An Employment-Targeted Economic Program for Kenya An Employment-Targeted The Kenyan economy has experienced improved economic growth in recent years, and the government has maintained a commitment to generating 500,000 new jobs per year. But the country still faces severe problems of poverty-level employment— people working full-time yet living with their families in poverty. This study develops detailed proposals for greatly expanding decent employment opportunities in Kenya, and to accomplish this in a manner that also creates a wide range of employment and business opportunities, including those for small and medium-sized enterprises, agricultural small holders, commercial banks, and microfinance institutions. “Three decades after the International Labor Organization’s ground-breaking study, Employment, Incomes and Equality, Profs. Pollin, Mwangi and Heintz re-open the path with 21st Century economic analyses and instru- ments. Kenya’s policy makers would be unwise not to study these ideas, and then study them again.” n DR. MBUI WAGACHA Former Director of Research, Institute of Policy Analysis and Research (IPAR), and Economic Consultant to the African Development Bank and United Nations Economic Commission on Africa “A key challenge faced by African countries today is to translate economic growth into meaningful improvements in living standards at the household level. One of the effective means of addressing this challenge is to design macroeconomic and sectoral policies that explicitly target the creation of decent employment to allow households to overcome poverty. This detailed An and innovative study on Kenya provides a valuable contribution on how this can be accomplished by offering a wide range of policy suggestions.” Employment- n PROFESSOR LÉONCE NdikUmaNA Targeted Chief of the Macroeconomic Analysis Section, United Nations Economic Commission on Africa Economic Program James Heintz “Average incomes in Kenya have been stagnant for about a quarter century and Mwangi wa G˜ıth˜ınji Robert Pollin for Kenya the rate of investment has declined. This important study contains a strategy for development that focuses on creating employment that lifts workers out of poverty by increasing public investment in roads and water infrastructure and promoting private investment in small enterprises by increasing the quantity of credit and lowering its cost. The strategy advocated stands in sharp contrast to Robert Pollin those who believe the solution to Kenya’s economic problems is to cut formal Mwangi wa G˜ıth˜ınji sector wages and increase ‘flexibility’ in the labor market.” James Heintz n PROFESSOR KeitH B. GRIFFIN Distinguished Professor of Economics Emeritus, University of California-Riverside Robert Pollin is Professor of Economics and Co-Director of the Political Economy Research Institute (PERI), University of Massachusetts-Amherst. Mwangi wa G˜ıth˜ınji is Assistant Professor of Economics, A project of the International Poverty Centre in Brasilia (IPC), University of Massachusetts-Amherst. James Heintz is Associate Professor and Associate Director United Nations Development Programme of PERI, University of Massachusetts-Amherst. An Employment-Targeted Economic Program for Kenya A project of the International Poverty Centre in Brasilia (IPC), United Nations Development Programme An Employment- Targeted Economic Program for Kenya ___________________________________________________ Robert Pollin Mwangi wa Githinji~ ~ James Heintz Department of Economics and Political Economy Research Institute (PERI), University of Massachusetts-Amherst COUNTRY STUDY SUPPORTED BY THE INTERNATIONAL POVERTY CENTRE This is an independent report produced by a team of international and national consultants supported by the International Poverty Centre in Brasilia (IPC). This report is part of a wider global research programme encompassing several other countries. The views in this report are the authors’ and not necessarily IPC’s. However, the IPC regards this report as an important contribution to the debate on economic policies and employment programmes in Kenya as well as in other countries in Africa. Copyright © 2007 POLITICAL ECONOMY RESEARCH INSTITUTE (PERI) Gordon Hall / 418 N. Pleasant St., Suite A Amherst, MA, USA, 01002 http://www.umass.edu/peri Contents ___________________________________________________ List of Tables ............................................................................................... ix List of Figures ............................................................................................. xi Acknowledgments....................................................................................... xiii Brief Highlights of Major Proposals ...................................................... 1 Summary of Major Findings and Proposals ....................................... 13 1. Introduction..................................................................................... 43 2. Employment Conditions and Living Standards .......................... 57 Division of Employment by Sectors .................................................... 57 Open Unemployment by Region Gender and Age ............................... 59 Breakdown of Paid Employment.......................................................... 60 Agricultural Self-employed ............................................................... 60 Informal Sector Workers ................................................................... 62 Formal Sector Workers ..................................................................... 62 Incomes from Employment ................................................................. 63 Labor Incomes and Poverty ................................................................. 64 Sources of Poverty-Level Employment: Low Hours and Low Earnings .......................................................... 66 3. Profile of Non-agricultural Household Enterprises ..................... 69 Household Enterprises by Industrial Sectors ....................................... 70 Service Sector .................................................................................. 70 Profile of Employment in Household Enterprises ................................ 72 Costs of Operating Household Enterprises .......................................... 73 Sources of Start-Up Credit ................................................................. 75 Earnings from Household Enterprises ................................................. 76 Factors Influencing Household Enterprise Earnings ............................ 79 Considerations for Policy Proposals ..................................................... 81 4. Labor Costs, Labor Market Institutions and Employment Expansion .......................................................... 83 Lowering Formal Sector Wages to Increase Employment ..................... 85 vi An Employment-Targeted Economic Program for Kenya Industrial Relations and Labor Market Rigidities ................................ 89 The Impact of Labor Unions............................................................. 91 Minimum Wage Laws ....................................................................... 93 Unit Labor Costs, Productivity, and Government Subsidies ...............100 Productivity and Global Competitiveness ..........................................101 Government Subsidies for Employment Creation ................................101 5. The Rural Sector: Institutional Reform for Development .........105 Overview of Agriculture’s Development and Decline .........................107 Coffee and Tea Sectors .......................................................................110 Output and Productivity Trends .......................................................110 Contrasting Institutional Histories ....................................................112 Horticulture .......................................................................................115 Maize and Wheat ...............................................................................120 Millet and Sorghum ........................................................................122 Sugarcane and Rice .........................................................................124 Livestock Sector.................................................................................128 Lessons from Sectoral Analyses ..........................................................130 Learning from Successes...................................................................130 Adaptation rather than Replication of Past Successes .........................130 Understanding Resources and Capabilities of Smallholders .................131 Designing Effective Extension Services for Smallholders.....................131 Returns to Scale and Agricultural Cooperatives .................................133 Infrastructure Improvements ............................................................134 Cost of Capital and Access to Credit .................................................135 6. Investing in Roads and Water Infrastructure ...............................137 Roads .................................................................................................138 Water .................................................................................................141 Medium-Term Budgets and Water Infrastructure ...............................142 Employment Effects of Expanding Roads and Water Infrastructure Spending..................................................143