77028 The World Bank Kenya Exports Performance Overview August 2012 Financial and Private Sector Development Poverty Reduction and Economic Management Table of Contents Executive Summary ...................................................................................................................................... 2 Background ................................................................................................................................................... 6 Section 1: Trade Orientation and Exports Growth ........................................................................................ 9 Section 2: Merchandise Export Trends ....................................................................................................... 11 Section 3: Merchandise Exports by Sector ................................................................................................. 12 Section 4: Merchandise Exports by Destination ......................................................................................... 15 Section 5. Export Diversification ................................................................................................................ 17 Figures Figure 1: Kenya’s Trade Performance .................................................................................................................2 Figure 2: Key Export Sectors ...............................................................................................................................3 Figure 3: Exports by Destination .........................................................................................................................4 Figure 4: Exports Growth Pattern ........................................................................................................................4 Figure 5: Kenya’s Current Account Deficit and Oil Imports ...............................................................................7 Figure 6: Kenya's share in World Exports of Goods and Services. 1970-2008 ...................................................7 Figure 7. Kenya: Trade/GDP (in percent) ............................................................................................................9 Figure 8. Trade vs Exports Relative to GDP .......................................................................................................9 Figure 9: Openness to Trade 1996-1998 ..............................................................................................................9 Figure 10: Trend in Exports / GDP ................................................................................................................... 10 Figure 11: Merchandise and Service Exports Relative to GDP ........................................................................ 10 Figure 12: Export Growth Volatility: Kenya and Vietnam (1990-2009) .......................................................... 11 Figure 13: Sectoral Composition of Exports: Kenya Over Time ...................................................................... 12 Figure 14: Sectoral Composition of Exports: Kenya vs. Peers ......................................................................... 13 Figure 15: Kenya Herfindahl Index vs. Peers ................................................................................................... 13 Figure 16: Merchandise Exports: Growth Decomposition (2005-2009) .......................................................... 14 Figure 17: Merchandise Exports by Destination............................................................................................... 16 Figure 18: Gravity Model: Predicted vs. Actual Exports, by Destination ........................................................ 17 Figure 19: Export Diversification: Herfindahl Index for Products and Markets .............................................. 18 Figure 20: Index of Export Market Penetration ................................................................................................ 18 Figure 21: Evolution of Revealed Comparative Advantage (2000-09) ............................................................ 19 Figure 22: Kenya Export Growth - Intensive and Extensive Margins .............................................................. 19 Figure 23: Extensive and Intensive Margin Decomposition ............................................................................. 20 Figure 24: Hummels-Klenow Intensive Margin (Markets): Kenya vs. Vietnam .............................................. 20 Figure 25: Hummels-Klenow Extensive Margin (Markets): Kenya vs. Vietnam............................................. 21 Tables Table 1: GDP Growth and Fiscal Performance....................................................................................................6 Table 2: Merchandise Export Growth Rates ..................................................................................................... 11 Table 3: Merchandise Exports: Sectoral Growth Rates .................................................................................... 14 Table 4: Top 10 Merchandise Export Products (6-digit HS level) ................................................................... 15 Table 5: Merchandise Exports: Top Destinations ............................................................................................. 16 1 Executive Summary 1. Kenya’s economy has been running on one engine. Kenya’s strong engine is domestic consumption, which accounts for 75 percent of GDP. Kenya’s weak engine remains its exports, which have been declining sharply in relative importance. In 2011 a number of external shocks further exposed Kenya’s unsustainable position. Imports soared (mainly due to higher oil and food costs) while exports remained stagnant. The gap between imports and exports of goods and services, known as the current account deficit, now stands at above 10 percent of GDP, which is even higher than in Greece. Kenya’s top four main exports do not earn enough to pay for oil imports, not to mention other imports. It will be very difficult for Kenya to achieve high growth over an extended period of time because of its existing economic imbalances. 2. Kenya needs to increase its export competitiveness. It is clear that Kenya’s trade performance is below its potential. The focus of analytical work has largely been on the shocks that led to high import costs and there has been limited analytical work to assess the performance and structure of Kenya’s exports. The objective of this overview is to provide some of that analysis and to contribute to the policy dialogue on the role of exports Kenya’s future growth. This paper focuses on five issues (i) overall trade orientation and export growth (ii) merchandise export trends (iii) merchandise exports by sector (iv) merchandise exports by destination and (v) diversification. 3. Kenya’s trade performance is below its potential. While the trade/GDP ratio has increased from about 48% to 64% over the study period (1996-2009), Kenya’s trade performance and export performance significantly lags the study comparators (Cambodia, Ghana, Mauritius, Thailand and Vietnam), as illustrated in Figure 1. Furthermore the gap between potential and actual engagement has widened. The analysis shows that for its level of economic development Kenya’s trade/GDP ratio should be at least 80% (the comparators have ratios of 100% - 160%). Figure 1: Kenya’s Trade Performance 160% 140% 120% 100% 80% Exports / GDP (%) 60% 40% Trade / GDP (%) 20% 0% 4. The growth of merchandise exports has been slow and volatile. The average annual growth rate of merchandise exports has been only 10%. And while countries such as Vietnam have has a distinct export growth trajectory with steady growth in merchandise exports year after year, Kenya’s pattern has been rather volatile with a few good years followed by major falls. 2 5. The agriculture sector continues to be the main driver of growth of Kenyan merchandise exports (Figure 2). Agriculture (primarily coffee and tea) accounted for a large part of the 31% growth in merchandise exports between 2005 and 2009. And agricultural products still form the bulk of the top ten product categories (at the 6 digit HS level). Figure 2: Key Export Sectors 13% Agriculture 8% Food& Beverage 46% Chemical 9% Extractive Textiles 11% Other 13% 6. Of the new sectors, Chemicals has shown noticeable increase. While the top five categories remain the same, the share of the top five (at the 6 digit HS level) has decreased from 64% to 48% of total merchandise exports. The share of coffee and tea decreased from 39% to 25%. 7. Kenya’s exports within Africa are increasing. The main export partners are high income OECD countries and low income countries in Africa. The share of exports to Kenya’s traditional trade partners - the high income OECD countries (primarily Europe, Japan and USA) has decreased from 41% to 34%. At the same time exports within Africa have increased from 34% to 43%, while exports to low income countries have increased from 32% to 38%. The share of exports to BRIC countries is still low at 3%. 8. Kenya under-exports to high growth emerging markets like China, Turkey, Brazil and India (see Figure 3). There is untapped potential to increase exports to the countries that play an important role on global markets. The study includes results from a bilateral gravity model which is a framework to evaluate the observed bilateral trade in relation with the projected trade estimated by the model. The analysis shows that Kenya’s actual exports are in line with predictions for partners such as Europe, US and Japan but are below potential to some high growth countries. However if the countries are above the 45-degree line, there is untapped potential to increase exports to that partner. In Kenya’s case, the model suggests that Kenya under-exports to high growth emerging markets like China, Turkey, Brazil, and India. 3 Figure 3: Exports by Destination 20% East African Community 26% Sub Sahran Africa 4% European Union 5% USA BRIC Countries 17% Rest of World 27% 9. Kenya’s exports have become less concentrated over the last decade. Over the last decade the index of export market penetration has increased from 14 to 25, indicating that Kenya has become better at accessing markets for its export products. The Herfindal index for products has decreased from 0.1 to 0.05 indicating reduced concentration. Kenya has also improved its relative competitive position (as measured by the revealed comparative advantage or RCA) in some new product categories such as inorganic chemicals, glass/glassware, beverages/spirits, metals manufacturing, and select apparel categories. 10. Export growth has been driven primarily by existing products in existing markets. Export growth can be decomposed into two broad categories – intensive margin and extensive margin. Growth at the intensive margin involves existing products and existing markets. Growth at the extensive margin can be of three types – existing products into new markets, new products into existing markets, and new products into new markets. Analysis of Kenya’s trade statistics for the period 20005 and 2009 reveals that export growth has been primarily at the intensive margin – with existing products in existing markets. Figure 4: Exports Growth Pattern 27% Traditional Products / New markets New Products / Traditional Markets 1% Traditioanal Products / Traditional Markets 72% 4 11. Overall there has been little new product/new market discovery. Cumulatively, between 2005 and 2009, approximately 72 percent of export growth was at the intensive margin. At the same time only 28% of the growth was at the extensive margin. And the bulk of this was an increase in exports of existing products to new markets. Discovery (new products exported to either new or existing markets) accounted for less than 1 percent of growth. 12. Further analysis is needed to understand the full potential of Kenya’s exports. This study provides a snapshot of Export Performance. It does not attempt to provide any specific policy recommendations. In order to develop useful policy recommendations it would be necessary to do further analysis on some key areas. These could include:  A study of Kenya’s trade patterns with a few key partners in Africa, in order to ascertain what could be done to either increase the total exports or to diversify  A study of Kenya’s trade patterns with BRIC countries (and Turkey). This would help identify the causes for Kenya’s relative inability to capitalize on this untapped potential  Field research on a couple of sectors (in line with the detailed TCD methodology) to identify the factors behind growing sectors (e.g. Chemicals) and declining sectors. 5 Background 13. Kenya’s economy has been running on one engine1. Even as the country copes with various internal and external shocks, it will be very difficult for Kenya to achieve high growth over an extended period of time because of its existing economic imbalances. Kenya’s strong engine is domestic consumption, which accounts for 75 percent of GDP. Kenya’s weak engine remains its exports, which have been declining sharply in relative importance. Table 1: GDP Growth and Fiscal Performance 14. In 2011 a number of external shocks further exposed Kenya’s unsustainable position2. Kenya’s economy is increasingly imbalanced, with a growing gap between exports and imports. This makes the economy particularly vulnerable to external shocks. In 2011 imports soared (mainly due to higher oil and food costs) while exports remained stagnant. The gap between imports and exports of goods and services, known as the current account deficit, now stands at above 10 percent of GDP, which is even higher than in Greece. Kenya’s top four main exports do not earn enough to pay for oil imports, not to mention other imports (see Figure 5). 1 Kenya Economic Update June 2010 2 Kenya Economic Update December 2011 6 Figure 5: Kenya’s Current Account Deficit and Oil Imports 15. Kenya needs to increase its export competitiveness. It is clear that Kenya’s trade performance is below its potential. Kenya’s share of world exports has been declining steadily since the 1960s (see figure 6). However while the focus has largely been on the shocks that led to high import costs there has been limited analytical work to assess the performance and structure of Kenya’s exports. The objective of this overview is to provide some of that analysis and to contribute to the policy dialogue on the role of exports Kenya’s future growth. Figure 6: Kenya's share in World Exports of Goods and Services. 1970-2008 percent 0.30 0.25 0.20 0.15 0.10 services 0.05 total goods 0.00 1970 1975 1980 1985 1990 1995 2000 2005 16. Kenya needs to undergo a structural transformation and manufacturing can be a key engine of growth. Recent research and experiences from other economies suggests that economic development requires structural change from low to high productivity activities and that the manufacturing sector is a key engine of growth in the development process (see UNCTAD 2011, Lall 2005; Rodrik 2007; Hesse 2008). Virtually all cases of high, rapid and sustained economic growth in modern economic development have been associated with industrialization, particularly growth in manufacturing production (Szirmai 2009). Commodity exports can lead to high but not sustained economic growth. 7 17. The manufacturing sector has strong linkage and spill-over effects. For example, manufacturing is a critical source of demand for other sectors. In particular, manufacturing firms are important consumers of banking, transport, insurance and communication services. Furthermore, manufacturing provides demand stimulus for growth of the agricultural sector. Consequently, manufacturing has high forward and backward linkages, thereby contributing to domestic investment, employment and output in the development process. 18. Manufacturing provides opportunities for export market expansion and job creation. Countries that have derived significant benefits from the tremendous increase in merchandise trade over the past three decades are those that have been able to increase their exports of dynamic products, particularly manufactures, with high income elasticity of demand. One of the major challenges which Kenya currently faces is to generate productive jobs and livelihoods for the 600,000 young people entering the labor force each year. This is difficult to achieve simply through commodity exports but rather requires a complementary process of agricultural productivity growth and development of non-agricultural employment opportunities in both industry and services. 19. This paper focuses on understanding the export patterns of merchandise goods and in particular on manufacturing exports. The study team3 has used elements of the Trade Competitiveness Diagnostic (TCD) framework to develop an assessment of Kenya’s export market.4 This paper is structured as follows: section 1 provides an overview of Kenya’s trade orientation 5; section 2 details export growth trends; section 3 assesses export performance by sector; section 4 assesses exports performance by destination; and section 5 analyses the diversification of Kenya’s exports. 3 The study was conducted by a joint FPD/PREM team comprising Ravi Ruparel, Jane Kiringai, John Randa, Taye Mengistae, and Edward Al-Hussainy, led by Yira Mascaró. The team received valuable guidance from Thomas Farole, Alvaro Gonzales and Ganesh Rasagam . 4 The TCD is a framework that facilitates a systematic assessment of a country’s position, performance, and capabilities in export markets. It allows for an analysis at the national level (looking at the export basket and the cross-cutting environment for export competitiveness). The TCD was developed by the World Bank’s PREM Trade group who have used the framework to undertake assessments in Senegal, Russia, Pakistan and Indonesia. 5 The comparators used for this analysis are medium sized countries with high export growth over the period 1995-2009. The key reason is that this is the kind of growth and trajectory that Kenya aspires to and therefore these are suitable comparators even if some of them have higher GDP per capita. The list does not include large countries or major oil exporters (Ghana began exporting oil at the end of 2010 and this development is not captured in this analysis). Nor does it include the “traditional� comparators – Kenya’s neighbors with similar or lower export performance and GDP per capita. We focus on three export-driven economies in East Asia (Cambodia, Thailand and Vietnam) and two African export successes (Mauritius and Ghana). 8 Section 1: Trade Orientation and Exports Growth 20. Kenya’s trade performance has improved gradually over the last fifteen years. The trade/GDP ratio has increased from about 48% to 64% over the period (see Figure 7). However even at a ratio of close to 70%, Kenya’s engagement in trade significantly lags the high export growth comparators such as Cambodia, Thailand and Vietnam, which have trade/GDP ratios of 130%-150%. (See Figure 8). Figure 7. Kenya: Trade/GDP (in percent) Figure 8. Trade vs Exports Relative to GDP Average of Trade (% of GDP) 160 Vietnam 150 69.4 140 Thailand Cambodia 64.5 130 63.5 62.7 63.0 120 Mauritius 59.5 110 57.3 55.9 100 55.2 54.1 54.1 53.3 90 48.9 48.2 80 Ghana 70 Kenya 0 0 30 35 40 45 50 55 60 65 70 75 Average of Exports of goods and services (% of GDP) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: WDI 21. Kenya’s trade performance is below its potential. The gap between potential and actual engagement has widened and Kenya has been unable to ramp up trade to accelerate growth. As illustrated in figure 9 below, if a country is above the line its openness to trade is below its potential (given its level of economic development). If a country is above the line, the country is performing above expectations. While Kenya’s ratio of trade to GDP increased during the study period it is still below the benchmark of about 80%. By comparison, countries on export-driven growth trajectories significantly outperformed their trade to GDP benchmarks for their level of economic development. Figure 9: Openness to Trade 1996-1998 Openness to Trade 9698 Openness to Trade 0608 250 250 200 200 Trade to GDP (%), 0608 VNM 150 150 KHM THA MUS MUS GHA 100 100 VNM THA GHA KHM KEN 50 50 KEN 0 0 6 7 8 9 10 11 6 7 8 9 10 11 Log of GDP per capita (PPP, av. 9698) Log of GDP per capita (PPP, av. 0608) Source: WDI; Country codes: KEN: Kenya, GHA: Ghana, KHM: Cambodia, MUS: Mauritius, THA: Thailand, VNM: Vietnam 9 22. Kenya’s export performance is poor compared to high growth exporters. The ratio of total exports (goods and services) to GDP has fluctuated between 20% and 28% (See Figure 10). In comparison, the ratios for Thailand and Vietnam increased from 20% to 60% over the same period. Figure 10: Trend in Exports / GDP Source: WDI 23. There has also been little growth in service exports (as % of GDP). Merchandise exports as a % of GDP have remained fairly constant at about 15% - 17% of GDP (See Figure 11). Service exports have also remained fairly stagnant at around 9%-11% of GDP. Figure 11: Merchandise and Service Exports Relative to GDP 30% 25% 10% 10% 11% 11% 11% 20% 8% 8% 10% 9% 8% % of GDP 15% 10% 18% 16% 16% 17% 16% 17% 15% 15% 15% 14% 5% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Merchandize Exports / GDP Service Exports / GDP Source: WDI 10 Section 2: Merchandise Export Trends 24. The average annual growth rate of merchandise exports has been relatively low. While there have been a couple of years with annual growth rates of over 20%, over the period the average annual growth rate has been about 10 percent. In contrast Vietnam and Cambodia have had average annual growth rates of 18 and 15 percent (see Table 2). Table 2: Merchandise Export Growth Rates y/y growth Cambodia Ghana Kenya Mauritius Thailand Vietnam 2000 23% -3% -1% 14% 18% 26% 2001 8% 3% 12% -10% -6% 4% 2002 28% 8% 9% 11% 5% 11% 2003 10% 26% 14% 5% 18% 21% 2004 32% 5% 11% 5% 20% 31% 2005 4% 14% 23% 7% 14% 22% 2006 27% 33% 4% 9% 19% 22% 2007 11% 16% 19% -4% 17% 22% 2008 15% 31% 22% 7% 13% 30% 2009 -12% 3% -10% -19% -12% -11% 2000-2009 Average 15% 14% 10% 3% 11% 18% Source: COMTRADE 25. There has been considerable volatility in the rate of merchandise exports growth (see Figure 12). Vietnam, a successful example of export-led growth, has had a distinct export growth trajectory with steady growth in merchandise exports year after year. In contrast Kenya has had little positive momentum and in fact has had some particularly challenging years. Figure 12: Export Growth Volatility: Kenya and Vietnam (1990-2009) Kenya Vietnam 200 75 1993 1995 1994 70 2008 2007 2008 Trade (% of GDP) (this year) 150 2006 2009 65 2005 2005 2004 2009 2007 2006 2003 2002 60 2004 2000 2001 100 1996 1999 1998 2001 1996 1997 1991 55 2002 2003 1997 2000 1992 1994 1992 1995 19931991 50 1998 50 1999 50 55 60 65 70 75 50 100 150 200 Trade (% of GDP) (last year) Trade (% of GDP) (last year) Source: WDI 11 Section 3: Merchandise Exports by Sector 26. The composition of merchandise exports has been changing slowly over time. Kenya’s exports are still dominated by the agriculture, meat and dairy and seafood sector6, which contributed 43 percent of total merchandise exports in 2005-2009 periods. Food and beverages is the second largest export category and its share of total merchandise exports has remained fairly constant. Chemicals plastics and rubber is becoming an import export commodity as its share has grown from 7 percent in 1998-2002 to 11 percent in 2005-2009 periods. This pattern is similar to that of the high growth comparators (See Figures 13-15). Cambodia and Mauritius appear to have decreased their dependence on the textiles sector while Ghana has increased its share of exports from extractive industries. The sectoral composition for Thailand and Vietnam has changed little over time. Figure 13: Sectoral Composition of Exports: Kenya Over Time Source: COMTRADE. 6 Sector Classification is based on the two digit HS codes: AFR =Agriculture, meat and dairy, seafood; CHE=Chemicals, plastics, rubber; EXT=Extractive industries; F&B= Food, beverges, tobacco, wood, paper; MAC= Machinery, electronics, transportation equipment, MET=Iron, steel and other metals; TEX=Textiles, apparel, leather, footwear; OTH=Other. 12 Figure 14: Sectoral Composition of Exports: Kenya vs. Peers 2000 2009 TradeFlowName Year TradeFlowName Year Sum of TradeValue in 1000 USD Sum of TradeValue in 1000 USD 100% 100% 90% 90% 80% 80% Sector Sector 70% TEX 70% TEX OTH OTH 60% 60% MET MET 50% 50% MAC MAC 40% F&B 40% F&B EXT EXT 30% 30% CHE CHE 20% 20% AGR AGR 10% 10% 0% 0% Kenya Cambodia Ghana Mauritius Thailand Vietnam Kenya Cambodia Ghana Mauritius Thailand Vietnam ReporterName ReporterName Source: COMTRADE Figure 15: Kenya Herfindahl Index vs. Peers 27. However, none of the sectors have had consistent export growth. As illustrated in Table 3, the picture for all the sectors is similar to that for total merchandise exports. Only the agriculture, metals and food & beverage sectors managed to string together some consistent growth over the 2005-2008 period. 13 Table 3: Merchandise Exports: Sectoral Growth Rates AGR CHE EXT F&B MAC MET OTH TEX Grand Total 2000 2% -11% -3% -21% -45% -15% -14% -9% -5% 2001 1% 2% -57% 14% 103% 27% -1% 3% -3% 2002 -53% -58% 453% -16% 334% -31% 245% -30% -8% 2003 150% 228% 23% 71% 4% 124% 46% 102% 82% 2004 4% -8% -73% -4% -60% 25% -73% 5% -20% 2005 17% 133% 344% 20% 213% 34% 151% 188% 68% 2006 16% -7% -48% 25% 40% 19% 20% 22% 2% 2007 13% 31% 2% 30% 36% 14% 26% 8% 17% 2008 23% 36% -13% 16% -26% 22% -4% -1% 15% 2009 -5% -9% 17% -10% 65% -20% 22% -25% -5% 28. The agriculture sector continues to the main driver of growth of Kenyan merchandise exports. Total merchandise exports grew by 31% over the period 2005-2009 (see Figure 16). Of this amount, 12% of the growth was from the agriculture sector while 7% was from extractive industries. Of new emerging sectors the only noticeable increase was in the chemicals sector. Figure 16: Merchandise Exports: Growth Decomposition (2005-2009) 35% 30% 3% 2% 1% 25% 1% 3% 20% 7% 15% 31% 3% 10% 5% 12% 0% AGR CHE EXT F&B MAC MET OTH TEX 29. The top five merchandise categories still comprise the major share of total merchandise exports. Table 3 shows the top 10 export product categories (at the 6 digit HS level). The share of the top 10 product groups has decreased from 76% to 61% and that of the top 5 product groups has decreased from 64% to 48% (Table 4). Furthermore while agriculture is still dominant (with the top three product groups) the share of coffee and tea has decreased from 39% to 25%. Aside from this change, the top five product groups remain the same. Two new product groups, Chemicals and Tobacco, have entered the top 10. 14 Table 4: Top 10 Merchandise Export Products (6-digit HS level) (In mil. current USD) 2000 2009 Value Export Share Cumulative Value Export Share Cumulative TOTAL $ 3,142 TOTAL $ 8,927 1 Coffee, tea, matï and $ 1,237 39% 39% Coffee, tea, matï $ 2,209 25% 25% spices. and spices. 2 Mineral fuels, oils & $ 255 8% 47% Live tree & other $ 959 11% 35% product of their distill plant; bulb, root; cut flowe 3 Edible vegetables and $ 207 7% 54% Edible vegetables $ 450 5% 41% certain roots and and certain roots tubers and tubers 4 Live tree & other plant; $ 200 6% 60% Mineral fuels, oils & $ 378 4% 45% bulb, root; cut flowe product of their distill 5 Salt; sulphur; earth & $ 119 4% 64% Salt; sulphur; earth $ 282 3% 48% ston; plastering mat; l & ston; plastering mat; l 6 Prep of vegetable, fruit, $ 112 4% 68% Tobacco and $ 272 3% 51% nuts or other parts manufactured tobacco substitutes 7 Fish & crustacean, $ 78 2% 70% Inorgn chem; $ 270 3% 54% mollusc & other aquatic compds of prec mtl, inv radioact elem 8 Plastics and articles $ 71 2% 72% Plastics and articles $ 229 3% 57% thereof. thereof. 9 Pharmaceutical $ 61 2% 74% Animal/veg fats & $ 223 2% 59% products. oils & their cleavage produc 10 Iron and steel. $ 60 2% 76% Iron and steel. $ 209 2% 61% Section 4: Merchandise Exports by Destination 30. Kenya’s exports within Africa are increasing. The main export partners are high income OECD countries and low income countries in Africa. The share of exports to Kenya’s traditional trade partners - the high income OECD countries (primarily Europe, Japan and USA) has decreased from 41% to 34% (see Figure 17). At the same time exports within Africa have increased from 34% to 43%, while exports to low income countries have increased from 32% to 38%. The share of exports to BRIC countries is still low at 3%. 15 Figure 17: Merchandise Exports by Destination 100% 90% 19% 22% 24% 24% 25% 26% 31% 33% 30% 80% 36% 10% 70% 10% 18% 17% 18% 17% 12% 10% 15% EAC 60% 13% SSA 50% 38% EU 36% 29% 28% US 27% 27% 40% 32% 32% 27% BRIC 33% ROW 30% 2% 3% 2% 3% 7% 6% 7% 9% 5% 2% 2% 20% 3% 4% 3% 4% 4% 4% 3% 2% 26% 27% 3% 10% 20% 19% 18% 19% 20% 20% 20% 12% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: COMTRADE; Key: EAC= East African Community; SSA=Sub Saharan Africa (excluding EAC); EU=European Union; US=United States of America; BRIC= Brazil, Russia, India, China; ROW=Rest of World. 31. At the country level, the relative importance of Kenya’s market destinations has changed little over the last decade. The share of commodity exports to the top 10 destinations reduced from 33.4% in 2000 to 31.9 percent in 2009 signaling some de-concentration. Uganda became the most important trading partner for 2009 and displacing the United Kingdom. But there was little overall change in top 10 markets except for Sudan and Congo Democratic replacing Germany and the United Arab Emirates, joining as Kenya’s top commodity exports destination while United Arab Emirates and Germany falling from 10 top destinations. Table 5: Merchandise Exports: Top Destinations (In mil current USD) 2000 2009 Value Export Share Value Export Share TOTAL $ 3,142 $ 8,927 United Kingdom $ 244 7.8% Uganda $ 598 6.7% Uganda $ 226 7.2% United Kingdom $ 498 5.6% Pakistan $ 131 4.2% Tanzania $ 389 4.4% Tanzania $ 114 3.6% Netherlands $ 341 3.8% Netherlands $ 96 3.0% United States $ 226 2.5% Egypt, Arab Rep. $ 93 3.0% Pakistan $ 196 2.2% Germany $ 73 2.3% Sudan $ 165 1.8% United States $ 36 1.2% Egypt, Arab Rep. $ 154 1.7% United Arab Emirates $ 34 1.1% Congo, Dem. Rep. $ 147 1.6% Somalia $ 33 1.1% Somalia $ 145 1.6% Source: COMTRADE 16 32. There is untapped potential to increase exports to the countries that play an important role on global markets. As illustrated in Figure 18 the results from a bilateral gravity model,7 which is a framework to evaluate the observed bilateral trade in relation with the projected trade estimated by the model. If a partner is on the 45-degree line, the exports are in line with predictions (as is the case for Europe, US and Japan). However if the countries are above the 45-degree line, there is untapped potential to increase exports to that partner. In Kenya’s case, the model suggests that Kenya under-exports to high growth emerging markets like China, Turkey, Brazil, and India. Figure 18: Gravity Model: Predicted vs. Actual Exports, by Destination Predicted vs Actual Exports 14 IND USA 12 CHN FRA RUS TUR JPN 10 ZAF BRA CAN KOR AUS HKG IDN EGY 8 LKA 6 4 6 8 10 12 14 Log of Actual Exports, 608 Section 5. Export Diversification 33. Kenya’s exports have become less concentrated over the last decade (see Figure 19). The total number of markets has not changed much. The Herfindal index for markets has remained between 0.26 and 0.29 over the period. However for products the Herfindal index has decreased from 0.1 to 0.05 indicating reduced concentration. 7 We run a cross-country regression on Kenya’s exports on the following bilateral characteristics with trading partners: distance, contiguity, common language, colony, common colonial power, as well as log of GDP, and log of GDP per capita. Key: BRA=Brazil, TUR= Turkey 17 Figure 19: Export Diversification: Herfindahl Index for Products and Markets 0.35 0.3 0.25 Herfindahl Index 0.2 Market 0.15 Product 0.1 0.05 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 34. There is some improvement in export market penetration (see Figure 20). The Index of Export Market Penetration (IEMP) measures the number of markets reached by a particular country’s exports compared to the potential number of markets those exports would reach if they were solid in all possible exports markets (i.e. in all countries that import that product). Over the last decade the index has increased from 14 to 25, indicating that Kenya has become better at accessing markets for tis export products (confirming the analysis in Section 4). Figure 20: Index of Export Market Penetration 35. Kenya has also improved its relative competitive position in some new product categories. Measures of revealed comparative advantage (RCA) have been used to help assess a country’s export potential. The RCA indicates whether a country is in the process of extending the products in which it has a trade potential. If the RCA is above 1 then the country is said to have a revealed comparative advantage in that product category. A full list of RCA calculations for 2009 (in Appendix 1), illustrates key merchandise categories that became economically competitive over the period: inorganic chemicals, glass/glassware, beverages/spirits, metals manufacturing, and select apparel categories. The upper right quadrant of Figure 21 shows the product categories with a favorable RCA and a positive annual growth rate. 18 Figure 21: Evolution of Revealed Comparative Advantage (2000-09) (By 2-digit HS product code) CAGR (2000-09) 50 45 CHE (31) OTH (66) 40 35 CHE (28) 30 TEX (62) 25 F&B (16) F&B (22) 20 AGR (14) TEX (61) 15 EXT (70) OTH (49) 10 MET (83) F&B (24) OTH (67) OTH (96) TEX (41) 5 MET (76) TEX (53) AGR (6) MET (72) F&B (15) CHE (34) 0 TEX (63) F&B (48) EXT (25) 5 TEX (64) F&B (17) AGR (7) AGR (9) F&B (11) 10 F&B (20) AGR (8) 15 AGR (3) 20 AGR (13) 25 1.0 10.0 100.0 1,000.0 RCA (2009) Source: COMTRADE 36. Export growth has been driven primarily by existing products in existing markets. Export growth can be decomposed into two broad categories – intensive margin and extensive margin. Growth at the intensive margin involves existing products and existing markets. Growth at the extensive margin can be of three types – existing products into new markets, new products into existing markets, and new products into new markets. Analysis of Kenya’s trade statistics for the period 2005 and 2009 reveals that export growth has been primarily at the intensive margin – with existing products in existing markets (see Figure 22). Figure 22: Kenya Export Growth - Intensive and Extensive Margins Source: COMTRADE 37. Overall there has been little new product/new market discovery (see Figures 23-25). Cumulatively, between 2005 and 2009, approximately 72 percent of export growth was at the intensive margin. At the same time only 28% of the growth was at the extensive margin. And the bulk of this was an increase in 19 exports of existing products to new markets. Discovery (new products exported to either new or existing markets) accounted for less than 1 percent of growth. Figure 23: Extensive and Intensive Margin Decomposition 87.40% 27.0% 0.0% 0.7% -7.3% -7.70% Intensive Margin: Intensive Margin: Intensive Margin: Extensive Margin: new Extensive Margin: Extensive Margin: new product/market death increase of export decrease of export countries, new existing countries, countries, existing value of existing value of existing products new products products product/market product/market combinations combinations Source: COMTRADE Figure 24: Hummels-Klenow Intensive Margin (Markets): Kenya vs. Vietnam 0.6 0.5 Intensive Margin 0.4 0.3 Kenya 0.2 Vietnam 0.1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Year 20 Figure 25: Hummels-Klenow Extensive Margin (Markets): Kenya vs. Vietnam 90 80 70 Extensive Margin 60 50 40 Kenya 30 20 Vietnam 10 0 Year 21 Appendix 1. Tables and Figures Table A1. Revealed Comparative Advantage by Product (2000-2009) Code CAGR Std Dev (2-digit HS) Product 2000 2005 2009 (2000-09) (2000-09) AGR AGR (9) Coffee, tea, mate and spices. 185.9 117.8 108.9 -5.2% 33.7 AGR (6) Live tree & other plant; bulb, root; cut flowers 46.9 62.3 75.7 4.9% 13.9 AGR (14) Vegetable planting materials; vegetable products 57.7 19.3 322.8 18.8% 95.0 AGR (7) Edible vegetables and certain roots and tubers 22.4 18.5 14.0 -4.6% 2.4 AGR (13) Lac; gums, resins & other vegetable saps & ext 17.6 12.5 1.9 -20.0% 6.3 AGR (3) Fish & crustacean, mollusc & other aquatic inv 4.2 3.5 2.1 -6.7% 0.8 AGR (8) Edible fruit and nuts; peel of citrus fruit or 2.7 1.9 2.1 -2.7% 0.7 AGR (12) Oil seed, oleagi fruits; miscell grain, seed, 0.7 0.8 0.7 0.0% 0.3 AGR (5) Products of animal origin, nes or included. 1.4 0.6 0.1 -20.7% 0.5 AGR (10) Cereals 0.1 0.5 0.3 9.9% 0.2 AGR (4) Dairy prod; birds' eggs; natural honey; edible 0.2 0.3 0.7 11.7% 0.3 AGR (1) Live animals 0.1 0.4 0.6 16.3% 0.1 AGR (2) Meat and edible meat offal 0.2 0.2 0.3 5.3% 0.1 CHE CHE (34) Soap, organic surface-active agents, washing p 3.7 6.4 5.9 4.6% 1.5 CHE (28) Inorgn chem; compds of prec mtl, radioact elem 0.3 4.1 4.7 32.2% 2.1 CHE (31) Fertilisers. 0.1 1.0 2.4 46.0% 1.1 CHE (33) Essential oils & resinoids; perf, cosmetic/toi 1.2 0.8 0.6 -6.9% 0.3 CHE (39) Plastics and articles thereof. 0.7 0.7 0.8 1.0% 0.2 CHE (32) Tanning/dyeing extract; tannins & derivs; pigm 0.7 0.5 0.7 -0.5% 0.2 CHE (30) Pharmaceutical products. 1.1 0.4 0.4 -9.5% 0.2 CHE (38) Miscellaneous chemical products. 0.5 0.8 0.5 1.0% 0.2 CHE (36) Explosives; pyrotechnic prod; matches; pyrop a 0.2 0.4 0.7 12.0% 0.4 CHE (40) Rubber and articles thereof. 0.4 0.4 0.4 -0.6% 0.0 CHE (35) Albuminoidal subs; modified starches; glues; e 0.2 0.4 0.4 4.6% 0.1 CHE (29) Organic chemicals. 0.0 0.0 0.1 14.6% 0.0 EXT EXT (25) Salt; sulphur; earth & ston; plastering mat; l 14.8 8.3 12.8 -1.4% 2.5 EXT (27) Mineral fuels, oils & product of their distill 0.9 1.6 0.4 -8.7% 1.2 EXT (70) Glass and glassware. 0.6 1.1 1.6 10.3% 0.4 EXT (68) Art of stone, plaster, cement, asbestos, mica/ 0.4 0.3 0.3 -5.2% 0.1 EXT (71) Natural/cultured pearls, prec stones & metals, 0.4 0.2 0.3 -2.4% 0.2 EXT (69) Ceramic products. 0.1 0.3 0.3 9.2% 0.1 EXT (26) Ores, slag and ash. 0.0 0.0 0.0 69.2% 0.0 F&B F&B (20) Prep of vegetable, fruit, nuts or other parts 11.7 8.4 5.6 -7.1% 2.3 F&B (24) Tobacco and manufactured tobacco substitutes 5.4 7.8 11.0 7.4% 3.2 F&B (17) Sugars and sugar confectionery. 5.8 5.6 4.1 -3.2% 1.4 F&B (15) Animal/veg fats & oils & their cleavage produc 3.9 4.1 4.6 1.9% 0.4 F&B (11) Prod.mill.indust; malt; starches; inulin; wheat 3.9 2.5 2.1 -5.9% 0.6 F&B (46) Manufactures of straw, esparto/other plaiting 1.5 0.9 0.7 -7.1% 0.3 F&B (21) Miscellaneous edible preparations. 1.4 0.9 0.9 -4.3% 0.3 F&B (48) Paper & paperboard; art of paper pulp, paper/p 1.0 0.8 1.0 0.2% 0.1 F&B (19) Prep.of cereal, flour, starch/milk; pastrycook 1.2 0.9 0.8 -3.8% 0.2 F&B (22) Beverages, spirits and vinegar. 0.3 0.4 2.1 21.3% 0.7 F&B (44) Wood and articles of wood; wood charcoal. 0.7 0.3 0.4 -5.5% 0.1 F&B (16) Prep of meat, fish or crustaceans, molluscs et 0.2 0.2 1.2 22.0% 0.5 F&B (18) Cocoa and cocoa preparations. 0.5 0.5 0.4 -1.7% 0.2 F&B (23) Residues & waste from the food indust; prepr a 0.0 0.0 0.1 14.8% 0.0 F&B (45) Cork and articles of cork. 0.0 0.0 0.1 73.4% 0.0 F&B (47) Pulp of wood/of other fibrous cellulosic mat; 0.0 0.0 0.1 36.4% 0.0 MAC MAC (88) Aircraft, spacecraft, and parts thereof. 0.0 0.0 0.0 44.3% 0.3 MAC (87) Vehicles o/t railw/tramw roll-stock, pts & acc 0.0 0.1 0.3 37.1% 0.1 22 Code CAGR Std Dev (2-digit HS) Product 2000 2005 2009 (2000-09) (2000-09) MAC (85) Electrical mchy equip parts thereof; sound rec 0.0 0.1 0.1 26.7% 0.0 MAC (84) Nuclear reactors, boilers, mchy & mech applian 0.0 0.1 0.1 21.5% 0.0 MAC (86) Railw/tramw locom, rolling-stock & parts there 0.0 0.1 0.0 6.6% 0.0 MAC (89) Ships, boats and floating structures. 0.0 0.0 0.0 12.4% 0.0 MET MET (72) Iron and steel. 1.0 1.2 1.1 0.8% 0.2 MET (76) Aluminum and articles thereof. 0.7 0.9 1.3 5.7% 0.3 MET (83) Miscellaneous articles of base metal. 0.5 0.5 1.1 9.7% 0.2 MET (73) Articles of iron or steel. 0.5 0.5 0.6 2.1% 0.1 MET (78) Lead and articles thereof. 0.0 0.1 0.5 28.6% 0.6 MET (79) Zinc and articles thereof. 0.8 0.4 0.4 -7.4% 0.2 MET (74) Copper and articles thereof. 0.2 0.3 0.6 14.3% 0.2 MET (82) Tool, implement, cutlery, spoon & fork, of bas 0.1 0.4 0.3 11.5% 0.1 MET (80) Tin and articles thereof. 0.1 0.2 0.0 -14.1% 0.0 MET (81) Other base metals; cermets; articles thereof. 0.1 0.0 0.0 -26.2% 0.1 MET (75) Nickel and articles thereof. 0.0 0.0 0.0 0.0% 0.0 OTH OTH (49) Printed books, newspapers, pictures & other pr 1.2 1.9 3.6 11.1% 2.6 OTH (96) Miscellaneous manufactured articles. 1.2 1.7 1.8 3.9% 0.5 OTH (67) Prepr feathers & down; arti flower; articles h 0.8 1.7 1.6 7.5% 0.3 OTH (66) Umbrellas, walking-sticks, seat-sticks, whips, 0.0 0.7 1.0 44.1% 0.7 OTH (94) Furniture; bedding, mattress, matt support, cu 0.3 0.4 0.5 5.2% 0.1 OTH (37) Photographic or cinematographic goods. 0.0 0.5 0.1 15.9% 0.4 OTH (97) Works of art, collectors' pieces and antiques. 0.2 0.4 0.2 0.6% 0.1 OTH (95) Toys, games & sports requisites; parts & accesso 0.1 0.3 0.3 18.6% 0.1 OTH (93) Arms and ammunition; parts and accessories the 0.0 0.2 0.1 81.5% 0.3 OTH (90) Optical, photo, cine, meas, checking, precision 0.0 0.1 0.1 16.7% 0.0 OTH (92) Musical instruments; parts and access of such 0.0 0.4 0.0 -2.3% 0.1 OTH (91) Clocks and watches and parts thereof. 0.0 0.0 0.0 26.8% 0.0 OTH (43) Furskins and artificial fur; manufactures ther 0.0 0.0 0.1 19.6% 0.0 TEX TEX (53) Other vegetable textile fibers; paper yarn & w 11.4 12.4 19.3 5.4% 4.2 TEX (41) Raw hides and skins (other than furskins) and 2.4 3.7 3.8 4.8% 1.0 TEX (63) Other made up textile articles; sets; worn clo 2.3 3.3 2.2 -0.9% 0.7 TEX (62) Art of apparel & clothing access, not knitted/ 0.1 2.9 1.7 29.9% 1.5 TEX (64) Footwear, gaiters and the like; parts of such 1.3 1.2 1.2 -0.7% 0.4 TEX (61) Art of apparel & clothing access, knitted or c 0.3 1.3 1.8 19.5% 0.7 TEX (55) Man-made staple fibres. 0.8 0.5 0.9 1.2% 0.3 TEX (56) Wadding, felt & nonwoven; yarns; twine, cordag 1.1 1.2 0.3 -13.1% 0.4 TEX (51) Wool, fine/coarse animal hair, horsehair yarn 0.3 0.4 0.7 8.0% 0.1 TEX (65) Headgear and parts thereof. 0.1 0.4 0.4 13.1% 0.2 TEX (52) Cotton. 0.7 0.4 0.2 -11.8% 0.2 TEX (59) Impregnated, coated, cover/laminated textile f 0.5 0.1 0.0 -23.7% 0.1 TEX (42) Articles of leather; saddlery/harness; travel 0.0 0.1 0.1 17.2% 0.1 TEX (58) Special woven fab; tufted tex fab; lace; tapes 0.1 0.1 0.1 3.7% 0.0 TEX (54) Man-made filaments. 0.1 0.0 0.0 -7.6% 0.1 TEX (60) Knitted or crocheted fabrics. 0.0 0.1 0.0 -5.8% 0.0 TEX (57) Carpets and other textile floor coverings. 0.0 0.1 0.1 22.8% 0.0 TEX (50) Silk. 0.0 0.0 23 Appendix 2. Technical Indicators of Trade Performance (COMTRADE/WITS) Country's Share of World Exports It is the share of a country's total exports in the world's total exports. This ratio can be used to assess changing world market share of a country over time. Share of Product in Total Exports It is the share of each export product (at a chosen level of disaggregation) in the country's total exports. Share of Market in Total Exports It is the share of exports sold in each foreign country in the home country's total exports. Hirschman Herfindahl Index It is the sum of squared shares of each product in total export. A country with a perfectly diversified export portfolio will have an index close to zero, whereas a country which exports only one export will have a value of 1 (least diversified). Revealed Comparative Advantage Index Measures of revealed comparative advantage (RCA) have been used to help assess a country’s export potential. The RCA indicates whether a country is in the process of extending the products in which it has a trade potential, as opposed to situations in which the number of products that can be competitively exported is static. It can also provide useful information about potential trade prospects with new partners. Countries with similar RCA profiles are unlikely to have high bilateral trade intensities unless intra-industry trade is involved. RCA measures, if estimated at high levels of product disaggregation, can focus attention on other nontraditional products that might be successfully exported. The RCA index of country I for product j is often measured by the product’s share in the country’s exports in relation to its share in world trade: RCAij = (xij/Xit) / (xwj/Xwt) Where xij and xwj are the values of country i’s exports of product j and world exports of product j and where Xit and Xwt refer to the country’s total exports and world total exports. A value of less than unity implies that the country has a revealed comparative disadvantage in the product. Similarly, if the index exceeds unity, the country is said to have a revealed comparative advantage in the product. Trade Intensity Index The trade intensity index (T) is used to determine whether the value of trade between two countries is greater or smaller than would be expected on the basis of their importance in world trade. It is defined as the share of one country’s exports going to a partner divided by the share of world exports going to the partner. It is calculated as: Tij = (xij/Xit)/(xwj/Xwt) Where xij and xwj are the values of country i’s exports and of world exports to country j and where Xit and Xwt are country i’s total exports and total world exports respectively. An index of more (less) than one indicates a bilateral trade flow that is larger (smaller) than expected, given the partner country’s importance in world trade. 24 Trade Complementarity Index The trade complementarity (TC) index can provide useful information on prospects for intraregional trade in that it shows how well the structures of a country’s imports and exports match. It also has the attraction that its values for countries considering the formation of a regional trade agreement can be compared with others that have formed or tried to form similar arrangements. The TC between countries k and j is defined as: TCij = 100(1 – sum(|mik – xij| / 2)) Where xij is the share of good i in global exports of country j and mik is the share of good i in all imports of country k. The index is zero when no goods are exported by one country or imported by the other and 100 when the export and import shares exactly match. Export Diversification (or Concentration) Index Export diversification is held to be important for developing countries because many developing countries are often highly dependent on relatively few primary commodities for their export earnings. Unstable prices for these commodities may subject a developing country exporter to serious terms of trade shocks. Since the covariation in individual commodity prices is less than perfect, diversification into new primary export products is generally viewed as a positive development. The strongest positive effects are normally associated with diversification into manufactured goods, and its benefits include higher and more stable export earnings, job creation and learning effects, and the development of new skills and infrastructure that would facilitate the development of even newer export products. The export diversification (DX) index for a country is defined as: DXj = (sum |hij – xi|) / 2 Where hij is the share of commodity i in the total exports of country j and hi is the share of the commodity in world exports. The related measure used by UNCTAD is the concentration index or Hirschman (H) index, which is calculated using the shares of all three-digit products in a country’s exports: Hj = sqrt [ sum (xi/Xt)2] Where xi is country j’s exports of product i (at the three-digit classification) and Xt is country j’s total exports. The index has been normalized to account for the number of actual three-digit products that could be exported. Thus, the maximum value of the index is 239 (the number of individual three-digit products in SITC revision 2), and its minimum (theoretical) value is zero, for a country with no exports. The lower the index, the less concentrated are a country’s exports. Export Specialization Index The export specialization (ES) index is a slightly modified RCA index, in which the denominator is usually measured by specific markets or partners. It provides product information on revealed specialization in the export sector of a country and is calculated as the ratio of the share of a product in a country’s total exports to the share of this product in imports to specific markets or partners rather than its share in world exports: ES = (xij/Xit) / (mkj/Mkt) Where xij and Xit are export values of country i in product j, respectively, and where mkj and Mkt are the import values of product j in market k and total imports in market k. The ES is similar to the RCA in that the value of the index less than unity indicates a comparative disadvantage and a value above unity represents specialization in this market. 25 Index of Export Market Penetration It is the share of the actual number of export relationships (at the country product level) forged by Country A in the maximum possible number of export relationships it can form given the number of its exports. The denominator is calculated by summing the number of countries that import each product that Country A also exports. Hummels-Klenow (Products) Intensive Margin It is the share of Country A's exports in world export of only those goods that Country A exports. Hummels-Klenow (Products) Extensive Margin It is the share of world export only in goods that Country A exports in total world exports of all goods. Hummels-Klenow (Markets) Intensive Margin It is the share of Country A's exports in total world export to only those countries that Country A exports to. Hummels-Klenow (Markets) Extensive Margin It is the share of world export to only those countries that Country A exports to in total world exports of all goods. 26