Entrepreneurship in Kenya and Service Economies

How we missed industrialization and how to get there.

Kenyans often ask two questions: Shall we ever industrialize? And how did we become a service-based economy? The chart below shows how our economy is distributed, with agriculture holding the highest share of GDP at 14.7%. However, when all the services are aggregated, the cumulative share of services to the country’s GDP is 58.9%. Industry is second at 17.8%, but manufacturing alone is only 8.3%.

This is an interesting turn of events since most developed countries moved from agriculture to industry and then divested to services after they had become wealthy enough. Kenya, on the other hand, seems to have skipped the industry and gone straight to services. It’s not entirely clear whether this is good or bad. However, its bad aspects become evident when we look at employment figures. The chart below shows where Kenyans are employed.

The majority are informally self-employed, followed by those self-employed in small-scale agriculture. The private sector comes in third (this one should probably be first), followed by those employed in small-scale agriculture, then once again those self-employed formally, Jua Kali, etc. Notice how many times self-employment has been mentioned. Self-employment forms a large bulk of employment in Kenya, and I believe this is what explains our entirely service-based economy.

When people self-employ, they often choose small businesses like shops, subsistence agriculture, or other businesses that provide services like salons, barber shops, street food, groceries, kiosks, water and cooking oil vending machines; you name it. These businesses only employ the sole proprietors or together with a few family members.

To understand Kenya's failure to pursue industry, one must ask why people pursue self-employment instead. The first answer is that those are the incentives people get from the powers that be. Most Kenyans have been socialized to self-employment as the gateway to wealth; many even loathe formal employment. The government also creates such incentives by purporting to support small businesses and coming up with youth and women’s funds to encourage youths and women to pursue self-employment. Even the idea of hustlers versus dynasties had connotations of uplifting small businesses through wheelbarrownomics and other ideas. But are these ideas good for the economy? Obviously not. Self-employment only creates employment for the owners; a majority are not licensed, do not pay taxes, and do not generate enough revenues outside what the sole proprietors need for sustenance.

The second answer is about entrepreneurship in general, which, by definition, encompasses even sole proprietorships. The idea of self-employment is usually sold in terms of entrepreneurship, and everyone who starts a business typically considers themselves an entrepreneur. When a nation wants to incentivize the populace into self-employment, it calls it entrepreneurship. Therefore, to be against self-employment is against entrepreneurship in general, which is likely to invite a scolding to anyone who goes yapping about it in public. On Substack, we are safe. The chart below comes from Scott Shane, and it will help us clear some doubts we might have about entrepreneurship in general.

From Shane (2009)

First, the chart shows that the most developed countries are usually the least entrepreneurial. The x-axis shows the percent GDP in agriculture, and the y-axis is total entrepreneurial activity (TEA). Countries where agriculture comprises a larger share of GDP, like Kenya, also tend to have more entrepreneurship (which incidentally creates service economies). On the other hand, most developed countries have industries that account for a larger share of GDP, meaning that instead of becoming entrepreneurs, people get employed in industry. This is good for industrialized countries because businesses that create employment also pay taxes and generate surplus revenue, usually invested in the business or elsewhere. Moreover, people tend to earn more in employment than they do in self-employment, and the stability of working on a large farm cushioned people from economic downturns.

This tells us it’s usually a bad sign if your country is full of entrepreneurs. In Kenya, the first chart shows that most of us are entrepreneurs and self-employed in one way or another. As is currently evident, this isn’t enough to lift people out of poverty and should never be advertised to the people or pursued as policy. All policies aimed toward entrepreneurship should not incentivize the creation of small businesses; instead, people should be advised to seek employment rather than ditch it. As for industrialization, the way to get there is to favor policies that promote the creation of larger businesses or those that are expanding quickly. Such policies reduce entrepreneurship (thus reducing the share of GDP held by services), reduce the share of GDP held by agriculture (which, as we’ve seen, correlates strongly with entrepreneurial activity), and increase employment and overall prosperity.

This post clarifies whether I support the Youth Fund, Uwezo Fund, or other funds and policies targeting small businesses. This GoK website states that the Youth Fund “…seeks to create employment opportunities for young people through entrepreneurship and encourages them to be job creators and not job seekers.” Uwezo Fund, on the other hand, “…seeks to promote gainful self-employment among the youth and women and to model an alternative framework for financing community-driven development. It has disbursed 5.9 Billion Kenya Shillings nationally.” If you want Kenyan industrialization, you’d better advocate for the 5.9 billion Uwezo Fund and the 12.8 billion Youth Fund to be slashed and invested in something industry-oriented.