Why turning Kenya into a construction site won't deliver lasting economic returns

In today’s article, we turn our eyes into a very interesting observation made by Mohammed Hersi, a well-known figure in the hospitality and tourism sector on his official X account. In the interest of full disclosure, I do not know and have never met Hersi personally. My knowledge of him is based on his professional contribution on policy questions, trends and issues in his sector, mainly through his social and professional media accounts.

In a post this past Monday, December 16, Hersi wondered why there are so many developers across the country building apartments and petrol stations and no investors putting up factories to generate much needed employment. Citing the case of Links Road in Mombasa, he notes that four petrol stations have been put-up within a span of 12 months along the short stretch.

This case is not peculiar to Mombasa only. For example, the section between Lukenya Group of Schools along Mombasa Road and Kathome shopping center, after Kyumbi junction on your way to Machakos town, there are at least four petrol stations that have been put up also within the last nine months. The only other types of business Hersi highlights that are attracting investments are pubs, liquor stores, restaurants, exclusive spars and salons, and car dealers/showrooms.

To complicate matters further, it is not only private capital that is being channelled only to the housing sub-sector.

The Affordable Housing Levy diverts billions from employee pockets each month to build similar apartments for the so called hustlers. President Ruto this week insinuated that his vision to the African Singapore will be realised by turning the country into one large construction site. Indeed, hours before writing this article, the President handed over keys to 4,536 housing units in one of his construction site, the Mukuru Boma Yangu Estate phase two.

From this context, three logical questions arises: Why would the President be dancing and preaching the miracle of building houses in the economy on the one hand, and on the other an accomplished professional and industry insider is wondering what would drive such a massive biased investments into only a single sub-sector and not industries that offer better returns at the macroeconomic level? Why the contradictions? Is it sustainable?

For broader context, Nairobi County has been at longer heads with a number of organised resident groups within middle and high income residential estates for quietly vacating controlled development policies in favour of high-rise Apartments. Areas like South C, Nairobi West, Kilimani, Westland, Parkland, Spring Valley, Lavington, Kileleshwa and Loresho have suffered the most from this construction boom.

This trend provides clear pointers to a consumerism leaning model of economic growth. However, before we explore the benefits and dangers of a consumerism driven economic growth, intuition leads us to potentially other underlying factors that may explain such a huge allocation of capital into such a small segment of the economy.

What we are witnessing, including the Affordable Housing Scheme itself, are covert projects to clean corruption, wash-wash  and other illicit money flows. In such a scenario, the so called investors are there not to transform any industry or drive national production, but to legitimise illegal or unethical wealth from underhand deals at night.

However, for arguments sake, let us a assume that the ongoing constructions are not as a result of dirty money but are legitimate investments in the economy. Does that then mean there are no other investment opportunities in the country?

Economists acknowledge that consumer spending or consumerism is a major component of Gross Domestic Product (GDP), drives demand, creates jobs and may fuel production, commonly known as the Keynesian model of economic growth. For high income countries, this may sustain growth in the short and medium term. In low income countries, the risks of heavy reliance of consumer spending as a strategy to grow the economy are much higher.

Alternative persuasive evidence exist that relying on consumerism as a strategy for growth creates significant long term issues. These includes environmental strain, household debt problems, inequality and resource depletion. All these factors are noticeable in many parts of the country going through the construction binge.

For instance, majority of the estates within Nairobi with high concentration of the construction activities are suffering from strained utilities like sewerage, water, electricity and traffic congestion. Property values and rental returns in those areas are also on the downward trend.

There is considerable economic evidence that overemphasis on construction can harm the economy in the long term mainly due to five factors. One, it leads to misallocation and waste of resources. This is often due to excessive concentration of financial capital into construction beyond the adaptive capacity of the economy. The net effect is over-expansion of the construction sector relative to other productive sectors of the economy, leading to a glut in supply and eventually waste. Official data has clear indicators on this glut in the market for both office and living spaces in many parts of the country.

Two is that over-construction eventually suffers from the ‘derived demand’ problem. This is based on the fact that demand for housing or construction does not exist on its own, but rather it arises out of a need to support other economic activities like factories, offices, transport of goods among others.

For example, do the Affordable Housing Scheme projects coming up in many parts of the country have a corresponding underlying economic activities to support them? In Embu County, there is a government housing scheme with several units that have remained unoccupied for over five years now. In Machakos town, the government housing scheme that the President launched last month, he has himself launched it more than three times before, since his days as the Deputy President in the Jubilee Administration. Many units remain unoccupied to date.

Without development in productive industries to use the infrastructure, construction leads to low returns on investment, potentially harming GDP in the long run. Three is that over-construction can generate inflationary pressure, especially on cost of inputs like labour and materials. In effect, this affects availability of financial capital for other uses.

Four is the problem of lack of diversification in the economy. Ultimately, this leaves the economy vulnerable to the inherent cyclical fluctuations and risks of the construction industry. For any economy, industrialisation is a necessary ingredient for a nation to transition from a low-to high income status. On account of this alone, President Ruto’s road to Singapore sounds hollow and an ignominious misadventure.

Finally, over construction leads to over dependence on imports. This is because if a country builds infrastructure without developing local industries, then it must import every other thing it needs, including construction materials themselves. This constrains foreign exchange reserves and distorts balance of payments.

Does it then surprise anyone why retailers and second hand clothe dealers compete with the few manufactures in the country for dollars in the forex market? Which country in the world has developed through such a model?