Tripartite Free Trade Area: Any threat to Kenya from SA?



The tripartite negotiations currently ongoing will open new markets for Kenyan goods in the whole of EAC, COMESA and SADC region but how can Kenya respond to the threat of South Africa’s manufacturing industry while still leveraging on the opportunities of a larger trading bloc?

Both nations share similarities since they are fundamentally influenced by access to local resources and therefore have strong food, textiles and metal processing activities. Manufacturers simply transform produce from these sectors.

The largest manufacturing sectors in both nations are predictably food and beverage, and non-metallic minerals processing while petroleum and chemical products are among the fastest growing sub-sectors in both countries. This makes the southern country is a formidable competitor indeed.

However, a comparative study done this year by the Carnegie Mellon University in Australia shows that it could be a David and Goliath scenario since the South African manufacturing industry is 9.3 times larger, less import dependent and more sophisticated. It includes a significant production level of elaborately transformed products such as transport equipment and electrical machinery with an export value that is nearly 13 times higher than Kenya’s.

The only catch is a slower growth rate of 30 percent between 2005 and 2011 compared to Kenya’s 92 percent in the corresponding period. Still, the fastest growing sub-sectors are relatively small while the largest sub-sectors feature modest growth and this is the fundamental reason that the growth rate in both nations has been disappointing.

Manufacturing remains a small and declining part of gross domestic product prompting both nations’ governments to target manufacturing growth to accelerate future development. Overall, in manufacturing trade activities, both nations export much less than they import and both have a significant trade deficit.

If concluded, Kenya will have to contend with South Africa as a manufacturing competitor. To do this it can exploit a few weaknesses that exist in South African manufacturing assistance policies. Despite being various, these policies have been mostly ineffective due to two reasons. In the first place, they adopt a scatter gun approach.

For example, the National Growth Path is said to target economic sectors with the most growth potential but it does not have clear criteria to determine that potential nor is it obvious why fast growth sectors need assistance. At the same time, the Industrial Policy Action Plan II targets 14 different sectors, eight of which are manufacturing sectors and again, the criteria for targeting remain unstated and the list of targets is very long. In effect, the country tries to support all of its industries. Secondly, these policies are aimed at multiple objectives.

The National Growth Path seeks to address economic development but also deals with unemployment, inequality and poverty. The Industrial Policy Action Plan II has mixed goals; while addressing the nation’s industrial development, it also includes historically disadvantaged people and marginalised regions. In a nutshell, while South Africa talks about targeting, it has no strategy for targeting

By contrast, Kenya has a clearer policy and strategic intent. As outlined in the Second Medium Term Plan under Vision 2030, Kenya will develop industrial clusters such as the meat and leather cluster through the establishment of meat processing plants, tanneries and the promotion of dairy products processing. As part of the policy development work within the East African Community some clear targeting criteria have been identified.

Using a framework developed by the UN Industrial Development Organisation (UNIDO), two parameters; attractiveness and strategic feasibility are used with 17 weighted sub-criteria for calculating the two parameters. Industries that score highly on both parameters become a priority. While the scoring system used is unclear in the policy documents, we take this to indicate that Kenya, has an appreciation of the need for a targeting rationale within a national development strategy even though it lacks a sophisticated approach to manufacturing and fails to clarify how these targets fit into the continental supply chains that will emerge with the Tripartite Free Trade Agreement (T-FTA).

The best way to respond to the upcoming T-FTA and alongside, competition with South Africa, is not to attempt to defend all Kenyan industries. Rather, the Kenyan manufacturing industry needs to look at the situation strategically as this will give the biggest impact from any assistance efforts. Kenyan policies should augment the current approach to give it a more pro-Kenyan manufacturing focus.

The targeting of assistance is based on the idea that some activities create benefits for others. In many cases, these benefits are factored into private decisions but when the benefits spread widely through the economy, a role for government emerges. By strategically targeting assistance according to the flow of benefits among private activities, the government ensures that greater benefits are created for the total amount that is spent.

Targeting deals with the question of choosing which industries should be selected for support and targets can either be designed to assist those industries that create benefits for others linked to it or to attract industries that make use of benefits created by other, linked local activities.

Targeting assistance can be allied to policies for clustering activity because the goals of one can be amplified by the other. Clusters work because it is cheaper to do business when other related businesses are close. These are the so-called “agglomeration advantages” which contribute to creating competitive advantages and these benefits typically operate vertically, that is, among suppliers and customers. It is precisely because of the way these advantages are exchanged that private firms are lead to create clusters independently and for the private sector to exploit them fully, agreements need to be specified, monitored and enforced among the affected parties.

Once the firms have been clustered, they will become less assistance-dependent, because they are part of a mutually-supporting structure. If government can build clusters around benefits emanating from strong industries, it can effectively restructure the economy to make it less assistance-dependent and more self-supporting in a way that promises greater benefits with the same base level of government-assistance expenditure.

The Special Economic Zones Bill captures this interest in clustering and if it is adopted and implemented properly within the relevant supply chains, Kenya will achieve production efficiency and economies of scale.

(The writer is the chief executive of  the Kenya Association of Manufacturers and can be reached on [email protected])

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