{"doc_id": "024c0e4e0c3001b81b15dd06b5116aa2", "text": "CENTRAL BANK OF KENYA\nREMARKS\nBY\nPROF. NJUGUNA NDUNG’U\nGOVERNOR\nCENTRAL BANK OF KENYA\nON THE OCCASION OF\nA PUBLIC LECTURE\nKenyatta University\n16th March 2010\nThe Chairman of Council;\nThe Vice-Chancellor;\n\nDeputy Vice-Chancellors;\nMembers of the entire University Community;\nDistinguished Guests;\nLadies and Gentlemen:\nTOPIC: “EAST AFRICAN INTEGRATION AS A SOLUTION TO\nECONOMIC GROWTH AND EMPLOYMENT GENERATION”\nIt is a pleasure and honour for me to address this distinguished audience on a\nvery topical and timely issue of EAC integration as a solution to economic growth\nand employment generation for Kenya and the EAC region. I wish to focus my\ntalk on domestic and regional policy initiatives and how they impact on growth,\nand more specifically on the employment situation in Kenya.\nMay I start by pointing out that unemployment reflects the inability of economic\nactivity to absorb labour or human resource at different levels. When we talk of\neconomic activity, we mean growth. It allows economic opportunities to emerge.\nThe most important one; investment opportunities that increase the demand for\nhuman capital. So employment is a derived demand, from the demands on\neconomic activity and increased investment.\nBut how does regional integration improve economic activity (growth) for\nmember countries and so increase labour absorption - employment? This is the\nquestion we need to focus our attention on. Let me try some quick avenues:\n1. EAC will provide a wider market - this will induce firms’ production\nexpansion in size and product lines – to satisfy a wider market.\n2. A larger market requires a larger investment outlay.\n3. A larger market diversifies the sources of income flows.\n4. Financial services to cover the region will have to adjust to a higher\nplatform: for instance, Kenyan banks are currently expanding to the region\nin a significant way. The same applies to a number of other sectors such as\nretail services as evident with the expansion of Nakumatt and Uchumi\nretail shops to the region.\n2\n\n5. Larger demands for regional infrastructure to facilitate trade and\nproduction.\nThe list can be long and depends on where one starts, but at the end, labour\ndemand is derived demand from all of these economic activities.\nTo develop this topic on Kenya, I wish to develop three arguments on Kenya’s\ncase:\nFirst, the policy solutions, their evolution and shocks; It is often good to start\nfrom a perspective that policies, once implemented, will work and even when\nshocks hit the economy, the economy will return to its potential. How long it\ntakes to return to its potential is determined by how pervasive and persistent\nshocks were. Having said that, the blue print of growth and employment creation\nwas laid out by the NARC Government - “Economic Recovery Strategy for Wealth\nand Employment Creation” which covered the period 2003-2007. This bore fruit\nand the economy picked up from a low of 0.5 percent annual growth in 2002 to\n6.3 percent in 2006 to 7.1 percent in 2007. This saw the number of new jobs\ncreated reaching 506.5 thousand, 488.4 thousand, 485.5 thousand, 467.3\nthousand in 2004, 2005, 2006 and 2007 respectively.\nThe results of this blue print of policy paradigm show that success will always\ngenerate success. Once policies are followed to the paper, they will generate the\ndesired results.\nBut then external and internal shocks hit the economy in 2008 stepped in.\nHowever, the economy is on the recovery path and it was expected to grow by\nabout 2.1 percent in 2009 and at between 3 and 4.5 percent in 2010 and by over\n5 percent in subsequent years. It is important perhaps to explain why in times of\nshocks, growth, investment and even economic decisions are affected and even\naffect other outcomes like consumption and employment.\nThree examples include:\n1. At the individual level optimizing welfare under uncertainty\n3\n\n2. Irreversibility of fixed investment decisions\n3. Informal sector expansion as a disequilibrium queuing model of employment.\nThese are short-run and should not condemn us to a low equilibrium trap.\nSecond, the EAC Common Market and its potential for employment\n• In general, most countries in Africa are forming regional economic\nintegration arrangements in order to; secure access to larger markets and\nenhance trade flows and in the process attract the much needed foreign\ndirect investments; lower trade costs among neighbours; leverage or lock\nin domestic reforms; create a framework for regional cooperation and\nresource pooling; increase their bargaining power and political cohesion.\n• Economic integration has the potential for economic growth; to create\nwealth; improve labour and social conditions and result in a better division\nof labour between countries based on comparative advantage. Exploiting\nrelative comparative advantage of each integrating member country\nenhances the region’s efficiency in production, increasing output and\nboosting economic growth of each member country.\n• Regional integration, uniformity of policy and common goals will act as an\nagency of restraint and cushion the external shocks in some cases.\n• The EAC brings together nationals of five countries namely, Kenya,\nTanzania, Uganda, Rwanda and Burundi. In 2008, the five countries had a\ncombined population of 126.6 million people and a nominal GDP of\nUSD73 billion (based on EAC Facts and Figures Report, 2009). In the\nsame year, Kenya’s GDP stood at USD26.9 billion, that is 37 percent of the\nEAC total. It is the dominant economy in the bloc. This enlarged market\nmeans potential for increased free trade among members. Free trade is\nexpected to lead to rapid expansion of trade and output, which in turn is\nexpected to lead to demand for further investment, employment and GDP\ngrowth. These gains result from the dynamic effects of a Common Market,\nwhich have been shown to overshadow the static effects, that is, trade\ncreation, trade diversion and terms of trade effects. The dynamic effects,\n4\n\nwhich are cumulative in nature lead to growth. Indeed, the dynamic effects\nof a Common Market are often described as the long-run consequences for\nthe economic growth of member countries as a consequence of increased\nmarket size and exploitation of economies of scale, increased competition,\nlearning by doing and increased investment. Also, the stronger the\npotential economies of scale are, and the more rapid the autonomous\nproductivity advantages, the more likely the economic integration will lead\nto growth. Thus, the contribution of the EAC Common Market to economic\ngrowth and employment will be greater if the economies of scale are\npossible by increased market size, takes place pari passu with learning by\ndoing.\n• However, higher levels of economic integration that would ensure such\nbenefits are realized require heavy infrastructural investments in the\nregion. With this realization, the EAC Development Strategy sets out the\npriority programmes for the region focusing on among others, cooperation\nin infrastructure development. An efficient infrastructure development\nmainly for EAC in terms of roads and railway interconnectivity has the\npotential to increase from 3.7 million tonnes in 2007 to over 16 million\ntonnes by 2030, at an annual rate of growth of 6.7 percent, according to a\nstudy on the EAC Railways Master Plan. Current EAC efforts to develop\nregional infrastructures are complemented at the continental level by such\ninitiatives as the Infrastructure Consortium for Africa (ICA), established in\n2005 and mandated to support and promote increased investment in\ninfrastructure in Africa from both public and private sources. In addition,\nwith the implementation of the EAC Common Market Protocol, regional\ninfrastructural projects will be well defined.\n• Ladies and Gentlemen, it is worth noting that the overriding rationale\nfor regional integration is development, with all the benefits that come\nwith it. Theoretically, integration fosters growth through different\nchannels such as increasing innovation through economies of scale and\nthrough technological spillovers and elimination of replication in research\nand development. Empirically, integration gives access to a larger market,\n5\n\nmore stock of technology and knowledge and therefore, more innovations\nand growth. Furthermore, expanded markets and increased productivity\nfollowing integration, triggers increasing returns in the research and\ndevelopment sectors due to the implied scale effects. All these channels\nhave important implications on employment generation and economic\ngrowth for the integrating economies.\n• The overriding objective of the EAC Common Market is to widen and\ndeepen cooperation among partner states in both economic and social\nfields for the benefit of the citizens of the member states. This is beyond\nwhat literature terms as “beg thy neighbour” effects. The Common Market\nProtocol provides for the free movement of goods, persons, labour,\nservices and capital within the region as well as the right of establishment\nand the right of residence.\n• The Common Market will unlock many other benefits among East African\ncitizens. Currently, efforts are underway to move to the next level of\neconomic integration, after the completion of a Study by the European\nCentral Bank consultants on the East African Monetary Union (EAMU).\nThe study has explored among other things the current preparedness for a\nMonetary Union, institutional frameworks and structure for an EAMU,\ndesign of a protocol on the EAMU to be negotiated by partner states, and\nproposals for monitoring and enforcing macroeconomic convergence in\nthe region.\n• Ladies and Gentlemen, all these integration endeavours will create\nemployment opportunities. I will emphasize on employment opportunities\nbecause it is a dynamic concept that focuses on gainful employment and\nspace to utilize your own relative comparative advantage. It is upon you to\nposition yourselves to take advantage of these new opportunities. Our\nhigher institutions of learning have the responsibility of training an\ninternationally competitive labour force to enable Kenya take full\nadvantage of these regional initiatives. The Investment opportunities that\ncome with it will allow the appropriate signals of skill requirement.\n6\n\nFinally, the Vision 2030 and Unemployment in Kenya: The Vision 2030 aims at\ntransforming Kenya into a newly-industrialised, middle income country: what\ndoes it mean to solve the unemployment problem of Kenya?\nTo solve unemployment, we need a long-run vision for growth and investment\nsupported by short-run policies like macroeconomic policies, specifically: fiscal\nand monetary policy and also trade policies.\na) Fiscal Policy and Fiscal Stimulus\nThe Economy is just emerging from the devastating consequence of drought and\nthe global financial crisis. The pervasiveness and persistence of these shocks\nrequired that the government develops a fiscal stimulus. It is important to\nunderstand how fiscal stimulus works in an economy like ours:\n1. Recognizes support and protection for the wage good through targeted\npublic investment and public works – Kazi Kwa Vijana\n2. A shilling spent in rural Kenya has a higher multiplier effect in the\neconomy\n3. Support local industries - via government expenditure and higher\ndomestic consumption - preserve jobs - prevent layoffs\n4. Increase public investments that are complementary to private\ninvestments - in that they enhance profitability of private investments\n5. Finally, in this way the government crowds-in private sector but not\ncrowd-out\nb) Monetary Policy\nBut perhaps one may ask how has the Monetary Policy reacted to the crisis and\nhow does it work to support economic activity? Monetary Policy works to control\nthe level of money supply consistent with economic activity.\nSeveral Instruments:\n7\n\n• Central Bank Rate (CBR) – as a signalling rate of the stance of\nmonetary policy. It has been progressively reduced from a high of 9\npercent in August 2008 to the current level of 7 percent. Lowering of the\nCBR signalled the intention of the Central Bank for a low interest rate\nregime to encourage credit extension to the private sector and so\ninvestment to support growth.\n• Cash Ratio Requirement (CRR) – in order to avail liquidity to\ncommercial banks and release more resources for financial intermediation,\nthe Bank has lowered the CRR from 6 percent to 5 percent in December\n2008 and further to 4.5 percent in June 2009.\n• Liquidity management tools: To further enhance liquidity\nmanagement in the banking system, the Bank has instituted several\nreforms to introduce new instruments like horizontal repo, vertical repo\nwith fixed tenors.\n• Financial Development: In general an efficient and developed financial\nsystem is important to collect and collate savings from micro-savers to\ninvestors. Second, an effective monetary policy will depend on an efficient\nand developed financial system.\nIn concluding my remarks, let me emphasize that employment is a function of\neconomic activity. Sustained economic growth is good for employment. One\nmajor solution for sustained growth is a wider market for trade and investment.\nEAC provides just that. But public investment infusion required to support the\nprivate sector investment is immense. Public investment especially in\ninfrastructure will reduce transaction costs for the private sector and allow\nprofitable regional trade. To date 43% of the total Kenyan exports of goods and\nservices go to the EAC region. These exports are mostly manufactured exports.\nThere is scope for more within the EAC and locational advantages. This is what\nwe want to strive for in EAC and these are the positive development agenda EAC\npresents to Kenya and East African countries.\nThank you for your attention\n8", "source": "CBK", "stratum": "cb_requests", "fetch_date": "2026-04-26", "url": "https://www.centralbank.go.ke//images/docs/speeches/2010/Governors%20Remarks%20during%20Kenyatta%20University%20Lecture.pdf"}