000 Kenyans were working in business process PROSPERITY could not be accessed without the necessary digital outsourcing jobs in 2016, compared with more than architecture. 1 million in the Philippines. As more jobs require use of digital technologies, and job opportunities in dig- The advancement of digital technologies holds promise for improv- itally enabled firms or through digital platforms grow ing productivity within informal firms. With more than 80 per- at an increasing rate, broadening the digital skills base cent of employment being in the informal sector, it is will be crucial to protecting existing jobs and facili- important that policies be adapted to increase pro- tating access to new ones. This agenda is of particular ductivity in the sector. A recent World Bank report 141 importance for youth employment. The government found that building pathways to full formalization recognizes this and, through its Ajira Digital Program, of the workforce in Africa has had limited success. is creating awareness among youth of work opportu- Although that should remain a goal in the long term, nities in the digital economy (domestic and global). It short- to medium-term interventions should focus on is also providing innovation hubs with free wi-fi, edu- building linkages between informal and formal firms, cation, and training opportunities and access to work as well as upgrading worker skills and productivity in opportunities. Nonetheless, the reach of this initia- the sector. Adoption of digital technologies by infor- tive needs to be expanded if it is to decrease youth mal firms has been identified as a catalyst for pro- unemployment. Furthermore, this initiative is likely to ductivity enhancement, job creation, access to credit, benefit only segments of medium- and higher-skilled and financial inclusion. Despite impressive growth in youth, whereas vulnerable youth who enter the labor investment and uptake of digital technologies, too market each year having barely completed second- many Kenyans are at risk of being left behind. The sig- ary education would need other initiatives to support nificant social and economic benefits that accrue to their employment. digitally engaged individuals could deepen inequal- ity if the digital divide persists. A digital divide is Improving the innovation ecosystem will require intervention at also bad for business because e-commerce and dig- the firm, sectoral, and institutional levels. There is an imme- ital entrepreneurs depend on growth of a digitally diate need for support programs that improve the active customer base to create the scale needed for capabilities and management skills of firms. Tech- success. Increasing access to affordable, high-quality nology extension services can address these market broadband connectivity and the skills to use it affords failures and engender organizational, managerial, an important opportunity for informal businesses to and technological changes to increase productivity lower transaction costs significantly. It also creates and competitiveness. At the sectoral level, there is a the opportunity to overcome information barriers that need for investment in human capital and infrastruc- small businesses (formal or informal) face in access- ture for innovation, as well as an increase in the sup- ing new markets, lower sourcing costs, and increase ply of skilled labor, especially in science, technology, access to credit. engineering, and math. Finally, given the current institutional vacuum in innovation policy, it is critical Accelerating the adoption of digital technologies by Kenyan indi- to finalize and implement the projected institutional viduals and businesses has contributed to recent job growth and framework in the Science, Technology, and Innovation could be harnessed to have an even greater impact on medium- and Act of 2013. This would help better coordinate and high-skilled employment. It is widely believed that digitally design instruments, effectively diagnose and evalu- enabled services will be the fastest growing segment ate policies, and encourage dialogue with the private of the global services economy. The services sector sector. represents roughly 35 percent of total employment in Kenya and routinely accounts for approximately half 4.1.8.  Strengthening regional of the country’s GDP. Kenya’s burgeoning digital ser- vices platforms employ an estimated 286,000 work- trade integration and boosting ers in areas such as transportation, logistics, and participation in global value chains ­e -commerce.142 Adoption of technology is proving Given underperformance in trade, regional integration holds great to have a more positive impact on job creation for potential to boost productivity and growth in Kenya. However, unskilled and lower-educated workers in low-income this will require better subregional connectivity (physi- countries than in most higher-income countries.143 cal and digital) and addressing nontariff barriers. Trade Equipping Kenya’s future and existing workforce liberalization between countries should be deepened SYSTEMATIC COUNTRY with digital skills will open doors to new forms of beyond merchandise to cover services, investment DIAGNOSTIC employment as the country repositions itself as a KENYA 68 141 Choi, Dutz, and Usman (2019). 142 Insight 2 Impact (2018). 143 Choi, Dutz, and Usman (2019). 4. PATHWAYS rules, and public procurement. Not only will this bene- before launching into the continental and global TO REDUCE fit Kenya, the spillover effects to other countries in the markets. It would attract significant new invest- POVERTY AND region will also be significant. Investments by Kenyan ment in digital infrastructure, expand domestic and BOOST SHARED PROSPERITY financial institutions across its borders in neighboring cross-border digitally enabled services and goods countries are already transforming the banking sector trade, stimulate development of locally relevant in these countries. Specific measures to boost trade digital content, and provide greater competition could include: across the region. The World Bank estimates that implementing a single digital market in East Africa • Improving regional trade corridors. Road transportation would generate a $1 billion to $2.6 billion increase links between the East African countries have until in GDP and between 1.6 million and 4.5 million recently received limited attention but offer sig- new jobs across the region. Digital market integra- nificant potential, such as the road links to South tion would also help close the digital divide within Sudan, Somalia, Ethiopia, and the Northern Lake- Kenya, with the biggest benefits accruing to those side area of Tanzania. The rail link between Kenya at the bottom of the pyramid who would be able and Tanzania was abandoned, and the Kenya-­ to participate in the digital economy for the first Uganda rail concession was terminated. Unlike in time because of falling costs of telecoms services. the past, when passenger and freight transport in Finally, the 2020 COVID-19 pandemic has under- inland waters, especially Lake Victoria, was thriv- lined the importance of digital infrastructure as an ing, transportation across the inland waters is now alternative platform to allow for economic activity minimal. Use of the lake could provide significant to continue in specific sectors despite major logisti- connectivity between the East African countries cal impediments to production and trade. and significantly reduce passenger and freight transport costs. The poor state of these trade cor- Kenya could increase its export orientation by leveraging participa- ridors has been identified as a major bottleneck for tion in global value chains. Firms with international exposure regional trade, and it is imperative that these trade tend to be larger, more productive, and better man- corridors receive attention. aged.144 Kenya’s participation in global value chains is • Developing standards and quality infrastructure. Kenya lackluster. A recent study found that unit labor costs needs to develop its standards architecture in were high and cost of capital in Kenya was more than the regional context so that it can move toward nine times that of Bangladesh. To increase exports and greater standards compatibility, joint management participation in global value chains, Kenya could seek systems, and mutual recognition. Such architec- to boost foreign direct investment in its special eco- ture should create conditions for enhancing trade nomic and export processing zones by implementing within the region, avoiding any diverting effect on the recently approved Kenya Investment Policy, which imports. inter alia seeks to ease entry conditions for foreign • Leveraging the digital economy to spur regional integration. investment. Furthermore, the implementing regula- An integrated East African digital market would be tions for the Special Economic Zones Act, which was the ninth largest in the world, bringing significant passed in 2015 but is not fully operational because benefits to Kenya’s digital firms and consumers (fig- of incomplete implementing regulations, must be ure 30). A more deeply integrated and competitive finalized. Further complementary factors discussed in regional market would provide a “friendly” space this section, such as standards, Internet and physical for Kenya’s digital firms to expand and mature connectivity, education, and skills are also important. Figure 30. East Africa is the ninth largest global market by population 1,400 1,200 1,000 Population (million) 800 East Africa 600 200 M 400 200 0 SYSTEMATIC China India E27 USA Indonesia Brazil Pakistan Nigeria East Africa Bangladesh Japan Philippines Tanzania Kenya Uganda Russia Mexico South Sudan Rwanda Burundi COUNTRY DIAGNOSTIC KENYA Source: World Bank (2018). 144 Haddad and Harrison (1993); Bloom and Van Reenen (2010). 69 4. PATHWAYS TO REDUCE These changes should be accelerated by the recent help boost productivity growth. Marginal yields have POVERTY AND free trade agreement with the United States. improved little over the last 10 years for staple crops BOOST SHARED such as maize, as well as for commercial crops such as PROSPERITY coffee. As a result, agricultural productivity has con- 4.1.9.  Boosting agricultural sector tributed little to poverty reduction in rural Kenya, in productivity and output stark contrast to the experience of other countries in Increasing agricultural productivity and output could provide the region, such as Ethiopia. Boosting productivity in a path out of poverty for many rural households. Although the agricultural sector will require policy interventions the reforms discussed in this SCD are meant to be that can reduce prevailing market distortions and mar- cross-sectoral, given that agriculture is the main ket failures and allow for the exit of less productive source of employment for the poor and one of the farms. Specific measures to boost productivity in the areas of Kenya’s comparative advantage, this report sector are discussed in box 10. considers measures in the agricultural sector that can Box 10. Measures to boost agricultural productivity Reforming the fertilizer subsidy program to ensure that it is efficient, transparent, and appropriately targeted will help raise yields. The current system of fertilizer subsidies, under which the government imports fertilizer in bulk and then redistributes it, is inef- ficient and introduces significant distortions into the market. The distribution system is regressive, with smallholder farmers not being the main beneficiaries, and farmers often receiving their fertilizer late. Furthermore, there are wide- spread allegations of corruption in the system. To increase productivity, especially for smallholder farmers, there is an urgent need for reform. The government should phase out the importation and distribution of fertilizer and leave fertil- izer marketing functions to the private sector while providing effective regulation. As envisaged in Kenya’s Agriculture Sector Growth and Transformation Strategy, the subsidy program should be moved to an “e-voucher” program using biometric registration, which would ensure a more balanced use of fertilizers and allow the program to be linked to soil testing and use of other critical inputs, such as seeds and post-harvest equipment. Given the extremely low rate of arable land under irrigation, investments in agricultural water management could have a strong effect on livelihoods. Expanded irrigation systems would boost yields, allow for an increase in cropping intensity, and enable farmers to switch to higher-value crops—all of which would increase farm outputs and incomes. These benefits could be further increased because water management itself justifies the use of additional yield-enhancing inputs. Irrigation also helps increase farm size, allowing smallholders to benefit from economies of scale. The government could support several interventions in small-scale irrigation and water harvesting infrastructure and create schemes to promote private sec- tor investment in medium-scale irrigation. The first priority should be to rehabilitate existing viable, sustainable irriga- tion schemes, focusing on those with the best prospects for success, regardless of whether they are located in ASALs or areas with greater agricultural potential. An increase in livestock productivity would make important contributions to livelihoods and food security. The livestock subsector accounts for a significant proportion of agricultural GDP, as much as 45 percent by some estimates, that includes informal mar- kets and secondary products. Pastoralism is the main livelihood strategy in Kenya’s ASALs, where more than 75 percent of the population depends directly or indirectly on livestock for food and income. In these areas, poverty rates are mostly higher than the national average—greater than 80 percent in Turkana, Mandera, and Wajir. Constraints on livestock productivity can be reduced by improving breeds and animal feed stock, increasing access to extension and veterinary services, improving water infrastructure, linking pastoralists to markets, and developing the meat value chain. Further implementing measures to help pastoralists cope with drought will also be critical. In high rainfall areas, where poultry and pig production is growing rapidly, ensuring availability of feed at reasonable cost is essential. Climate change variability already affecting agricultural productivity will escalate with additional climate change and needs to be addressed pro- actively to ensure sustained growth in the sector. Further policy measures to help climate proof the agriculture sector include increasing adoption of heat- and drought-tolerant varieties, which can achieve 20 percent to 30 percent higher yields than non-drought-tolerant varieties; improving water management systems, such as efficient surface irrigation, pre- cision irrigation, and sustainable harvesting of aquifers; and developing agroweather forecasting, monitoring, and dissemination. There is room to build on the pioneering work of the Government of Kenya (its crop and livestock SYSTEMATIC insurance programs protect vulnerable pastoralists in the ASAL counties) to strengthen the financial resistance of vul- COUNTRY nerable households to climate shocks. DIAGNOSTIC KENYA Fostering regional integration and ensuring a predictable trade policy environment will be essential for increasing value growth in the sector. Kenya is part of the Comprehensive African Agriculture Development Program, the African Union’s regional policy framework 70 for agriculture transformation. The country is making good progress in meeting its commitments under the program, 4. PATHWAYS TO REDUCE and the program will continue to be an important source of agriculture and rural development and to enhance Kenya’s POVERTY AND integration into regional agricultural markets. Working against these gains, however, is a highly unpredictable and BOOST SHARED discretionary approach to grain trade policy, the imposition of unanticipated export and import bans, and chang- PROSPERITY ing import tariff rates. Furthermore, government tenders are issued with opaque selection criteria for private firms to import grain at highly subsidized prices. Reducing government interference in grain pricing would allow market forces to promote a shift toward high-value, high-return cash crops. Increasing land tenure security has been shown to have a stronger effect on productive investments made by female-headed households than by male-headed households. Women in the agricultural sector have less access to land, not only because of challenges in the formal legal code, particularly related to inheritance, but also because of the continued importance of customary law, the interpretation of which is grounded in uneven gender norms and thus often disadvantages women. Such barriers to ownership also reduce women’s chances of accessing credit, because land is often required as collateral, reduc- ing opportunities for entrepreneurship and growth. Creating specific initiatives to facilitate equal access to agricul- tural land would not only promote women’s empowerment, but would also increase agricultural productivity overall. Evidence from neighboring Uganda from the World Bank Gender Innovation Lab, for example, demonstrates that informational nudges (i.e., providing information that slightly alters decision making) and conditional incentives can strengthen women’s property rights over rural land. To develop feasible, effective policies, it will be critical to involve women in discussions to identify constraints and develop solutions regarding access to agricultural resources. Promoting women’s access to agricultural land would have a disproportionately positive effect on productivity. Agricultural extension services should be strengthened to spur productivity growth and adoption of new technologies. The positive effect of fertil- izer and improved seed varieties has been well demonstrated in Kenya, with households that used chemical fertilizer experiencing a 20 percent increase in maize yields between 2000 and 2010. Despite these clear benefits, the share of farmers using these inputs changed little over that period. Policies designed to promote adoption of improved agricul- tural inputs by smallholder farmers, combined with a more competitive input market, could help increase household income and reduce rural poverty. Extension services and education campaigns could also increase diversification from cereals to high-value products such as fruits and vegetables. Extension services should be strengthened by imple- menting the National Agricultural Sector Extension Policy, which allows nongovernmental organizations to provide services. Furthermore, the technical and operational capacity of existing extension staff needs to be increased with more investment and training. New digital technology has the potential to increase agricultural productivity and raise farm incomes. Applying new technologies in the agricultural sector can boost efficiency, increase competitiveness, and facilitate access to markets. A number of dig- ital innovations are already disrupting the status quo and providing significant benefits to smallholder farmers and agribusinesses. Nonetheless, adoption is slow. The reach of the leading platforms and technologies ranges from 1,000 farmers to more than 600,000, suggesting reasonable uptake but also significant room to expand. Several start- ups are using technology to share agricultural knowledge and boost productivity. For example, Digital Green uses a video approach with highly localized content to amplify the effectiveness of extension agents, and Digicow offers voice-based training for farmers who lack access to smartphones. Furthermore, M-shamba, a Nairobi-based start-up, uses a voice platform and interactive short message service (SMS) messaging to link farmers to markets and provide information on agronomy and weather. Efforts to enhance adoption of these innovations could increase productivity. Targeted investments in rural infrastructure such as roads, market and storage facilities, and electrification are also needed. Gaps in the pro- vision of essential infrastructure drive up the cost of agricultural inputs and products and are a significant drain on Kenya’s agricultural competitiveness. Poor roads also reduce market integration and prevent farmers from finding buy- ers for their produce. Electricity is expensive and often unavailable, which limits investments in cold storage, process- ing facilities, and irrigation, ultimately reducing the value of agricultural outputs. Coordination between ministries to ensure investment in better quality roads, rail services, and electricity will be essential. Commercial opportunities should be enhanced across agricultural quality and safety standards. Kenya also has an enor- value chains. Private investments have already boosted mous opportunity to expand into a variety of agro-­ growth in important agricultural subsectors such processing and value-addition activities. Necessary as cut flowers, horticulture, dairy, tea, and agricul- actions include removing restrictions on private invest- tural input markets. Kenyan farmers nonetheless still ment in critical agricultural value chains, supporting face major challenges in marketing produce, and the farmers in gaining relevant certifications, leveraging SYSTEMATIC COUNTRY potential for adding value to products such as tea, cooperatives to organize farmers to benefit from econ- DIAGNOSTIC coffee, pyrethrum, milk, beef, fruits, and vegetables omies of scale and relevant government interventions, KENYA is largely untapped. The government should facilitate and operationalization of the Warehouse Receipt Sys- 71 private sector involvement in developing marketing tem and the National Commodity Exchange. infrastructure that meets regional and international 4. PATHWAYS TO REDUCE POVERTY AND 4.1.10.  Development of the blue 4.2  Reducing inequality BOOST SHARED economy and wildlife conservation of opportunities through PROSPERITY The government has started prioritizing the blue economy as the advancing human capital seventh sector to drive achievement of its Vision 2030 development agenda. Sustainable development of the blue econ- The diagnostic component of this SCD highlights several constraints omy will require strategic planning by integrating on human capital formation that are hindering Kenya’s progress in economic development with environmental manage- increasing output growth and boosting shared prosperity. Human ment, fiscal policy, and social goals. In parallel, the capital consists of the knowledge and skills accumu- enhanced well-being of rural coastal communities lated over a person’s lifetime, in combination with will require better governance and management at all good health. Human capital formation is an essential levels to generate greater returns from the fisheries driver of economic growth through increased pro- sector. Strengthening sovereignty over offshore fish ductivity. Consequently, disparities in rates of human resources would also increase benefits to coastal com- capital accumulation can severely widen welfare gaps munities and to the national economy as a whole. One between socioeconomic groups over the medium and strategy would be to domesticate a greater portion of long terms. the high-value offshore catch by developing relevant facilities at ports and a national fleet of offshore vessels Investing in building human capital will be an essential pathway operating out of Kenyan ports that could potentially to development in Kenya. It will mean investing in peo- displace foreign vessels over time. This would require a ple through health care, nutrition, quality education, greater regional effort in managing fish stocks; greater skills training, and the creation of productive jobs. This monitoring of illegal, unregulated, and unreported should be carefully implemented alongside improving fishing; and research targeted toward understanding public wage bill management and enhancing perfor- sustainable levels of resource extraction. Given the mance management and productivity, which will in adverse effects of marine litter on fisheries, tourism, turn contribute to higher GDP and ultimately trans- and biodiversity, sustainable waste management will form Kenya’s economy. Efforts to mainstream a per- also be fundamental for effective delivery of the gov- formance culture in the civil service would be greatly ernment’s commitments under the blue economy bolstered by a review of the existing legal framework framework. The government will need to rigorously that fragments performance management practices pursue its commitments, including the August 2017 and policies. Subsequently, a national performance ban on single-use plastic bags and the June 2020 ban and productivity policy should be developed to on ­single-use plastics in protected areas. The imple- guide, streamline, and standardize public sector per- mentation of an inclusive, multi-­ s ectoral, circular eco- formance management across all levels and agencies nomic approach is needed to change behavior and of the government. Human resources policies and foster technological innovation, private sector inter- practices that encourage optimal performance and a vention, and social inclusion. Engagement of county well-functioning reward and sanctions system must be governments with communities (including waste pick- implemented. ers and women) is critical. Many of the initiatives of the first pathway will have strong posi- Support for wildlife conservation in Kenya would contribute signifi- tive effects on the second pathway. Measures taken to boost cantly to job creation and environmental sustainability. Accord- productivity and create jobs in the Kenyan economy ing to the National Wildlife Strategy (2018–2030), will not only be beneficial for aggregate growth, but nature-based tourism contributes more than 10 per- will also reduce inequality and promote human capital cent of GDP and is a leading employer, accounting for formation. For example, increasing access to credit for 9.3 percent of total employment. At the same time, MSMEs will help to level the playing field for Kenyans recent analytical work 145 shows that wildlife biomass wishing to start small businesses and allow entrepre- is in dramatic decline. In the past three decades, the neurs to hire and train more workers in their com- country has lost more than 60 percent of its wildlife munities. Similarly, skills development and training according to data from the Directorate of Resources, will give previously unskilled workers access to bet- Surveys and Remote Sensing. 146 The National Wild- ter quality jobs. Concerning spatial inequality, build- life Strategy identifies priority deliverables, including ing better transportation networks will help connect maintaining and improving habitats and ecosystem workers with jobs and allow smallholder farmers to integrity; enhancing species conservation and man- sell their produce in other markets. In parallel, bring- SYSTEMATIC agement; and increasing access, incentives, and sus- ing broadband Internet connections to rural commu- COUNTRY tainable use of wildlife resources while ensuring nities will provide these populations with access to DIAGNOSTIC equitable sharing of benefits. KENYA previously unavailable information and skills training. 72 145 World Bank (2019d). 146 Ibid. 4. PATHWAYS Given the overwhelming importance of agriculture rates of stunting will be essential to ensure that chil- TO REDUCE as a livelihood for the rural poor, increases in produc- dren reach their full productive capacity when they POVERTY AND tivity through fertilizer subsidy reform and irrigation become adults in the workforce. High child and mater- BOOST SHARED PROSPERITY schemes would be most beneficial to smallholder nal mortality rates should also be the focus of major farmers. Finally, addressing corruption in public sec- public policy interventions. Not only should public tor service delivery would mean greater spending resources for health be increased, but there is also a efficiency at the local level and consequently greater need to improve the efficiency of health spending, access to services for the poor. Although the first and notably by strengthening strategic purchasing. second pathways are presented separately in this SCD, there are strong synergies between the two, and the Changing the focus of existing health care initiatives can also unlock identified initiatives are fully complementary in pur- human capital in the short term. There is an opportunity to suit of the twin goals. reengineer primary health care in the country, with a new focus on preventive services and health promo- A particular focus on rural areas will be required. Low-quality tion. The government will need to continue its support jobs, mostly in the agricultural sector, do not provide for addressing communicable diseases to reduce mor- strong opportunities for learning by doing or for the bidity and mortality. In parallel, support for prevention development of transferable skills. In rural areas, lack and treatment of non-communicable diseases will of financial resources and a tendency toward late need to be scaled up, through financing and new pilot enrollment in primary school have a negative impact initiatives. The government has identified achieving on transition rates between primary and secondary universal health care coverage as part of its Big Four levels of education. Given that constraints on accu- Agenda, and progress is being made. Health indicators mulation of human capital are stronger in rural Kenya, have been steadily improving, and the incidence of policy initiatives should pay specific attention to these catastrophic health expenditures is declining. regions. The effect of existing public health care resources can be greatly Development of human capital in women and girls faces additional enhanced through specific policy initiatives. The productivity constraints that will need to be addressed directly. Although of health care workers should be improved by ensur- the country has made important gains in closing gaps ing an appropriate mix of skills among staff and a more in education and reproductive health outcomes, dis- balanced distribution of resources. Maintaining a good parities remain, particularly at the regional level. The operating environment will allow the use of existing existing gaps are influenced in part by social norms resources to have the greatest possible impact on that contribute to high rates of early marriage and health outcomes. It will be equally important to ensure childbearing, with negative implications for dropout that the right incentives for health care workers are in rates, maternal mortality, and complications in preg- place, including appropriate payment mechanisms. nancy. Gendered divisions of household labor and The authorities should take steps to guarantee the sus- time use limit women’s economic opportunities and tainability of health care financing, particularly for pri- participation in the labor force, notably with wom- ority programs. This should include adopting common en’s disproportionate responsibility for childcare and mechanisms to budget, track, and control withdrawals domestic tasks. Addressing gender disparities and from consolidated and county revenue funds and to empowering women would reduce fertility, promoting account for and report on conditional grants issued to human development and economic growth by balanc- health care facilities. Finally, absenteeism (sanctioned ing dependency ratios. Specific initiatives will also be and unsanctioned) should be addressed. required to lower rates of sexual and physical violence. If not addressed, these deeply entrenched norms will Institutional mechanisms to promote collective action on health work against progressive, well-intended policies to care service delivery require enhancement. Multidisciplinary promote gender equality. and multiagency efforts should be strengthened, including inter- and intragovernmental collaboration within the sector, which to a large extent are devolved 4.2.1. Health to ensure needs-based financing of initiatives in coun- In terms of lost productive capital for Kenya, the long-term costs ties where the national and county governments agree associated with underinvestment in health are massive. This SCD on how their respective roles and responsibilities in has identified constraints, including limited access to the sector should be implemented. health care facilities for the poor, high out-of-pocket health care costs, and a concentration of health care 4.2.2. Education SYSTEMATIC human resources in cities. There is an urgent need to COUNTRY scale up spending on health care and launch a battery Kenya needs to aim higher in educational attainment as a means DIAGNOSTIC KENYA of priority interventions to ensure the steady growth of increasing human capital accumulation in the long run. This of human capital for future generations. The expan- SCD has identified constraints, including socioeco- sion of programs to improve nutrition and reduce nomic disparities in net enrollment, the large number 73 4. PATHWAYS TO REDUCE of vacant teacher posts, the low quality of teaching, a lack of coordination between national and county POVERTY AND and high out-of-pocket costs for secondary educa- governments on preprimary education, as well as the BOOST SHARED tion. Kenya will need to make strategic long-term absence of a structured quality assurance framework. PROSPERITY investments to harness human capital as a pathway Significant gains in access to preprimary education for increasing output and shared prosperity. Effective have nonetheless been realized through the devolu- strategies include schooling for learning147 (i.e. focus- tion of preprimary services, with the net enrollment ing on learning outcomes and student proficiency), rate improving from 70.4 percent in 2013 to 77.2 per- increasing the efficiency of spending, and addressing cent in 2018. A focus on early childhood development wide regional disparities (including in gender) partic- could yield positive spillovers for primary caregivers; ularly for the arid and semiarid regions. Promoting col- select studies highlight that steep child care costs lective action, cooperation, and coordination between constrain women’s labor force participation and girls’ actors in the sector will be required to ensure a com- schooling.151 Emerging evidence from experimental mon approach for implementation of policies and interventions confirms these findings and indicates strategies. that married women in Nairobi who receive child care vouchers are more likely to be employed.152 Increasing secondary school enrollment rates among the poor will require demand-side interventions. Targeted support Tertiary education in Kenya must also be improved. The govern- will be essential for creating equal opportunities for ment must find a way to expand access in an equita- children from all socioeconomic backgrounds. Schol- ble and financially sustainable manner, improve the arships, in-kind support, and cash transfers have all quality and relevance of the programs offered, and proven effective in increasing enrollment rates. Strong strengthen university-based research and technol- advocacy will also be needed to help ensure that girls ogy transfer. Improving quality and relevance will remain in school in regions where the gender gap in require a combination of interventions: better prepa- the dropout rate is severe. ration of incoming students, enhanced qualification of academics, innovative curricular and pedagogi- Improving the quality of teaching will require multiple interven- cal practices, closer links to industry, and increased tions. The education system could benefit from the internationalization. greater use of contract teachers to fill vacant positions, with an “up-or-out” promotion system in which the School financial management systems should be harmonized with best-performing contract teachers are given full-time those of the central government, and the disclosure of financial and employee positions. A new and still unproven moni- nonfinancial information relating to schools should be improved. toring and evaluation system requires all teachers to Harmonization of the education budget’s structures be systematically and regularly evaluated, with perfor- (including providing vote heads at national, county, mance linked to employment benefits and the credi- and institutional levels) is required. The quality and ble threat of termination. Matching teacher incentives methodology applied in audits is highly variable and with student learning objectives will be critical for different from that of mainstream government, with attaining better outcomes in public education. limited capacities in certain areas of expertise (e.g., value for money, performance audits). Past expendi- Multi-sector approaches will be needed to improve learning out- ture data and information about transfers to schools comes and reduce disparities between students. There is strong should be made available via the Hyperion module evidence of the efficacy of nutrition and water and of the Integrated Financial Management Information sanitation programs in improving learning outcomes System. This information should also be simplified and in Kenya. School feeding has been shown to boost made available to stakeholders inside and outside gov- test scores,148 hygiene promotion has been found to ernment in a searchable form on an online platform raise student attendance,149 and deworming has been that provides access to a library of budget documents. shown to improve primary school completion rates. 150 Solutions from outside the education sector will thus Extending broadband connectivity to all schools would enable dis- be essential for boosting human capital formation tance learning capabilities that are critical in the case of a pandemic through education. and more generally to enable students from rural areas or those fac- ing other challenges to access educational resources. Many of the Investments in early childhood development, both inside and out- classrooms provided with equipment under digital lit- side the school system, should be prioritized. Service delivery eracy programs lack connectivity, requiring all content in the preprimary subsector has been weakened by to be loaded manually onto computers. This not only SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 147 Bashir et al. (2018). 148 Omwami, Neumann, and Bwibo (2011). 149 Freeman et al. (2012). 74 150 Ahuja et al. (2015). 151 Lokshin, Glinskaya, and Garcia (2004). 152 Clark et al. (2019). 4. PATHWAYS limits the ability of teachers and students to access financial performance of water and sanitation service TO REDUCE additional content from the Internet, it also does not providers to enhance their creditworthiness. Output- POVERTY AND enable them to learn how to operate in an online envi- based-aid water and sanitation projects that the World BOOST SHARED PROSPERITY ronment. Other areas to address include improving the Bank has supported in Kenya have attracted some e-cloud infrastructure at the Kenya Institute of Curric- $30 million for pro-poor water and sanitation access ulum Development to enhance mass delivery of the expansion and have demonstrated the huge potential lessons, digitizing all curricula and assessments so that of domestic commercial financing.154 However, suf- they can also be delivered online in regular situations, ficient private capital cannot be leveraged with the and training teachers in development and delivery of current weak governance structure and inefficiency quality online-based curriculums and assessments. of water utilities. Government at the national and county levels will need to implement serious reforms to strengthen the governance of water utilities and 4.2.3.  Water, sanitation, to fast-track development of water tariff and pricing and hygiene policies. Such measures would increase the financial Kenya should scale up investments in safely managed water, sustainability of services and service providers and sanitation, and hygiene (WASH) infrastructure and institutions mitigate the risk of elite capture. to help boost the development of human capital. Particular efforts should be made in sanitation, which is at the Kenya’s underperforming water utilities are also creating a fis- center of the government’s Big Four Agenda and the cal burden for the government. Deficits persist because region’s open defecation Africa vision. Because of the of a constellation of challenges, including low bill multi-sectoral nature of human capital development, collection rates, excessive losses due to inefficient interventions aimed at combating undernutrition and operations or theft from the networks, and tariffs stunting will not be effective unless they include a set below cost-recovery rates.155 These inefficiencies WASH component. The global COVID-19 pandemic result in unintentional implicit subsidies that can be has dramatically highlighted the importance of water considered an illegitimate claim on public resources. and sanitation infrastructure in combatting infectious Unlike direct subsidies, which are formally allocated disease. When these investments are being made, and recorded on the utilities’ books, “hidden” costs, the functional divide between water and sanitation although accumulated by utilities, are unrecorded, must be resolved at the policy and operational lev- placing a fiscal burden on the local or national gov- els. For sanitation, institutional mechanisms will need ernment that amounts to a hidden subsidy. Typically, to be established to allow for effective cooperation utilities compensate for these hidden costs by reduc- and coordination between the water, environmental, ing investment in maintaining their assets. They may and health management agencies. The fragmented also delay or forgo essential maintenance and repairs, approach that has been used to manage sewerage, which can trigger a downward spiral of deterioration fecal sludge, solid waste, and hygiene separately in the value of assets, declining service quality, and must change, and Kenya should adopt an integrated, increasing costs for each unit of service provided. inclusive approach to sanitation covering all elements When this happens, losses are substantially greater, along the supply chain, such as city- and county-wide and abnormally high investment is required to make inclusive sanitation. Similarly, an approach such as repairs. This vicious cycle—which begins with hidden integrated urban water management should be pro- costs and proceeds to hidden subsidies—means that, moted for water management and service delivery in when governments finally absorb accumulated debts, urban areas. they add to the national debt or must reduce funding for other programs. There is therefore a need to invest Kenya needs to diversify its financing strategy and attract pri- in Kenya’s water service providers by deliberately link- vate investment to close the financing gap in the water sector. ing public financing to verifiable improvements in A recent water sector debt study by the World Bank operational efficiency. Improvements in operational and the Water Services Regulatory Board indicated efficiency would boost financial performance and that most water service providers, county water util- enable water service providers to contribute to capital ities, and regional water service boards are heavily investments through increased cash flows. indebted and at risk of becoming unsustainable.153 This high demand for water infrastructure financing 4.2.4.  Social protection has to be met through a combination of dedicated public budget allocation and blended financing, espe- The expansion of social protection programs will be important for cially in marginalized and underserved regions. This helping the poor increase their own productive potential. Given its SYSTEMATIC will require an improvement in the operational and far-reaching implications for medium- and long-term COUNTRY DIAGNOSTIC KENYA 75 153 Water sector debt study report (draft), World Bank/WASREB, January 2019. 154 Implementation Completion Report of OBA Nairobi Sanitation Project, World Bank, January 2019. 155 WASREB (2019). 4. PATHWAYS TO REDUCE productivity growth, the potential benefit of investing It is critical that the Government of Kenya develop viable options POVERTY AND in human capital is considerable, for individuals and and a robust system of social insurance for workers in the informal BOOST SHARED for the economy as a whole. Given the global eco- sector. Of the 16.8 million people employed in Kenya, PROSPERITY nomic impact of the COVID-19 pandemic, social safety 14 million are self-employed or work in the informal nets will be even more critical in addressing the needs sector and thus have no access to traditional social of the poor and vulnerable households that are more insurance schemes. Although there are two major likely to fall into poverty during an economic contrac- schemes for informal sector workers (the National tion. Although the full impact of the pandemic is still Social Security Fund’s Haba Haba scheme and the not clear, Kenya may need to follow the lead of other Mbao Pension Plan), they both face low uptake, high countries in rolling out an ad hoc safety net to cover administrative costs, and a high rate of withdrawals. basic needs to lessen the dramatic fall in consumer It could be possible to scale up these schemes cost-­ demand. effectively by creating a specialized administrative platform that can better manage the small and vary- The government is committed to moving beyond cash transfers to ing contributions of informal sector workers, as well an integrated social protection system to enhance the social and as making information more readily available to its economic inclusion of the poor and vulnerable. Although the members. achievements of the National Safety Net Program are impressive, social protection systems can be further 4.2.5.  Digital technologies developed. For example, although the Single Registry helps avoid duplication in cash transfers, it does not Digital technologies present opportunities to disrupt business as provide welfare information on potential beneficiaries usual and address Kenya’s stubborn constraints on human capital for existing or new programs. To better integrate social development. Constraints that can be addressed using protection systems, the government aims to make technology include lack of access to classrooms in greater investments intended to improve delivery sys- rural areas, poor quality teaching, lack of access to tems and institutional capacity, as well as coordination health care services, and inefficiencies in adminis- and partnership arrangements. tration and targeting of social protection schemes. Online learning and digital curricula can open oppor- The immediate priorities should be to increase the coverage of the tunities for students regardless of teacher quality and poorest households and reassess the adequacy of benefits, prefer- geographic location, and GPS-based attendance and ably by indexation with inflation. To enhance institutional automated student outcome performance monitor- capacity, particular focus should be placed on the cov- ing can make it easier to reward and correct teacher erage and functionality of the Single Registry, as well performance.156 A self-motivated individual can have as continuing to increase the efficiency of other deliv- a world of information and experience at their finger- ery mechanisms. To boost the self-sufficiency of poor tips through the Internet and digital platforms such as and vulnerable households, the government should YouTube to build their skills as auto mechanics, plumb- expand the existing nutrition-sensitive safety net. To ers, or video­ graphers. Social protection payments and improve the shock responsiveness of the safety net other voucher schemes can be administered using system, the government should expand its coverage mobile money, linked using the new national identifi- and strengthen financing arrangements for enhancing cation number (Huduma Namba) at low administrative households’ resilience and providing support to cope cost and with little hassle in even the remotest areas. with recurrent droughts. Through the innovative use of data, access to credit and insurance can be enabled for those without a for- A social registry able to identify households most vulnerable to mal credit history or collateral. A mother in a rural vil- shocks, such as drought and pandemics such as COVID-19, would lage can get advice from a doctor in Nairobi (or even allow the government to address vulnerabilities more swiftly. The Mumbai) on her mobile phone without the need to COVID-19 pandemic is likely to affect poor and vulner- undertake a costly, time-consuming, potentially dan- able households more severely than better-off house- gerous trip to a distant clinic. None of these opportu- holds, but specific impacts—for example, mobility nities will be possible without widespread access to restrictions on workers in different sectors—require affordable connectivity and digital financial services. that mitigating social protection measures be tar- geted not only to poor and vulnerable households. The health care sector has already made significant efficiency gains In addition, budget constraints necessitate selectivity through the invention and implementation of digital solutions. in targeting. A social registry should be in place that Technological innovation can be especially effective in allows for timely identification of potential beneficia- health care at the county level, where resources have SYSTEMATIC COUNTRY ries based on specific characteristics that expose indi- traditionally been much weaker than in urban cen- DIAGNOSTIC viduals to a shock. ters. Several health care technology–focused start-ups KENYA 76 156 Economist (2018). 4. PATHWAYS have made significant strides in the county-level tech- nology ecosystem. One example is Nyumbani Medics, 4.3  Improving governance TO REDUCE POVERTY AND a web platform that connects qualified health care for service delivery BOOST SHARED PROSPERITY practitioners to patients in need of health care ser- vices. In parallel, the growth of mobile money has cre- 4.3.1.  Establishing effective ated opportunities for paying insurance premiums and and accountable institutions for other health-related transactions. New digital plat- forms have begun to change public health care admin- The fight against corruption will need to be intensified to reduce istration, augmenting the efficiency of core services, business transaction costs and improve service delivery by the pub- reducing unnecessary duplication of registries, and lic sector to the private sector. Reducing corruption would increasing the security and traceability of transactions. help to spur increased private investment, productivity Digital platforms already launched in the health care growth, and job creation. Although the current admin- arena include the Health Management Information istration has recently stepped up its anti-­ corruption System and the Biometric Hospital Insurance Manage- efforts, more needs to be done, and government ment System. Implementation of a robust digital iden- institutions will need to be reinforced. Transparency tification platform would give Kenyans easier access in public procurement will need to be improved, and to basic health care service and create efficiency gains in the private sector, corporate governance should be in diagnosis and treatment by improving the manage- strengthened. Confronting corruption and promoting ment of hospital records. performance and accountability for service delivery (rather than taking punitive actions such as arrest and Kenya has made a concerted effort to embed digital skills in the prosecution) would increase sustainability. Digital national education system, but access to critical enablers is still technologies should replace face-to-face interactions lacking. Policies and programs promoting the use of in providing government permits, licenses, approv- ICT for teaching and learning are formally in place, als, and incentives, but these technologies must pro- including a competency-based framework that fea- mote transparency, accountability, and accessibility tures digital skills. Flagship initiatives such as the to avoid becoming a constraint. The backlog of court Digital Literacy Program have sought to better inte- cases must be addressed, particularly those related to grate ICT into the education system. Nevertheless, corruption, commercial infractions, and land title. Sys- insufficient teacher training and lack of digital devices temic improvements should also be made to shorten and connectivity have hindered training delivery and the time it takes to resolve court cases. skills attainment. The Digital Literacy Program cov- ers 93.4 percent of public primary schools (providing Establishing effective public institutions and systems is a multi- connectivity, devices, and electricity), yet only an esti- faceted task involving the interrelationship between national and mated 36 percent of schools are fully using the equip- county government institutions and between state and non-state ment as intended.157 Secondary schools fare far worse actors regarding public policies, practices, institutions, and out- in terms of connectivity and access to devices, and the comes. Efforts to create new governance arrangements curriculum fails to offer digital skills as a stand-alone in Kenya need to factor in corruption, given the role compulsory course. Alternative learning methods that it has played in how public institutions have such as private sector–led training and certification worked in the past and because of the distortions that schemes can also be used to bridge the skills gap. corruption can create in policy formation, implemen- tation, and outcomes. Successful programs to reduce A handful of technical and vocational education and training (TVET) corruption are specific and outcome focused, com- institutions and universities offer advanced information technol- bining changes in policies that reduce opportunities ogy courses, but the pipeline of digital talent still faces signifi- for corruption, for example, the radical simplification cant constraints. Factors holding back the development of tax regimes, moving away from the distribution of digital skills include weak enrollment in the STEM of subsidies, and targeted work confronting corrupt fields (science, technology, engineering, and math), practices and individuals. The latter efforts are most low completion rates, and the limited relevance of the effective when they combine steps to prevent cor- training on offer. Many universities teach outdated ruption with improvements in institutional perfor- coding languages and focus on theory rather than mance, efficiency, and outcomes. Overall, constructive application, leading to a shortage of workforce-ready engagement on corruption involves policy changes; graduates. Several informal education programs (e.g., specific acts to fight corruption; and improvements in coding bootcamps, artificial intelligence learning pro- access, transparency, accountability, and performance. grams) run by the private sector have helped address SYSTEMATIC this skills mismatch and have been successful at plac- It will be important to strengthen incentives for collective action COUNTRY ing graduates, but these initiatives are restricted to in identifying and resolving constraints that are focused on service DIAGNOSTIC delivery outcomes rather than institutional or individual inputs. KENYA major cities and have struggled to grow. 157 World Bank (2019a). 77 4. PATHWAYS TO REDUCE Critical to this process is a certain level of flexibility to corruption overall. Reducing corruption in other sec- POVERTY AND respond to the changing nature of problems over time tors, such as health care, or enforcing business regu- BOOST SHARED and identification of relevant stakeholders to collab- lations may also generate concrete improvements in PROSPERITY orate with. For instance, improving management of people’s lives and establish a true reform momentum. public resources involves addressing constraints such as human resources and system capacities; ensuring The lack of clarity in institutional and organizational mandates, that entities transparently and adequately allocate, functions, and management systems in many instances works at manage, and report on public finances; and develop- cross-purposes to the overall objective of improving performance ing a robust, accessible citizen feedback mechanism. and increasing productivity. National and county govern- Stakeholders would include the National Treasury, ments continue to conflict over mandates, roles, and sector ministries, county governments, state cor- responsibilities. Laws are in place, but there are mul- porations, sector facilities, and state corporations. tiple interpretations of the meanings of various pro- These actors need to agree on the problem, changes visions. Overlapping roles in public sector institutions required to address the problem, and appropriate and between national and county governments about steps to be taken (sifted from a wide range of iden- devolved functions create dysfunction and addi- tified actions). Limited coordination between institu- tional unnecessary bureaucracy, leading to delays. tions and between national and county governments Public service management information systems are undermines delivery of services and prevents effective not integrated, leaving gaps, creating overlaps, and implementation of policies. A collective solution to generating operational inefficiencies. Although there governance challenges has the potential to address is universal appreciation of the capacity constraints problems sustainably. on county governments (and the role of the national government in addressing this), a coherent, struc- Broadening the “bargaining space” for policy making would make tured approach has not been properly developed or it more inclusive. There is a need to ensure meaning- implemented. ful participation of all relevant players so that their interests are effectively rebalanced and no group is Investing more resources in strategic planning and public invest- systematically favored over another. Inclusiveness ment management would increase spending efficiency and help in policy-­ m aking processes will ensure enhanced build synergies between branches of government. A renewed accountability and weaken the “silos” approach to focus on coordinated strategic planning will be criti- overcoming challenges. However, doing so is chal- cal for achieving development outcomes over the long lenging because the mechanisms for public participa- term. Clearly defining collective goals makes it easier tion are not robust; not all counties have established for different branches of government to work together mechanisms through which the voices of ordinary and to share limited public resources. Capacity build- citizens can influence decision making. Furthermore, ing with respect to public investment management information asymmetry is a challenge in relationships would help ensure that infrastructure projects and between counties and the national government and other major public initiatives are completed on time between national government ministries and coun- and within budget and that the impact of these proj- ties. Addressing this will improve relationships in dif- ects is properly understood and measured. In addition, ferent sectors of service delivery. large-scale procurement contracts would benefit from new digital solutions, greater transparency, and deeper Addressing corruption effectively requires the visible demonstra- citizen engagement to ensure open competition and tion of concrete results, some of which are related to holding peo- to mitigate efficiency losses due to corruption. ple publicly accountable for illicit behavior. Public trials and convictions for corruption offenses can demonstrate a 4.3.2.  Strengthening devolution commitment to punish misbehavior and indicate that no one can act with impunity. Confronting system- to enhance service delivery atic corruption requires systematic ways to identify The 2010 constitution and its implementation have fundamentally corrupt acts. Effective mechanisms for handing down changed the overall governance framework of the country and how administrative sanctions are also important given the public goods and services are delivered. As noted in Chap- cost and time required for criminal convictions. ter 1, not only did the constitution introduce a range of checks and balances on the powers of the national At the same time, simply increasing the number of criminal con- executive and government, it also devolved significant victions or administrative sanctions for corruption is unlikely to public sector responsibilities to county governments, have much effect on overall levels of corruption. It is therefore each with its own elected governor and legislature. SYSTEMATIC COUNTRY important to identify focal areas for anticorruption DIAGNOSTIC work that can serve as the leading wedge for reduc- Devolution has largely been a political success and has widespread KENYA ing corrupt practices. Reducing corruption in public popular support. Kenya began its ambitious process of procurement, for example, has the potential to have devolution in 2013, when 47 county governments 78 a dramatic and noticeable effect on the prevalence of were elected alongside the national government. Five 4. PATHWAYS years into this process, devolution has largely been a equitable service delivery based on citizen needs. TO REDUCE political success: “devolution has established a robust Given that citizen oversight groups have not always POVERTY AND tier of government that Kenyan politicians and voters been effective or sufficiently autonomous, it will be BOOST SHARED PROSPERITY are deeply invested in.” 158 County governments have important to encourage civil society organizations to rapidly established themselves as crucial elements of better organize and support them through capacity Kenya’s political system. Devolution has also emerged building. Greater capacity is also needed for county as one of the main areas for optimism with respect assemblies, in particular their technical committees to addressing corruption, given that recent audit and support structures, in addition to strengthening reports show a positive trend across the 47 counties their links with national oversight bodies. Finally, the and include a small number of counties with clean within-county marginalization of small ethnic groups audits. The Building Bridges Initiative—a government-­ and minorities is evident in many counties and has commissioned study on how to promote reconcilia- consequences for equitable distribution of services. tion following the disputed 2017 election—largely A broader set of county-specific policy approaches endorses this positive evaluation of devolution. 159 to increase ethnic inclusion should be considered within the county executive and public service, and Devolution in Kenya means that service delivery depends simul- village-level information should be collected on the taneously on county governments and the national government. needs of marginalized groups. Since 2013, county governments have taken on exten- sive responsibilities for the management, financing, The division of functional responsibilities between levels of gov- and delivery of a wide range of public sector functions. ernment needs to be clarified. Although Schedule 4 of the To assume these responsibilities effectively, counties Constitution provides overall normative guidance on can make subnational laws and raise their own rev- the two-tiered distribution of service delivery respon- enues, have access to a constitutionally-approved sibilities, in practice, there are ambiguities, inconsis- share of national revenues, and have extensive human tencies, and duplication. It will also be important to resources management powers. With county gov- eliminate service delivery vacuums that arise when ernments at the frontline of service delivery in many neither the national government nor the counties critical areas (health care, early childhood education, assume responsibility for a function. Responsibilities agriculture, roads, water), achieving the twin goals in the agricultural sector, for example, are confusing, calls for strengthening the devolution process and and clarification will be needed. In the urban water increasing counties’ capacity to deliver. Drawing heav- supply sector in particular, there is a pressing need to ily on the provisional conclusions of an ongoing joint rethink and clarify functional responsibilities to put in Government of Kenya and World Bank study, “Making place a workable planning and finance process. Devolution Work for Service Delivery,” some specific recommendations to support in this regard are dis- The adequate funding of devolved functions will be essential to cussed in the ensuing paragraphs. ensure provision of accessible, high-quality services at the county level. The success of the devolution project will depend If properly implemented, devolution can significantly improve to a large extent on ensuring that “finance follows func- governance by ensuring that authorities are more directly account- tion,” through own-source revenues or appropriate able to citizens. The ultimate success of the devolution intergovernmental fiscal transfers. The vertical sharing process will depend on the extent to which citizens of national revenue between the national government are able to participate in decision making and have and county governments is heavily skewed in favor of mechanisms through which they can hold their execu- the former. Even though counties are constitutionally tives accountable. In principle, devolution means that responsible for delivery of most public goods and ser- county governments are more proximate as service vices, they account for only 15 percent of total public providers, making it easier for citizens to engage with expenditures, with the national government account- them and ask questions about what they are doing ing for 85 percent. The current resource allocation for- or not doing. In practice however, many county gov- mula used to distribute shares equitably among the ernments still lack the technical approaches, skills, 47 counties is based on a generic index of expenditure and tools to facilitate effective participation forums. needs and should be revised to ensure a closer link Ways need to be found to create meaningful partic- with service delivery responsibilities. In areas where ipatory processes with respect to service delivery there is a lack of clarity in functions, sector ministries chains and their operations and not just regarding tend to retain budgets rather than devolve them to fragmented infrastructure investments that aim to counties. A common streamlined framework for con- provide everyone with something. In addition, the ditional grants should be enacted, within which sector SYSTEMATIC County Integrated Development Plan process should grants would help address vertical imbalances within COUNTRY be strengthened to achieve its objective of efficient, sectors while supporting national policy objectives DIAGNOSTIC KENYA 158 Cheeseman et al. (2019). 159 Government of Kenya (2019). 79 4. PATHWAYS TO REDUCE POVERTY AND Box 11. Enhancing accountability through participatory governance: The case BOOST SHARED of Makueni County PROSPERITY Through participatory development Makueni has transformed itself from a net recipient of food aid to food self-­ sufficiency, as the Cabinet Secretary for Devolution and Arid and Semi-Arid Lands acknowledged during a structured peer learning exercise organized for governors and their technical teams: “It is amazing that we can come for a visit to Makueni County and be gifted with food to take back. Previously, as the government, whenever we heard about Makueni, we would always think we needed to provide relief food.” The county has implemented effective, value-for- money projects that cut across health care, water, and agriculture that the public has endorsed through participation. How has the county been able to achieve this? Development projects in Makueni undergo a citizen prioritization and validation process using a structured multitier decision-making model that starts at the village level and moves upward to village clusters, sub-wards, wards, and finally the county forum. At each of these levels, the community selects a development committee comprising 11 citizens to represent the project priorities that the community has identified at the next level of engagement. County officials conduct a technical evaluation on the feasibility of projects before citizens arrive at final decisions. By shifting decision-making power to the citizens on the kinds of projects they want to implement, Makueni County has significantly altered patronage politics, wherein elites exchange public resources and material goods for electoral support. Although the Members of County Assembly in charge of the wards approve the budget that the county executive presents, it is difficult for them to override citizens’ decisions on the ward-level budget and introduce new projects given the elaborate participation structure, which logically traces how projects emerge from the village level upward. At the county forum, which governors and the Members of the County Assembly attend, citizens present their ward-level projects to the governor, who acknowledges these by signing them as a true record of the citizens’ choices. Citizens are also given an opportunity to verify that the investment projects reflect what they agreed upon. Assigning a given portion of the county budget to citizens’ decisions enables citizens to budget with a specific ceiling in mind, which manages their expectations and reduces the wish lists of projects that are often presented to govern- ments operating on limited budgets. This builds the credibility of the budget process, increasing trust between the county and citizens. Citizens are further engaged in budget execution when project management committees comprising democratically elected community representatives oversee the implementation of projects. This has greatly increased accountability in the use of county funds and of county officials. “The people of Makueni County do not just give us views, they must approve the projects and ensure that they have been completed to the people’s desire before the county can process the payment,” said Governor Kivutha Kibwana of Makueni County. During the public budget forum for the 2020/21 budget, citizens took county officials to task over what they felt was slow implementation of some water projects. The citizens had also engaged their Members of County Assembly to report the slow execution by the county executive, and assembly members were able to make follow-up demands of the county executive to address the matter. The county executive responded by setting up a rapid results implementa- tion committee comprising the sub-ward and ward administrators, sub-county administrators, and department heads, that evaluates implementation of the budget, reviews the progress of projects, and identifies challenges and addresses them to ensure that projects are completed by their deadlines. and county-level service delivery. Finally, and per- sufficient. How counties, in turn, allocate resources to haps most importantly, county own-source revenues sectors also needs to be revisited if services are to be are low, making counties highly dependent on grants. improved. Existing planning, budgeting, and reporting County revenues will need to be increased by improv- systems need to be strengthened, making them much ing county revenue administration and expanding the more focused on results. Program-based planning and revenue base, possibly by adding piggy-back taxes budgeting would also be a better, more meaningful onto nationally collected taxes. basis on which to structure participation and citizen consultations. Monitoring of spending is also insuffi- SYSTEMATIC COUNTRY Expenditure management needs to be revisited at the subnational cient, and an increase in public transparency would DIAGNOSTIC level, with counties allocating more resources to operational help ensure greater “value for money” regarding fund- KENYA spending. Although increasing the amount of resources ing of service delivery. Furthermore, cash management allocated to counties as part of their share of national practices of counties need to become less centralized 80 revenues is probably a necessary step toward enhanc- ing frontline service delivery, it is unlikely to be to ensure that service delivery facilities receive bud- get resources regularly and on a timely basis. Finally, 4. PATHWAYS counties could redirect excessive spending on general have been marginalized) and improved governance TO REDUCE administrative functions toward the delivery of front- through transparency in the use of funds for develop- POVERTY AND line services. ment projects. Working with county governments such BOOST SHARED PROSPERITY as Makueni and civil society organizations, the Auditor Human resources management is arguably the weakest element in General has begun to pilot the use of social account- Kenya’s current devolution framework and requires urgent atten- ability mechanisms in auditing counties, which should tion and action. Staffing and payroll challenges place be enhanced. serious constraints on subnational performance and affect service delivery. County human resources man- Finally, counties will need greater technical support and must agement systems and frameworks need to: (1) be improve their information management capacities. Much more rationalized so as to eliminate fragmentation in staff can and should be done with respect to capacity build- pay and employment conditions, as well as to enable ing and technical support. Although counties can (and the right mix of staff numbers and skills; (2) ensure do) secure such support unilaterally, the national merit- or performance-based recruitment, evaluation, government needs to be more proactive in providing and promotion (the other side of this coin being the counties with assistance, based on its comparative need to ensure that sanctions are used to address poor advantage and ability to deliver such support eco- or unacceptable staff performance); (3) be aligned nomically and efficiently. There is also a clear need for with service delivery imperatives, rather than build- counties to improve their information management ing administrative bureaucracies; and (4) be protected and monitoring functions to enable evidence-based against local political interference and patrimonial planning and budgeting. Although some counties may tendencies. Finally, county human resources manage- be doing a decent job of managing and using informa- ment information and records management need to be tion, many are not. substantively upgraded, providing a proper basis for human resources planning and budgeting. Although much of this was foreseen at the outset of devolution, 4.4  Foundational issues the measures taken have been ineffective and require review and rethinking. Three foundational issues cut across all identified pathways, sug- gesting ways to implement the selected priorities. The interven- Improving service delivery will require investment in management tions identified under the three pathways are specific and oversight. Building capacity in Monitoring and Eval- actions that can be taken to move toward attainment uation (M&E) and statistical analysis will be critical for of the World Bank’s twin goals. In contrast, the foun- ensuring that the successes and failures of various ini- dational challenges discussed below cut across all the tiatives are measurable and comparable. Service deliv- proposed pathways to define ways of doing—themes ery indicators should be clearly defined and openly and approaches that should be applied universally shared between levels of government and with the in the planning and execution of these development public, helping to ensure transparency in project exe- activities. Concerns about sustainability should inform cution and spending efficiency. Service delivery units the design of all interventions to ensure that their should be established at the county level to monitor effects will be durable and that resources are being the efficiency of services, ensure that community par- efficiently applied for long-term results. Dimensions of ticipation standards are being met, and regularly and inclusivity and gender are also fundamental to all of transparently review service delivery. these activities in that their economic and social ben- efits will be greater when no part of the population Expanding participatory governance and monitoring into the or labor force is excluded. Finally, given the changing decentralized system will improve integrity and efficiency of public global technological landscape, development initia- spending. Through institutionalization of transparency, tives will be unlikely to succeed without leveraging accountability, and participatory public processes, the power of low-cost, highly effective digital solu- county governments can address endemic governance tions. Applying the lenses of these three foundational challenges. In Makueni County (box 11), the executive issues will magnify the effect of individual initiatives made deliberate efforts to promote inclusive gover- and maximize gains for the people of Kenya. nance by embedding participatory budgeting models, citizen-led project implementation, and the establish- ment of robust Grievance Redress Mechanisms (GRMs). 4.4.1.  Fiscal, social, and This improved accountability in multiple dimensions. environmental sustainability Makueni County was also the first to receive a clean Fiscal sustainability SYSTEMATIC audit in 2018/19, evidence that it had improved finan- COUNTRY cial management practices to meet the demands of an Macro stability and fiscal sustainability remain fundamental to DIAGNOSTIC engaged citizenry keen to track how the government Kenya’s growth prospects, and by extension to poverty reduction. KENYA has followed through on development priorities that The critical importance of recreating fiscal space to they themselves had identified. This also enhanced the voice and agency of citizens (especially those who support the crowding in of the private sector has been discussed in section 4.1 within the context of boosting 81 4. PATHWAYS TO REDUCE productivity and job creation. Recreating fiscal space fisheries, and tourism. Beyond the importance of POVERTY AND is important for fostering an enabling environment to environmental resilience, addressing climate change BOOST SHARED support the productive side of the economy. In paral- will create opportunities for economic growth. New PROSPERITY lel, it allows the government to address some of the public and private investments in renewable energy highlighted critical pathways in a number of ways, can create jobs. Climate-smart agriculture and land- including investing in people to building human cap- scape management can address land degradation ital and reducing inequality of opportunities, invest- and increase productivity, contributing to food secu- ing in infrastructure, and strengthening devolution for rity and increasing household incomes. Climate-smart enhanced service delivery. It is against this backdrop health care strengthens not only the health sector, that fiscal sustainability is considered to be of founda- but also communities more generally by providing a tional importance. public model for clean energy and water conservation. Finally, because climate change disproportionately affects the poor, they stand to gain the most from Social sustainability these adaptations in terms of sustainable livelihoods As the Government of Kenya pursues its rapid development agenda, and access to services. awareness is growing of the social costs associated with the devel- opment process and potential harm to local communities. In Kenya will need stronger crisis prevention measures to ensure the Kenya, major social risks and bottlenecks associated long-term stability of its development efforts. Unforeseen nat- with the development process include displacement ural disasters, health crises, and economic shocks will due to land acquisition or land repurposing, the effect demand policy responses, and it will be critical to have of the labor influx on communities, mistreatment of mechanisms in place to avoid diverting funds from workers, and fomentation of local conflicts. Social Risk planned development spending and social safety nets. Management (SRM) seeks to work with communities With the support of the Africa Disaster Risk Financing to systematically identify risks associated with a proj- initiative, the World Bank approved a catastrophe credit ect and plan for their mitigation. Effective SRM not for Kenya in 2018, providing a $200 million contingent only avoids and manages potential unintended harms, line of credit. In parallel, the Government of Kenya also but can also have a powerful transformational effect became the first government in Africa to develop and on society as a tangible demonstration of participa- implement a National Disaster Risk Financing Strategy. tory governance. It includes a strategic priority of “improving financing capacity by strengthening and expanding the govern- The adoption of effective Social Risk Management practices in ment’s portfolio of disaster risk financing instruments.” Kenya faces several constraints. Implementation of these Market-based solutions, such as catastrophe bonds standards and practices would help to minimize harm and insurance products, could add an additional layer to communities and streamline the development of support in response to major disasters and trans- process, but is currently hampered by fragmented fer some risk to the market. The appropriate agencies institutional arrangements with unclear, missing, or should also create contingency plans for specific sce- overlapping institutional mandates at the national narios, including pandemics, natural disasters, and ter- and county levels; a lack of a coherent, integrated leg- rorist attacks, and contingency stocks should be put islative and regulatory framework for managing social in place. The global COVID-19 pandemic highlights the risks; and capacity constraints on core SRM functions importance of contingency funds both to mitigate the throughout government. impacts of national health crises and to provide for fis- cal stimulus in the wake of a global demand shock or commodity price fluctuation. Not only are these con- Environmental sustainability tingency funds and emergency response plans critical Climate change poses a risk to the sustainable implementation for responding to shocks that do arise, but having such of all three pathways, and interventions will need to be climate measures in place reassures markets and creates a sta- smart (supporting low-carbon strategies and climate resilience) ble climate for investment and savings. to ensure sustainable, durable outcomes across timescales. The effects of climate change must be understood from The current growth path for Kenya will require a major effort to a causal perspective so that interventions can be ensure that principles of environmental sustainability are respected. planned accordingly. Developing a capacity for adap- Kenya’s second National Climate Change Action Plan tation and building resilience to climatic shocks are (NCCAPII) sets out the constraints and opportunities essential components of economic growth in Kenya. that climate change poses to the achievement of the Ecological and social systems are interdependent, and country’s Vision 2030 and the Big Four agenda. The SYSTEMATIC COUNTRY any environmental shock is liable to affect multiple NCCAPII represents the framework for the implemen- DIAGNOSTIC sectors of the economy simultaneously. Broad use of tation of Kenya’s Nationally Determined Contribution KENYA to the Paris Agreement in 2015. It identifies seven its natural capital means that Kenya must be partic- ularly careful to think sustainably and maximize its priority climate action areas: disaster (drought and 82 climate change readiness, specifically in agriculture, floods) risk management; food and nutrition security; 4. PATHWAYS water and the blue economy; forestry, wildlife, and market, particularly for out-of-school girls.161 Fur- TO REDUCE tourism; health, sanitation, and human settlements; thermore, improving women’s engagement in formal POVERTY AND manufacturing; and energy and transport. A significant enterprises and businesses would increase house- BOOST SHARED PROSPERITY commitment of resources will be required from the hold security, reduce poverty, and enhance Kenya’s government and development partners if the coun- broader economic potential, and can be accomplished try’s climate goals are to be achieved. Targeted, peo- by addressing limits on access to capital, markets, ple-centered, customized solutions will be required and skills training. Closing gender gaps in Kenya will to enhance household and community resilience. This require a comprehensive strategy in various sectors approach strengthens the ability of the poorest and and will necessitate addressing social norms and most vulnerable to recover quickly and more effec- biases to enhance human capital through improved tively from climate impacts. health, education, and skills for women. Appropriate fiscal policy will be essential to address climate The effects and costs of GBV in Kenya on human potential, health, change. Climate shocks continue to increase in inten- and well-being are a significant barrier to development, gender sity and frequency and can affect fiscal sustainability. equality, and women’s socioeconomic engagement. Strengthen- It is estimated that the economic cost of floods and ing national and local capacity for GBV prevention and droughts creates a long-term fiscal liability equivalent response is a critical facet of addressing underlying to 2.0 percent to 2.8 percent of GDP each year. Specif- norms and dynamics that entrench gender inequality ically, the estimated costs of floods are approximately and limit women’s and girls’ voice and agency. Recom- 5.5 percent of GDP every seven years, and the costs mendations include consolidating ongoing efforts at of droughts are approximately 8 percent of GDP every the county level to strengthen capacity for integrated, five years.160 Fiscal instruments—taxation and spend- multi-sectoral service provision for survivors, particu- ing choices made by governments—are among the larly through the health sector, including support for most effective ways to address climate change and holistic provision of care and support for referral path- its effects. Conventional macroeconomic models do ways related to: (1) medical support, (2) mental health not regularly integrate climate shocks and adaption and psychosocial care, (3) legal support, (4) opportu- into Kenya’s core macrostructural model. The regular nities for livelihoods and economic empowerment, occurrence of acute climate shocks and chronic cli- and (5) follow-up for survivors within their respective mate effects in poor and vulnerable areas can quickly communities. Activities should identify opportunities erase development gains and put households and to support interventions that promote gender equal- communities into a spiral of poverty. There is substan- ity, behavioral change, and violence prevention, work- tial potential for private sector climate investment in ing at the household and community levels to shift the country that could be further developed. Kenya attitudes and norms and reduce violence. Potential recently launched the Green Bond Program, which entry points include pairing economic empowerment was designed to promote financial sector innovation and livelihood programming with prevention inter- by developing a domestic green bond market. ventions to address factors of vulnerability that may increase exposure to risk of violence and to address norms and dynamics that might perpetuate GBV. 4.4.2.  Inclusivity and gender Enabling access to livelihoods has also been an effec- Improving gender equality and diversity enhances productivity, tive means of enabling long-term recovery and sup- improves development outcomes for the next generation, and port for survivors of GBV. allows businesses and institutions to perform more effectively. Global evidence shows that gender disparities impede In addition to a focus on better development outcomes for women, human capital formation and economic productivity. it is necessary to ensure that vulnerable and excluded groups are Women consistently earn less than men in formal and part of Kenya’s development process. Programming needs to informal employment and have unequal access to include an effort to address the needs of groups such resources such as agricultural inputs and secure land as persons with disabilities, youth, and vulnerable and tenure. These inequalities in jobs and assets reduce marginalized groups. productivity and investment for the economy overall and have large, lasting effects on household incomes. 4.4.3.  Digital transformation Access to productive employment is also critical for poverty reduction, and as such, equal access to edu- Taking advantage of these opportunities will require addressing cation is critical for capitalizing on the productive stubborn bottlenecks preventing the digital economy from achiev- potential of Kenyan youth. Adolescent program- ing its full potential in driving growth, job creation, and service SYSTEMATIC ming combining life skills and livelihood training has delivery. These include more independent and agile reg- COUNTRY been shown to strengthen the transition to the labor ulation of the telecommunications market to ensure DIAGNOSTIC KENYA 160 NCCAPII 2018. 161 Bandiera et al. (2018). 83 4. PATHWAYS TO REDUCE competition, investment, and affordability of services, the resilience of individuals and the ability of govern- POVERTY AND as well as strategic public and private investments in ment to respond to climate events and other shocks. BOOST SHARED digital infrastructure networks to increase reach and Such measures could include enabling innovation in PROSPERITY performance throughout the country. Strengthening mobile-based insurance products, using big data for the entrepreneurial ecosystem is also vital to increase early identification of potential threats, supporting the success rate of digital start-ups reaching the high effective targeting of affected communities and indi- growth stage and creating significant numbers of jobs. viduals, and rapidly administering payments and other Embedding digital skills in the curriculum and provid- services before and after an event. ing opportunities for lifelong learning are needed to increase readiness for jobs. Building links with digital As economic transactions, public services, and social interaction markets in East Africa will provide access to a much become increasingly digital, it will be critical to ensure that vul- larger pool of online consumers for Kenya’s digital nerable groups are not left behind. This includes extra efforts firms and attract investment in digital infrastructure to promote digital inclusion targets such as universal and services. access to broadband, universal basic digital literacy, and the ability for everyone to identify themselves Kenya’s increasing connectivity and wider adoption of digital tech- and transact digitally. According to a 2014 Gallup sur- nologies likewise provide a foundation for improving the efficiency vey, 44 percent of Kenya’s urban population but only and effectiveness of public service delivery. Processes can be 17 percent of its rural population reported using the automated, improving the customer experience and Internet weekly. On average, 1 gigabyte of data costs decreasing opportunities for corruption. With a mobile 4 percent of per capita gross national income, more phone, digital identification, and a mobile wallet, than double the 2 percent target established by the individuals in remote communities can access health Alliance for Affordable Internet, a price that is still out care services, view critical documents and records, of reach for the poorest households. Women in Kenya pay fees, and receive government payments. In many are 39 percent less likely than men to have access to cases, this saves them from making time-consuming, mobile Internet, 23 percent less likely to own a smart- costly trips to major population centers or waiting in phone, and less likely to participate in the digital long lines. These same digital assets can help increase workforce.162 SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 84 162 Rowntree (2019). 5. Prioritization 5.1  Identifying priorities and job creation, with specific interventions to support the millions of out-of-school young men and women in accessing employment within the pathways and expanding their opportunities. This challenge is all the more important given Kenya’s demographic dynamics, The objective of this SCD is to identify the most critical priorities with an increasingly large number of youth projected to accelerate poverty reduction and promote shared prosperity in to enter the labor market every year. With unemploy- Kenya. A number of constraints have been identified for ment being high, in particular youth unemployment, Kenya that will limit achievement of the World Bank’s the need for the private sector to create jobs and for twin goals. These include challenges affecting the youth to be equipped with the skills to be productively operating environment for firms and farms, difficulties self-employed is critical. Likewise, with urbanization advancing human capital development, inadequate accelerating, congested cities must be transformed infrastructure, and the insufficient inclusiveness of the into productive spaces. Addressing this will require, growth model. The recent COVID-19 pandemic high- inter alia, creating a conducive operating environment lights the importance of addressing these challenges for firms and farms, addressing remaining infrastruc- to allow for rebuilding the economy in the medium ture gaps, advancing the use of digital technologies, term and regaining momentum toward achieving the and promoting integration of markets (rural and twin goals. Three pathways have been identified to urban, domestic and international). For employment, address these constraints and help accelerate attain- specific interventions are needed to allow youth, ment of the twin goals: (1) boosting productivity and including young women, to take advantage of broad- job creation, (2) reducing inequality of opportunities based reforms, including a combination of skills through advancing human capital, and (3) improving development (socio-emotional, cognitive, technical) governance for service delivery. These pathways must and support to start businesses. Additional measures be pursued in ways that are sustainable and inclusive can target young women to empower them and pro- and that leverage new digital technologies, which vide support for their labor force participation while are the three foundational themes that cut across all they also transition into family life, including having aspects of a successful growth path for Kenya. children. SYSTEMATIC COUNTRY DIAGNOSTIC First, given the fundamental importance of productive jobs as a Second, inclusiveness is critical to achieving the twin goals. Kenya’s KENYA means of promoting poverty reduction and shared prosperity, an poverty reduction experience over the past decades 85 important pathway to achieve the twin goals is the need to create has revealed that, unless particular attention is paid an enabling environment that supports private sector investment to spatial dimensions of poverty, segments of the 5. PRIORITIZATION population are left behind. Addressing inequalities is specific reform on the twin goals, (2) the improvement important to sustain social cohesion. Hence, although of spatial equity, (3) the complementarity of the reform there are physical and human capital gaps across the action, (4) the time horizon for the reform to have an country, the gaps are more acute in lagging and mar- impact, and finally (5) the feasibility of implementing ginalized regions, especially in the northeastern parts the reform action (figure 31). The first criterion is the of the country. Addressing these gaps and improving dominant one. In other words, reform actions that are the integration of marginalized regions into the rest of deemed to have greater potential positive effects on the country should accelerate achievement of the twin the twin goals should be prioritized. The second cri- goals in Kenya, especially given that poverty in these terion requires that interventions increase geographic marginal regions has been remained stubbornly high. equity. As the diagnostic shows, there are large and increasing geographic inequities, especially between Third, it will be essential to recognize the critical importance of the NEDI counties and the rest of Kenya, creating a sustainability, and identified vulnerabilities should be reduced potential risk factor for the stability of the country and using mitigation strategies. Given the increasing vulnera- its social contract. bility of Kenya to extreme weather events (e.g., floods, droughts, locusts) advancing the twin goals will Interventions are then filtered according to their complementarity require Kenya to mitigate and adapt to climate change with other interventions, their time horizon, and their feasibility. to build its resilience against shocks and protect the The third filter is the complementarity objective, which lives and livelihoods of its citizens. Furthermore, Ken- seeks to identify the extent to which a specific inter- ya’s ability to achieve the twin goals also rests on vention will have positive externalities in addressing safeguarding social cohesion. In this regard, the 2010 other constraints. For instance, although improving constitution provided an important step forward by digital technologies should help increase productiv- enacting a devolved system of governance. Although ity, growth, and job creation, it also is important to much progress has been made in a short period, Ken- advance human capital development. The fourth filter ya’s devolution journey is nascent and a work in prog- focuses on how long it is likely to take for a particular ress. To this end, it is critical for the devolution process intervention to affect the twin goals and geographic to be strengthened and the economic gains to be equity, with a view to prioritizing measures that are equitably shared. most likely to accelerate achievement of the twin goals and increase geographic equity by 2030. Finally, the Specific policy interventions are prioritized according to their effect fifth filter is the feasibility of the proposed interven- on the twin goals and on spatial equity. Given the numerous tion. Specifically, the feasibility of proposed interven- constraints identified, it is important to prioritize the tions will be evaluated based on perceived willingness most critical reform actions needed to accelerate to reform, governance challenges, and fiscal feasi- achievement of the twin goals. This SCD adapts the fil- bility. Only reforms that are deemed feasible will be tering criteria provided in the World Bank SCD guide- prioritized. lines. The criteria used here are: (1) the impact of the Box 12. Prioritization process Based on inputs from sectoral colleagues, the systematic country diagnostic (SCD) team developed a list of 36 potential priorities to address the identified constraints hindering Kenya’s achievement of the World Bank’s twin goals. The SCD team invited the country team and sectoral focal points to participate in a prioritization workshop held simultaneously at the headquarters of the World Bank and in the World Bank Kenya country office. After a short presentation of the overall SCD framework, the SCD team explained the filtering criteria that workshop participants would use to help decide priorities. These criteria were the impact on the twin goals, spatial equity, complementarity, time horizon, and feasibility. At the workshop there were two rounds of voting. In the first round, each participant was invited to rank their first, second, and third priorities from the list of 36 potential priorities. The voting was displayed using colored notes on the wall. After the initial vote, each participant explained to the group the rationale behind their chosen rankings. After all participants had explained their choices, they were able to validate or alter their ranking of the priorities based on what they had heard from colleagues. Several colleagues took this opportunity to revise their initial votes. After the workshop, the SCD team consolidated the results of the voting process into the priorities presented in this section. SYSTEMATIC COUNTRY A quality enhancement review was later conducted to solicit further views from independent reviewers on the prior- DIAGNOSTIC KENYA ities selected using the voting process. The results of the prioritization exercise were further validated in four virtual workshops held with a wide cross-section of Kenyan society, including policy makers, academics, civil society, and private sector leaders. 86 5. PRIORITIZATION Figure 31. Kenya Systematic Country Diagnostic (SCD) methodology Strategies for achieving the twin goals Higher aggregate output Equity and and productivity growth inclusiveness Constraints Constraints • Subdued growth in private • MSMEs lacking access to finance, • Regional disparities in monetary • Inadequate coverage of social investment and FDI and facing cumbersome poverty protection programs • Low and declining agricultural processes and high tax rates • Gender disparities in education, • Higher dependency ratios among productivity (inadequate inputs) • Weak learning outcomes in basic health, and labor market poor households • Weak productivity in education participation • Weak access to safe water and manufacturing • Restricted national electrical grid • Widespread physical and sexual improved sanitation for the poor • Expansionary fiscal stance • Climate change reducing crop and violence against women • Limited access to broadband crowding out private investment livestock productivity • Geographic and socioeconomic Internet in rural areas • Barriers to entry and direct • Increased impact of flooding and disparities in access to health care • Household coping strategies competition from SOEs droughts • Geographic and socioeconomic adversely affecting future • Complex, costly, and • Land degradation and disparities in school enrollment well-being unpredictable business regulatory deforestation • Low transition rates into • Lack of social risk management environment secondary among the poor measures and procedures • High levels of corruption • High vulnerability rates Pathways Reducing inequality of Boosting productivity Improving governance for opportunities through and job creation service delivery advancing human capital Filters: Twin goals—Spatial equity—Complementarity—Time horizon—Feasibility Improving the operating environment for firms Improving access to quality Strengthening anti-corruption Opening markets and enhancing primary/basic health care mechanisms and institutions competitiveness through infrastructure upgrades Improving access to quality Strengthening devolution education services to improve to enhance service delivery Enhance commercialization learning outcomes opportunities across agriculture value chains Foundational issues: Fiscal, social, and environmental sustainability—Inclusivity and gender—Digital 5.2  Priorities to achieve delivery, the selected priorities are (6) strengthen- ing anti-­corruption mechanisms and institutions, the twin goals and (7) strengthening devolution to enhance service delivery. The seven selected priorities are presented below. Under the pathway of boosting productivity and job creation, 5.2.1.  Improving the operating the selected priorities are (1) improving the oper- ating environment for firms, (2) opening markets environment for firms and enhancing competitiveness through infrastruc- The combined effects of the deficit of productive jobs ture upgrades, and (3) enhancing commercialization and a significant narrowing of the fiscal space in recent opportunities across agriculture value chains. Under years calls for spurring greater dynamism in private the pathway of reducing inequality of opportunities investment (both domestic and foreign), which has SYSTEMATIC COUNTRY through advancing human capital, the selected prior- underperformed in recent years. An important part DIAGNOSTIC ities are (4) improving access to quality primary/basic of creating a more conducive environment for private KENYA health care, and (5) improving access to quality edu- investment is the need to reduce the public sector’s cation services to improve learning outcomes. Under 87 crowding out effect on the private sector (discussed in the pathway of improving governance for service detail as part of the foundational issues in Chapter 4). 5. PRIORITIZATION However, beyond reducing the crowding out effect of need to undertake specific measures to de-risk lend- fiscal policy, this diagnostic prioritizes three actions ing to MSMEs. These could include: that could encourage productive investment in the private sector: remove regulatory hurdles to enhance • Establishing an operational and efficient Credit Guarantee competition, increase access to finance for MSMEs, Scheme. Such a scheme could build the capacity of and address inefficiencies in land markets. MSMEs to absorb finance through greater finan- cial literacy and managerial capabilities; build the a. Removing Regulatory Hurdles and Enhancing Competition financial data of MSMEs, which is critical in credit appraisals; and bridge the gap caused by late pay- It is estimated that reducing anticompetitive regula- ments to MSMEs through procurement entities. tions and better aligning them with best practices has • Leveraging alternative data for MSME finance. Financial the potential to increase productivity gains by 3 per- institutions in Kenya have mentioned the challenge cent to 13 percent. 163 Part of the post-2003 increase of finding current information and data on MSMEs, in GDP growth in Kenya was due to structural reforms which affects their ability to make data-driven busi- that, inter alia, supported the removal of various ness decisions. Market players are encouraged to licensing restrictions. Nonetheless, restrictive regula- identify ways to use financial technology to exploit tions and the predominance of SOEs hinder entry into alternative sources of data and advanced data ana- and competition within markets. Measures to improve lytics to increase access to markets and finance for market entry and contestability include: MSMEs. • Building the capacity of SACCOs for better intermediation of • Removing regulatory barriers and government interven- MSMEs. tions that restrict entry and competition. These include • Addressing the accessibility of capital for early-stage enter- licensing and policy restrictions in various sectors, prises and opening alternate funding channels. Although including agriculture (tea, sugar, seeds), electronic there appears to be an adequate supply of ven- communications (spectrum allocation, mobile pay- ture capital available within Kenya and especially ment systems), electricity generation, professional globally, accessibility is a considerable constraint, services (legal, architecture, quantity surveying), largely because of information asymmetry between insurance, and transport logistics. investors and investees. Government agencies and • Improving market discipline mechanisms for SOEs and encour- other nongovernmental bodies can play an active agement of private sector solutions. Increasing the role in addressing this market failure through inter- efficiency of SOEs and limiting direct public par- ventions such as de-risking such ventures or invest- ticipation to markets where private participation ing in information and awareness campaigns for is not feasible would help ensure competitive neu- investors and investees. trality and crowd in the private sector. Also, given the drain on the exchequer from SOEs, such reforms c. Addressing Inefficiencies in Land Markets would help increase fiscal savings. Land reform is a highly sensitive topic in Kenya, and it b. Improving Access to Finance for MSMEs, Including Under-­ could prove difficult to enact major reforms. Nonethe- integrated Interventions for Youth-Led Microbusinesses less, there is much room to improve the functioning of land markets and to help address the myriad chal- Although the removal of interest rate caps in Octo- lenges that arise from inefficiencies in land markets. ber 2019 was a step in the right direction to increase These difficulties include unplanned land use, low agri- credit access, it needs to be accompanied by deeper cultural productivity, the high cost of land for public structural reforms. First is the reduction in the fis- investments, informal settlements, traffic congestion, cal deficit to lower the government’s domestic bor- high housing costs, and informality. Specific measures rowing requirements, benchmark interest rates, and to improve land market efficiency could include: ultimately commercial bank lending rates. Beyond the macro-level reforms to reduce the degree of gov- • Improving land record management. Implementation of ernment involvement in the domestic market is the a National Land Information Management Sys- need to enact reforms to support universal adoption tem would be beneficial. It will also be important of credit scoring and sharing, helping banks discrim- to accelerate the digitization of land records and inate between borrowers. It will also be important to establish a geo-referenced land registry. accelerate implementation of the movable collateral • Accelerating implementation of the National Land Use Policy SYSTEMATIC registry. Although these measures should generally (2016). The uncoordinated allocation of land use COUNTRY support an increase in private sector credit growth, needs to be addressed. Implementation of the DIAGNOSTIC given the peculiarities of the MSME sector, there is a policy would help ensure that the selection and KENYA adoption of land use options meet the economic 88 163 Bourlès et al. (2010b). 5. PRIORITIZATION and social needs of Kenyans while safeguarding markets and promote self-sustaining economic resources for the future. activities. The North Eastern Transport Improve- • Completing the National Spatial Plan and the derivative county ment Program is expected to cut travel times and spatial plans. The National Spatial Plan (2015–2045) transportation costs, facilitate trade, and create was developed to increase the efficiency of pub- new income-­ earning opportunities. The opening lic investment spending and guide private invest- up of the region is also expected to reduce the inse- ment decisions in industry and services. It provides curity that constrains private investment. a coordinating framework for sectoral planning, • Linking rural areas with urban centers. Given the dispropor- particularly infrastructure for basic services and tionate level of rural poverty, connecting rural areas industrialization. with urban centers can help boost shared prosper- • Improving property registration systems. This would help ity. This calls for rural infrastructure upgrades such entrench property rights and accelerate land trans- as roads, water and sanitation, electrification, and fers and release for development. small-scale irrigation that can decrease the cost of • Leasing unused public lands to private sector actors. Large inputs and products and increase competitiveness. tracts of land owned by the state (often through Furthermore, there is a need to bridge the digital parastatals) lie idle. There is significant room divide—44 percent of the urban population have to increase productivity by engaging in leasing access broadband services but only 17 percent do arrangements with the private sector to put this in rural areas. In rural areas that have access, digital land to productive use in addressing the govern- technologies have supported financial inclusion, ment’s development priorities (e.g., food security, access to information, and off-farm jobs. affordable housing). Upgrading infrastructure to enhance connectivity with regional and global markets would stimulate growth. Developing regional 5.2.2.  Opening markets and transportation and trade corridors can increase enhancing competitiveness regional integration and deepen economic synergies. through infrastructure upgrades However, Kenya lacks an efficient, integrated inter- Infrastructure upgrades can boost productivity and shared pros- modal national transportation system, and many trade perity and accelerate the pace of poverty reduction. Yet, as corridors connecting the country to its neighbors are important as this agenda is, it is equally important in poor condition. Interventions on a few corridors to recognize that infrastructure upgrades need to are planned or are underway, such as upgrading the be financed within a sustainable medium-term fis- Isiolo-Mandera road corridor linking Kenya to Ethi- cal framework. Given the current fiscally-constrained opia and Somalia and reconstruction of a section of environment, it will be important to undertake this by the Kenya–South Sudan road corridor. Given the lack crowding in private investment. The constraint on fis- of fiscal space, decision makers will need to prioritize cal space also calls for infrastructure upgrades to be highly effective investments in infrastructure upgrades well targeted to maximize positive effects on the twin with clear and substantial social returns. Specific trans- goals. To do so will require infrastructure upgrades portation infrastructure initiatives needed to improve that enhance geographic and economic integration, Kenya’s trade performance and role as a regional hub increase connectivity to regional and global markets, include: and transform urban centers into productivity hubs. • Continuous investment in improving regional trade corridors. Enhancing geographic and economic integration can reduce inequal- This includes the development of major inter- ity. As noted in Chapter 3, although economic growth national roads, inland waters navigation infra- has helped decrease poverty over the past decade by structure, regional aviation security and safety approximately 1 percentage point per year, poverty authorities, border crossings, and customs facilities. remains stubbornly high in parts of the country. Some • Promotion of regional private sector initiatives and private of the areas in the country with the highest incidence infrastructure investment. Barriers to entry should be of poverty are cut off from productive centers and pay reduced for export-focused firms aiming to access higher prices in travel time and costs. Infrastructure markets within the East African Community cus- developments can help connect economically mar- toms union and outside the region. ginalized parts of the country with economic hubs to • Improved railway planning. Freight-flow and logistics increase economic activity in both areas. Specific mea- demand models need to be developed that account sures of focus could include: for economic geography and disaggregated freight flow patterns. Such analysis would help maximize SYSTEMATIC • Developing the northeastern transport corridor. Improved the utility of the planned standard gauge railway COUNTRY and inform decisions on last-mile connectivity. DIAGNOSTIC transportation networks and digital connectivity KENYA with the most dynamic economic hubs (in par- • Develop a national aviation policy. Such a plan would ticular Nairobi and Mombasa) can help open new increase aviation security, modernize the passenger 89 5. PRIORITIZATION terminal facilities at Jomo Kenyatta Interna- Increase commercialization opportunities for farmers by developing tional Airport, and strengthen the Kenya Airports a warehouse receipt system and commodities exchange. The oper- Authority. ationalization of the Warehouse Receipt System and the National Commodity Exchange would give farmers Infrastructure investment can help transform urban centers into more flexibility in choosing when to sell their produce hubs of productivity and job creation. As noted in Chapter 2, and would reduce transaction costs for millers and the improvement of Kenya’s infrastructure over the processors by allowing them to procure grain directly past decade has stimulated growth in recent years. from farmers. Enacting these mechanisms would also Notwithstanding this progress, with a growing popu- increase lending to the agricultural sector by providing lation and rapid urbanization, there is increasing pres- alternative security. Furthermore, this would improve sure on existing infrastructure, particularly in urban the grading of produce along the entire value chain, areas (e.g., traffic congestion, water shortages, power increase the quality of goods being sold, and reduce outages), which threatens the ability of urban spaces postharvest losses through professional storage. At to be productive economic hubs. Specific interven- the same time, reforming the Strategic Food Reserves tions could include: and National Cereal and Produce Board to reduce gov- ernment interference in the output and input markets • Streamlining the institutional arrangement in managing urban will encourage private sector participation. mobility. This can best be accomplished by estab- lishing a lead agency responsible for planning and Support the adoption of relevant standards and certification to coordination. allow farmers to join domestic and global value chains. Many • Developing and implementing urban mobility programs for farmers, especially small and medium-sized ones, are major cities. This would include land use planning not aware of these standards and consequently miss and involve integrated public transportation sys- out on economic opportunities. Government efforts to tems, rail and non-motorized transport networks provide training on relevant standards and certifica- with safer and greener solutions, and operational- tion requirements can help small- and medium-sized ization of metropolitan transport authorities. producers connect to value chains. This is essential to • Economic water scarcity must be addressed though large, coor- access not only lucrative external markets, but also dinated investments. To meet the fast-growing demand domestic markets, with the supermarket revolution from urban centers, investments must be increased in Kenya leading to consolidation in the retail market. in strategic water storage, productive watershed Complementing this could be efforts to streamline the management, interbasin transfers, water delivery issuance of relevant sanitary and phytosanitary certif- works, last-mile connectivity to water distribution icates of compliance from government agencies such systems, water conservation, and adaptation infra- as the Kenya Plant Health Inspectorate Service, the structure. An integrated water management and Horticultural Crops Development Authority, and the service delivery approach should also be adopted Kenya Bureau of Standards. Recent advances in certi- for urban areas, including investments in improving fying avocado farmers in Kenya have contributed to a the efficiency of water service providers. remarkable rise in avocado exports, with Kenya now • An integrated approach to sanitation should be adopted. overtaking South Africa as the largest African exporter Kenya needs to change its fragmented approach of avocadoes. This is one example to suggest that to urban sanitation infrastructure that deals sepa- there is significant scope to scale up and replicate this rately with sewerage, fecal sludge, solid waste, and success in other agricultural value chains. hygiene. Governments should adopt an integrated approach to sanitation covering all elements along Leverage cooperatives to enable smallholder farmers to ben- the supply chain. efit from value chain opportunities. Uncertainty and lim- ited information about demand are barriers to being connected to value chains, especially for SMEs. The 5.2.3.  Enhancing commercialization government can help rectify this information asym- opportunities across agriculture metry by assuming a coordination role in bringing value chains together agricultural firms to help them discover new markets and build relationships with clients. This can Prioritize initiatives that help producers gain access to agricultural be accomplished through trade fairs, business-to- value chains. Advancing commercial agricultural oppor- business events, and trade missions, and using embas- tunities can be supported by addressing bottlenecks sies more effectively to facilitate business links. Kenya faced by the leading companies in the sector. It will has some 23,000 registered cooperative societies with SYSTEMATIC also be important to build the capacity of institutions COUNTRY 15 million members. Many small-scale farmers belong and agents to identify and take advantage of opportu- DIAGNOSTIC to cooperatives and through them access inputs, stor- KENYA nities along the value chain. Furthermore, investments age facilities, and marketing opportunities. Histori- in irrigation could double or triple agricultural produc- cally, cooperatives have increased the incomes of their tivity and increase farm income while enhancing the 90 climate resilience of rural communities. members, helped smooth consumption, and opened 5. PRIORITIZATION education opportunities for members’ children. How- on schooling for learning (including at the preschool ever, several agricultural cooperatives have in recent level) and directly address the regional and gender years been rocked by governance challenges that have disparities that persist in Kenya, notably for the very disincentivized their membership (farmers) and eroded low learning outcomes in basic education in 14 coun- their influence. The State Department of Co-operatives ties. Strong advocacy will be needed to help ensure could leverage existing cooperatives to link producers that girls remain in school in regions where the gender to value chains, but this would require first addressing gap in the dropout rate is severe. The substantial lack these lingering governance challenges. of equity in access needs to be addressed, especially for girls and residents of informal settlements. Tar- geted support such as scholarships and in-kind sup- 5.2.4.  Improving access to quality port should be used to help equalize enrollment rates, primary/basic health care thereby helping to create opportunities for children Health outcomes in Kenya can be greatly improved through increased from all socioeconomic backgrounds. Multi-sectoral spending, better financial management, changes in health care pri- interventions, such as deworming and investments in orities, an improvement of human resources policy, and better coor- water and sanitation, will also be crucial for maintain- dination. Specific interventions could include: ing attendance and learning outcomes. The human capital of the millions of youth who dropped out of • Reallocating health care funding to county-level service provid- school early needs to be built with integrated inter- ers and increasing spending efficiency. Public spending on ventions that teach multiple skills including cognitive, health care and select priority initiatives, including socio-emotional, and technical. These training pro- provision of universal health care coverage through grams should be designed to respond to labor market more robust protections against financial shocks, needs, especially where they address technical skills should be shifted to the local level as quickly as gaps. possible. In parallel, the efficiency of health spend- ing needs to be improved, notably by strengthen- The quality of teaching needs to be improved. Mechanisms to ing strategic purchasing. achieve this can include greater reliance on contract • Changing health care priorities. Specific public policy teachers to fill the more than 100,000 vacant positions, interventions should address the high rates of child better teacher professional development, and a stron- and maternal mortality, as well as stunting and ger monitoring and performance evaluation system. malnutrition. Primary health care services should New investments should be made in early childhood be redesigned to focus on preventive services and development and education, and a structured quality health promotion. assurance framework should be put in place. Finally, • Improving human resources policy. The productivity of the education sector requires major improvements health care workers needs to be enhanced by estab- in its financial management systems as a means of lishing the right incentives and payment mech- increasing spending efficiency. This should include the anisms, addressing absenteeism, and ensuring a harmonization of budget structures between levels more balanced sharing of resources. The operating of government and more regular auditing. Financial environment for health care can also be improved information relating to schools should be disclosed, to ensure that available resources have the greatest and this information should be made available online possible impact on health outcomes. to stakeholders inside and outside government. • Improving financial management. Health financing should be made more sustainable by adopting 5.2.6.  Strengthening anti- common mechanisms for budgeting and tracking corruption mechanisms and withdrawals from county coffers, including condi- tional grants issued to health care facilities. institutions • Strengthening coordination. Multidisciplinary and multi­ A consistent and holistic approach to tackling corruption would have agency coordination should be strengthened positive knock-on effects throughout the whole society and econ- within the health care sector, including intergov- omy. More needs to be done to fight corruption, and ernmental collaboration and the clarification of institutions will need to be strengthened. Although roles and responsibilities. punitive measures such as arrest and prosecution have an impact, a more sustainable approach would be to 5.2.5.  Improving access to quality promote performance and accountability for service delivery. Specific interventions that can help in this education services to improve regard include: SYSTEMATIC learning outcomes COUNTRY DIAGNOSTIC Major gains in education—and therefore human capital in the long • Digitization of public services. Digital technologies KENYA run—can be made through policy changes aimed at reducing ineq- should be phased in to replace face-to-face inter- actions in providing government permits, licenses, 91 uities in access and improving learning outcomes. The long-term strategy of the education system should be focused approvals, and incentives. 5. PRIORITIZATION • Digital land registry. Greater transparency and docu- money is being spent mostly at the county level, mentation in the land market will be essential for where public goods and services are delivered. reducing risk and increasing tenure security. County revenues can be strengthened as well • Public procurement reform. Another area that could eas- by increasing the efficiency of county revenue ily yield benefits is public procurement, ensuring administrations and expanding the revenue that private interests do not compromise the integ- base with new taxes. Expenditure management rity of decisions made by public officers and by sep- can also be improved to ensure that planning arating as much as possible the realms of politics and budgeting are directly linked to service and business. delivery results. Service delivery units should be established at the county levels to monitor the efficiency of services, ensure that commu- 5.2.7.  Strengthening devolution nity participation standards are being met, and to enhance service delivery conduct regular and transparent reviews of Service delivery can be strengthened by expanding participatory services. governance, voice, and accountability at the county level and build- • Providing better human resources management. Human ing the capacity of county governments to enhance service delivery. resources systems and frameworks need to be rationalized to eliminate discrepancies in pay- a. Expanding participatory governance, voice, and accountability roll and employment conditions and to ensure that teams have the right number of staff mem- • Expansion of participatory governance. County assem- bers with the appropriate skill profiles. Other blies need to be provided with the resources priorities should include using merit-based needed to go beyond “ward-style” develop- recruitment, ensuring that management prac- ment. A structured multitier decision-making tices align with service delivery goals, and model should continue to be introduced, by establishing safeguards against local political establishing development committees starting interference and nepotism. at the village level and continuing upward to • Building capacity for county administrations. The village clusters, sub-wards, wards, and finally national government needs to be more proac- counties. Urban and rural planning offices tive in providing counties with technical assis- should be fully established at the county level, tance and training, based on its established and county executives’ capacity in participatory capacity and comparative advantage. planning should be increased through training. • Strengthening county and national monitoring and evalua- • Public expenditure transparency. Mechanisms must tion systems. Building capacity in Monitoring and be put in place to enable citizens to track gov- Evaluation (M&E) and statistical analysis would ernment spending and the execution of agreed- help reinforce linkages between strategic plan- upon development priorities. In parallel, county ning, budgets, Public Investment Management, governments must be given the resources citizen engagement, and performance manage- needed to enable better service delivery. ment at the individual and institutional levels. • Clear definition of national and county government roles. Service delivery indicators should be clearly The separation of functional responsibilities defined and openly shared between levels of needs to be better defined between national government and with the public, thereby help- and county governments, to eliminate duplica- ing to ensure transparency in project execution tions, inconsistencies, and service delivery gaps. and spending efficiency. b. Building the capacity of county governments to provide better service delivery • Strengthening county-level public finance management. Public finances need to be reallocated so that SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 92 Knowledge and data 6.  gaps Although Kenya has closed important data gaps in recent years, and policies. Although recent efforts to improve data crucial gaps remain in a fragmented and production-centered sta- quality, availability, and timeliness have successfully tistical system. Historically, Kenya’s statistical system focused on the KNBS, administrative data across minis- had multiple data gaps, including the absence of an tries and agencies, as well as with sub-national entities agricultural census, large gaps between consecutive like county governments, are not effectively shared. household surveys and consequently outdated con- Agencies collecting (administrative) data must be inte- sumption weights to measure inflation, infrequent or grated into the national statistical system to facilitate non-existent establishment surveys, and an insufficient data sharing and monitoring also in the context of the business registry, among many others. In an effort sup- ongoing devolution process. The pragmatic, demand- ported by Development Partners including the World driven prioritization of agencies and sectors will be Bank, the Kenyan National Bureau of Statistics (KNBS) essential in this process. Although the national sta- improved its institutional setup and technical capacity, tistical system in Kenya remains production-centered, and additional funding from partners facilitated the user demand for statistics has increased, as reflected closure of the most essential data gaps, except for the in the use of public data sources (e.g., KNBS’s national agricultural census. Instead of a 10-year gap between data archive). Better dialogue and capacity building household consumption surveys to estimate poverty for users are needed to help move the statistical sys- from 2005/06 to 2015/16, KNBS began to administer tem toward a user-centered approach. Thus, greater a continuous household survey in 2019, producing effort will be needed to sustain the improvements and quarterly labor and annual poverty indicators. The con- increase the frequency and quality of data collection sumer price index weights for inflation were revised while creating an integrated national statistical system based on the latest survey. A survey of SMEs and a cen- that brings together data from different ministries and sus for industrial production were implemented that agencies and is also vertically integrated with data SYSTEMATIC will allow GDP to be rebased. Additional data gaps, from the county level. COUNTRY such as the lack of an agricultural census since inde- DIAGNOSTIC pendence in 1963, will need to be closed. High-frequency survey systems can help mitigate uncertainties KENYA in the context of shocks such as the COVID-19 pandemic and pro- 93 Better integration of available data is also an essential priority, vide evidence for policy makers. In the context of shocks, to ensure an appropriate evidence base that can inform programs as emphasized by the current COVID-19 pandemic, 6. KNOWLEDGE AND DATA GAPS current data are crucial to inform crisis mitigation Kenyans. It suffers from knowledge gaps regarding measures because it is essential for decision mak- unclaimed benefits and the liabilities of inactive con- ers to understand the impact of the crisis on specific tributors. Providing significant information technol- socioeconomic indicators. High-frequency observa- ogy assistance for cleaning and mining data for NSSF tories can develop the physical and statistical infra- will be necessary to ensure that the scheme stays structure and technical capacity necessary to quickly funded and able to provide acceptable returns to its deploy surveys in the context of a crisis. For example, members. This is urgent given that the NSSF will need sampling frames for phone surveys can be prepared to manage an increasing number of contributions as part of the implementation of scheduled house- with the significant increase in the contribution rate hold and firm surveys. Ready-to-use call centers with proposed in the NSSF reform. The data and knowledge trained enumerators can allow phone surveys to be gaps for formal-sector pension schemes in Kenya need administered swiftly, and an analysis unit maintaining to be addressed swiftly, in light of the very substantial survey dashboards can ensure timely dissemination of reforms of the civil service and the NSSF that are likely results. The current COVID-19 pandemic has shown the to be implemented soon. importance of such surveys in Kenya. A high frequency observatory should be set up in Kenya to prepare for There are major knowledge gaps in pension schemes for workers in future crises. the informal sector. The informal sector generates 83 per- cent of new jobs, but developing pension schemes will Major data and knowledge gaps remain with regard to the sustain- require strong collaboration between the public and ability and adequacy of pensions for civil servants. The growing private sectors to address knowledge gaps. In light pension bill for civil servants has prompted policy of the limited regional and global experience around makers to introduce significant reforms, but signifi- covering the informal sector, creativity in using tra- cant knowledge gaps remain regarding the effect of ditional data sources will be needed. For example, the proposed reforms on the equity and adequacy of household surveys can be used to identify vulnerable benefits and on how transition costs will be funded. and non-vulnerable informal sector workers, along The growing burden of civil service pension expendi- with pilot surveys designed specifically to discover tures (0.8 percent of GDP as of 2016) has prompted the the characteristics of target households. Given the government to move from the current pay-as-you-go irregular incomes earned in the informal sector, some defined benefit scheme to a defined contribution workers with the ability to save for old age also have a scheme for new entrants and individuals younger than need for flexibility in accessing savings. For this group, 45. The move to a defined contribution scheme without a data- and behavioral economics–driven approach any parametric reforms to the existing defined benefit to designing products and systems would make the scheme would result in higher costs (also referred to as schemes efficient and increase the likelihood of them transition costs) because the government would have being successful. to make contributions for entrants to the new scheme in addition to paying pensions for existing and upcom- Some knowledge gaps remain with respect to new digital tech- ing retirees of the defined benefit scheme. If new and nologies. To strengthen Kenya’s existing statistical sys- existing civil servants younger than 45 were all to tem, it will be important to continue modernizing the switch to the defined contribution scheme, pension statistical infrastructure by tapping into big data and expenditures would increase by 0.2 percent of GDP in technological innovations to lower costs and improve 2021. By 2030, total pension expenditures would equal quality. Given the fast-changing digital landscape, it approximately 1.2 percent of GDP and then slowly fall will be essential for policy makers to have access to to 0.4 percent by 2060, at which point the transition to regular, more extensive survey data. Companies such the defined contribution scheme would be complete. as Facebook have far better data than government If only new hires are switched to the defined contribu- or international organizations in this space, which is tion scheme, the transition costs will be lower but the fundamental for better policy and decision making. In pace of decline in expenditures will be slower. Once light of this, there is a strong potential for partnerships the transition of the civil service pension scheme from with the private sector in data collection. Another pos- a defined benefit to a fully-funded defined contribu- sibility would be investing in sensors that generate tion scheme is complete in a few decades, government real-time big data, for example in agriculture or public expenditures will be limited to paying contributions, transit. This would create opportunities for govern- which are 15 percent of the basic wage bill. ment services and applications and for use of the data by private sector innovators. The mandatory pension scheme for the formal-sector National SYSTEMATIC COUNTRY Social Security Fund (NSSF) needs to clean its data records and Energy sector reforms would benefit greatly from market studies, DIAGNOSTIC perform an analysis to ascertain the funding ratio of the scheme more complete financial data, and better analysis of integration KENYA and to inform its growth strategy. The mandated private sec- of renewables into the grid. After two successive phases tor NSSF scheme has assets equal to approximately of reforms, the energy sector is set to embark on a 94 2.4 percent of GDP and covers roughly 2.7 million third phase that would devolve some of the planning 6. KNOWLEDGE and development functions to county governments. renewables (solar and wind) will need to be better AND DATA GAPS The aim of these reforms is to prepare the system to managed with careful analysis of the power system embrace technological innovations in clean energy in to absorb them. A better analysis of the direct use of support of the provision of modern, affordable, reli- geothermal would help leverage Kenya’s vast geother- able green energy to the entire Kenyan population. mal resources, which have already made the country Recognizing that the national grid is a natural monop- eighth in the world in terms of geothermal generation oly, devolution of planning and development func- capacity. 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In the model, the change in the natural logarithm of real gross domestic product (GDP) per capita between two periods is related to the lagged level of the natural logarithm of real GDP per capita and a set of growth determinants, X: lnyct – lnyct-1 = φlnyct-1 + Γln(X)ct + ac + bt + ect where lny ct – lnyct-1 is the change in the natural logarithm of real purchasing power parity (PPP) GDP per capita in country c between period t and t-1; lny ct-1 is the natural logarithm of real PPP GDP per capita of country c in period t-1; a c and bt are country and time fixed effects; and ect is an error term. The model is estimated using system generalized method of moments (GMM) and fixed effects ordinary least squares (table A1). The selected model is the system-GMM estimation. The model is estimated on 5-year nonover- lapping panel data. X’s are endogenous variables that, in the GMM estimation, are instrumented with their lags. The panel comprises 126 countries. Table A1. Description of variables Variable Description Source Growth rate of GDP per capita Change in natural logarithm of real PPP GDP per capita between period t and t-1 PWT 7.1 Lagged GDP per capita Natural logarithm of real PPP GDP per capita in period t-1 PWT 7.1 SYSTEMATIC COUNTRY Schooling Natural logarithm of secondary school enrollment rate WDI (2017) DIAGNOSTIC KENYA Natural logarithm of ratio of domestic credit to private sector divided by GDP: Domestic credit to private sector refers to financial resources provided to private Financial development WDI (2017) sector, such as through loans, purchases of nonequity securities, and trade credits and other accounts receivable, that establish a claim for repayment. 99 APPENDIX A Natural logarithm of ratio of exports plus imports over PPP GDP adjusted for Trade openness PWT 7.1 countries’ population sizes Natural logarithm of main telephone lines per capita: Telephone lines are fixed telephone lines that connect a subscriber’s terminal equipment to the public Telecommunication switched telephone network and that have a port on a telephone exchange. WDI (2017) infrastructure Integrated services digital network channels and fixed wireless subscribers are included. Government burden Logarithm of ratio of government consumption expenditures over GDP PWT 7.1 The polity2 score measures the degree of political constraints, political Political institutions competition, and executive recruitment. It ranges between –10 and 10, with Polity IV higher values denoting more democratic institutions. Natural logarithm of 100+ consumer price inflation rate: Consumer price index Inflation inflation reflects annual percentage change in cost to average consumer of WDI (2017) acquiring a basket of goods and services. Real exchange rate Natural logarithm of GDP price level divided by nominal exchange rate PWT 7.1 Indicator variable that is unity in period t if the country experienced a banking Reinhart and Rogoff Financial crisis crisis (2011) Change in natural logarithm of the barter terms of trade index, calculated as Terms of trade growth percentage ratio of export unit value indexes to import unit value indexes WDI (2017) measured relative to base year 2000 Change in an international commodity export price index, which is constructed as ComPIct = ∏ComPriceitӨic Arezki and Brueckner ComPI growth i∈I (2012) where ComPriceit is the international price of commodity i in year t, and θic is average (time-invariant) value of exports of commodity i in GDP of country c Table A2. Economic growth model (baseline) Dependent variable: Δln(GDP p.c.) (1) (2) SYS GMM FE OLS Transitional convergence –0.22*** –0.25*** ln (GDP p.c.), t-1 (0.06) (0.03) 0.02 –0.03 Structural policies and institutions schooling (0.05) (0.03) 0.07*** 0.02 Financial development (0.03) (0.02) 0.08* 0.10*** Trade openness (0.05) (0.03) –0.26*** –0.13*** Government burden (0.04) (0.03) 0.14*** 0.08*** Telecommunication infrastructure (0.03) (0.02) –0.00 –0.01 Political institutions (0.03) (0.02) Stabilisation policies –0.01 –0.01* Inflation SYSTEMATIC (0.01) (0.01) COUNTRY DIAGNOSTIC –0.06 –0.02 Real exchange rate KENYA (0.04) (0.03) –0.04 –0.05* Financial crisis 100 (0.03) (0.03) APPENDIX A External conditions 10.48*** 6.96*** ComPI growth (2.69) (2.59) 0.12*** 0.11*** Terms of trade growth (0.03) (0.03) Country FE Yes Yes Time FE Yes Yes Observations 464 464 Countries 126 126 Note: The dependent variable is real GDP per capita. The method of estimation in column (1) is system-GMM; column (2) least squares. *Significantly different from zero at the 10 percent significance level, *** 1 percent significance level. SYSTEMATIC COUNTRY DIAGNOSTIC KENYA 101