Total factor productivity change in the Kenyan manufacturing sector: A malmquist index analysis

Abstract

Industrialization has been embraced by many developing countries as a means of achieving structural transformation of the economies. In Kenya, the goal to industrialize has long been held as a strategy for economic development. It has received emphasis as the main strategy for addressing the principal challenges of development in Kenya; employment creation and poverty eradication. While Kenya inherited a relatively well established manufacturing sector at independence in 1963, the sector's overall performance has been rather dismal. The share of the manufacturing sector in GND, which accounts for over 70 percent of the industry, has changed little over the last three decades. At the same time, the sector which was expected to play a leading role in the country's development and growth process has not been dynamic enough to effectively play this role. The study examined Kenya's manufacturing sector to empirically analyze the total factor productivity change. The study used the latest World Bank's Regional Programme on Enterprise Development firm level data for the period 2000-2003 to form a panel over the three year period 2000, 2001 and 2002. The total factor productivity change over the period was measured and decomposed into efficiency change and technical change. The study used data envelopment analysis (DEA) to derive Malmquist productivity indices. The study revealed an overall decline in Total Factor Productivity (TFP) of about 8.3 percent. The decline resulted mainly from declining which dropped by about 17.8 percent over the period despite an overall technical progress of about 11.5 percent. In as far as the sub-sectors were concerned, the study revealed that only the chemicals and pharmaceuticals sub-sectors recorded a TFP growth of about 7.9 percent. The textile and wood and furniture sub-sectors recorded an efficiency improvement of about 11.8 and 6 percent, respectively. Efficiency change was revealed to be the major source of TFP changes. The vision 2030 envisages the development of a robust, diversified and competitive manufacturing sector. The overall goal for the sector for the next five years is to increase its contributions to GDP by at least 10 percent per annum and moving Kenya to a middle income country by year 2030. The study concluded that, for the manufacturing sector to play the crucial role in employment creation and poverty eradication, the infrastructural and institutional bottlenecks bedeviling the sector must be addressed. These includes; low capacity utilization, poor infrastructure, lack of innovation, licensing and security.