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Post-COVID-19 Recovery and Economic Transformation Will Be Increasingly Service-Sector-Led

Economic Recovery

Kenya has a very dynamic private sector, with a relatively high entry rate of new firms, in comparison to other countries with similar levels of per capita income.

These firms do face challenges in terms of scaling up – most firms in Kenya are small, largely based in Nairobi, and operate in the informal sector, according to the latest Kenya Economic Update Edition 24: From Recovery to Better Jobs. Kenya has over 138,000 formal establishments, and 7.4 million micro, small and medium enterprises (MSMEs). Among formal firms, only 3% have 50 or more employees, and only 1% of firms have 150 or more employees. The majority of Micro, Small and Medium Enterprises (MSMEs), 94%, are unlicensed micro firms with fewer than five employees. Nairobi hosts 36% of formal firms and 14% of MSMEs. The services sector dominates the firm landscape with 84% of formal firms and 83% of MSMEs in the services sector.

“Improving conditions in Kenya to support the ability of new firms to scale up and innovate is important to support the creation of better jobs at a large scale,” said Keith Hansen, World Bank Country Director for Kenya. “When firms reach a critical mass, and are able to access larger markets, use technology, and expand exports, this results in increased productivity, better-quality jobs, and higher standards of living for large parts of the population.”

 

Services sector leads in job creation

The report finds that, prior to the onset of the pandemic, Kenya’s job creation was concentrated in the services sector. For instance, the number of formal firms in the retail sector increased fivefold – from around 700 in 2013 to 3,500 in 2018. This outpaced the growth of formal firms in the manufacturing sector, the number of which roughly doubled over this period, from 336 to 714.

With services driving job creation, Kenya is exhibiting a new pattern of economic transformation that is emerging in Africa, and which may differ from the manufacturing-led transformation of East Asia and many high-income economies. The growth in digital technology could enable some service sub-sectors to replicate features of the manufacturing sector that enable scale, innovation, and spillovers that are important for long-term development and job creation.

The services sector can be divided into four groups of sub-sectors based on their ability to enable scale, innovation, and spillovers: the global innovator services (ICT, finance, and professional activities); the skill-intensive social services (education and health); the low-skilled tradable services (transportation and storage, accommodation and food services, and wholesale trade); and the low-skilled domestic services (retail trade and personal services,). Low-skilled services currently dominate employment in Kenya. Low-skilled domestic services accounted for over half of all service sector employment, and the low-skilled tradable sub-sectors for one-quarter, in 2019.

The good news for Kenya: Prior to the pandemic, Kenya saw strong growth in employment among the higher-skilled services sub-sectors. Employment in the global innovator sub-sectors grew by 10% between 2015/16 and 2019, largely led by the finance and insurance sub-sectors. Employment in the skill-intensive social subsector, i.e. education and health, increased by an even larger 23%.

“Kenya’s fintech success story highlights how global innovator services can be a source of job creation, reduce poverty and benefit the broader economy,” said Ramya Sundaram, Senior Economist, World Bank. “With appropriate investment in trade, technology and training, Kenya will be able to create jobs for people at all skill levels, ensuring that growth benefits everyone.”

 

The pandemic’s impact on the job market

The COVID-19 pandemic has had a very large impact on the labor market and some of the scarring will have longer-term implications. Workers lost jobs and moved into agriculture to survive. The services sectors, and urban areas were worst affected. The share of employment in services declined by 7 percentage points, reversing almost all the gains since 2005. Agriculture absorbed 1.6 million additional workers, increasing its share of employment from 47% to 54% in one year. Unemployment increased in urban areas, while employment increased in rural areas. In addition to contemporary effects, human capital losses during the pandemic can have significant intergenerational consequences, including through the productivity of future generations.  The incipient rebound in employment in more recent months suggest that, with appropriate measures, Kenya could recover and surpass these losses.

 

Way forward for job creation

Key takeaways from the report:

  • To recover fully from the pandemic and to create more jobs over the longer term, there is a need to orient policies consistently towards supporting a thriving private sector.
  • The main challenges facing Kenya are three-fold: (1) creating conditions that support firms in entering the market, in scaling up, and in innovating through the creation of strong entrepreneurial ecosystems; (2) reversing the losses in jobs during the pandemic in sectors such as global innovator services and skill-intensive social services to help increase the availability of better-quality jobs over the long-term; and (3) raising demand for jobs in labor intensive, lower skill sectors, including through linkages to the more skill-intensive sectors.
  • Creating conditions that support firm entry, scale-up, and innovation can be done through supporting greater access to finance, reducing barriers to technology adoption, supporting development of entrepreneurial eco-systems in lagging regions, and providing business development services to help improve firm capabilities and entrepreneurial skills.
  • Creating conditions to support the growth of firms and jobs in the services sector (among other sectors) and exploiting its linkages with the rest of the economy involves the 3Ts: (i) trade: lowering barriers to trade – particularly in services; (ii) technology: expanding access to digital technologies, and updating the regulatory framework to address new features of data and digital business models; and (iii) training: improving training and skills development among the current and future workforce to enable faster adoption of technology, as well as better socio-emotional and interpersonal skills that are especially important in some services.
  • Raising demand for jobs in labor intensive, lower skill sectors, helps support all segments of the population in attaining a higher standard of living. Cross-cutting reforms such as enabling a stable business environment and improving access to both physical and digital infrastructure can benefit all firms, across all sectors. For example, with appropriate investment in physical infrastructure, better roads, and so on, the tourism sector has great potential to further benefit the Kenyan economy and continue creating jobs for low-skilled labor.

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