Discussion Paper No 289 of 2022 on Tracking Economic Transformation for Sustainable Development in Kenya

Abstract

Monitoring economic transformation is crucial for tracking the implementation of economic reform measures. This study aims to establish a framework for monitoring economic transformation in Kenya, with the goal of promoting economic growth and development. The framework utilizes the Distance to Frontier Methodology to construct an index, while Principal Component Analysis assesses the indicators' robustness. The key dimensions identified as critical to Kenya's economic transformation include human capital, productivity growth, macroeconomic stability, environmental conservation, essential infrastructure, and ICT and innovation. Kenya's economic transformation score between 2010 and 2020 was 0.48, indicating halfway progress in the country's economic transformation. Within the various dimensions, human capital and ICT and innovation scored highly at 0.62 and 0.63, respectively, while macroeconomic stability (0.32) and environmental conservation (0.35) had lower scores. ICT and innovation showed the most significant improvement during the period, attributed to increased government investment in digital infrastructure. These scores indicate that Kenya is still on the path towards economic transformation, highlighting the need for enacted and implemented measures to accelerate this process. The study recommends strengthening education policies, enhancing labor force contribution to GDP through industrialization and job creation, improving fiscal policies and boosting local production for macroeconomic stability, accelerating rural electrification and sanitation, promoting clean energy utilization for environmental conservation, and utilizing technology, innovation, and skills development to enhance productivity.