Kenya lags behind sub-Saharan Africa in poverty reduction, as uneven wealth distribution widens the rich-poor gap. This is despite Kenya’s gross domestic product (GDP) expanding by an average 4.8 per cent since 2000.

This additional wealth generation has benefited only a small section of the population, leaving millions of low-income earners trapped in cycles of poverty.

A new development index places Kenya fourth in the region in transforming the benefits of growth into wellbeing for citizens, despite the country’s economic and political clout.

Ethiopia on top

Ethiopia is ranked top in the index that seeks to go beyond the use of GDP in measuring economic wellbeing, with Rwanda emerging second and Tanzania third.

The rankings were presented in the latest edition of the Sustainable Economic Development Assessment Index (SEDA), published by global think-tank Boston Consulting Group.

“Leaders around the world increasingly recognise that GDP alone cannot give a full picture of a country’s performance, as the wellbeing of the citizens is an even more important measure,” the study reads in part.

Large African economies like South Africa, Nigeria, Angola and Kenya scored poorly in transforming this wealth into improved wellbeing for their citizens, with smaller economies like Rwanda and Sierra Leone scoring higher in recent progress towards alleviating poverty.

The index defines wellbeing using three elements. The first is economics, which gauges a country’s performance in generating balanced growth through income, economic stability and employment.

The second is investments in sectors like health, education and infrastructure that boost economic growth and wellbeing.

The third is sustainability, which refers to environment and social inclusion measures that factor in indicators of income equality, civil society and governance.

These indicators were then collated to generate scores of a country’s current level and recent progress in wellbeing.

The findings released last month are the latest evidence of the uneven wealth distribution model that has seen many low and middle-income Kenyans question the country’s economic growth data.

The World Bank early this year said Kenya’s growth is volatile and lacks inclusivity. The volatility has been attributed to external (trade or global commodity prices) and domestic factors (election cycle or drought), with the latter having a larger and more ruinous impact on the economy.

The economy has further been affected by the stagnation of what should be the country’s growth engines – manufacturing and agriculture.

The contribution of agriculture to the country’s GDP has shrunk from 26.5 per cent in 2006 to 22 per cent in 2014. Over this period, the contribution of manufacturing to GDP also shrunk, stifling competitiveness, productivity and innovation. As a result, the economy has been unable to increase the number of jobs available for its growing skilled and educated population.

When stacked against comparator countries like Senegal, Ghana, Tanzania and Burkina Faso, Kenya’s youth unemployment stands at 17 per cent, double the figure in Tanzania and thrice as high as in Burkina Faso.

The country’s unemployment levels have, however, fallen marginally from 46 per cent in 2006 to 42 per cent in 2013.

National savings

Further, data from the Kenya National Bureau of Statistics indicates that only one in four people working in formal employment earn more than Sh50,000 per month. This lowers the amount of available national savings required to fuel economic growth.

Ethiopia, on the other hand, has managed to not only grow GDP at an impressive 10.9 per cent over the last 15 years, but leads the continent in translating this growth into wellbeing for its citizens.

The World Bank estimates that the country has been able to cut the population living on less than $1.25 (Sh125) a day from 56 per cent in 2001 to 31 per cent in 2011.

This poverty reduction has simulated foreign direct investment that is slowly turning Addis Ababa into the economic centre of the region.

It has also put Ethiopia on course to attain its plan to achieve middle-income status by 2025, beating Kenya to become the regional economic powerhouse that improves the living standards of its citizens.

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Many developed countries are struggling to convert economic growth into well-being improvements for citizens – trailing large developing countries

A new report by The Boston Consulting Group finds that many leading developed countries are not effectively converting their economic growth into well-being improvements for their citizens. Using BCG’s measure of well-being, the research also finds a clear and measurable link between financial inclusion – access to basic financial services such as a bank account – and national well-being. The report, titled The Private-Sector Opportunity to Improve Well-Being: The 2016 Sustainable Economic Development Assessment, was released on 21 July. It uses the example of financial inclusion to highlight the critical role private-sector innovation can play in improving living standards.

The findings are based on the firm’s latest study of worldwide economic growth trends using BCG’s Sustainable Economic Development Assessment (SEDA). The fact-based, comprehensive analysis measures the relative well-being of 163 countries through ten key areas, including economic stability, health, governance, and environment. SEDA scores countries in two ways: the current level of well-being and recent progress in well-being from 2006 to 2014. It also assesses how countries convert wealth and growth into well-being.

Changing Global Dynamics as World Leaders’ Progress Slows

The report underscores the growing challenges many large developed countries face. Among the key findings:

• The United States’ performance in converting both wealth and growth into well-being is below par globally, while Germany’s performance is above par on both counts. The UK’s strong performance in converting wealth into well-being is being threatened by its recent subpar conversion of economic growth into well-being improvements.

• A  European divide: Among countries in Western Europe, those with high current levels of well-being (Austria, Denmark, Finland, Germany, the Netherlands, and Norway) are making greater progress than those with low current-level scores (Cyprus, France, Greece, Italy, Malta, Portugal, and Spain), particularly in employment and education. These countries, concentrated in southwest Europe, are performing particularly poorly in employment and are falling further behind the rest of the world in that area.

• Central and Eastern European countries that have recently joined or are in the process of joining the EU have made strong gains in sustainability measures, which include income equality, civil society, governance, and the environment

• China is converting wealth into well-being at a rate slightly above par and – remarkably, given its very high growth rate – is converting growth into well-being at par. China continues to score low on the environment, however. India also produced strong recent progress improvements but converted its strong growth into well-being at a rate slightly below average. India also leads the pack in progress on financial inclusion, as nearly 200 million people have gained access to financial services.

• Peru has outstripped Brazil’s recent progress in well-being with strong gains in employment and education.

• Ethiopia holds the top spot when it comes to recent progress in well-being. Ethiopia’s performance is emblematic of gains in sub-Saharan Africa as a whole

“The G20 finance ministers’ meeting in China this weekend is taking place amid concern about low global growth – even stagnation – so making the most of what you have is going to be crucial,” says Douglas Beal, a BCG partner and a coauthor of the report. “SEDA’s two measures that look at the conversion of wealth and growth into well-being provide a more meaningful perspective than GDP alone can offer on how well countries are doing in that regard. Changes in the relative performance of countries are making the old ‘advanced’ and ‘developing’ labels obsolete – some countries in Europe are stuck, while others around the world are making significant progress.”

The Importance of Financial Inclusion

The 2016 SEDA report took a close look at the issue of financial inclusion. The analysis found that the strong link between well-being, as measured by SEDA, and financial inclusion existed even when controlling for income. This means that among countries with the same income (GDP per capita) level, those with higher levels of financial inclusion are likely to have higher well-being levels.

That finding is particularly relevant now, as G20 finance ministers discuss an ongoing agenda that includes the importance of financial inclusion. Nobel Peace Prize Laureate Muhammad Yunus remarks in his foreword to the report that BCG’s analysis sheds light on the implications of the 2.5 billion people who are cut out of the financial system.

The report notes that financial inclusion is not an issue that is confined to the developing world. Though the United States’ overall rate of financial inclusion increased from 88% in 2011 to 94% in 2014, some US states have more than double the national unbanked rate of 6%. Louisiana and Mississippi, for example, have lower financial inclusion levels than Greece.

“We have found a clear and measurable association between financial inclusion and well-being” says Enrique Rueda-Sabater, a BCG senior advisor and a coauthor of the report. “The private sector can make a significant improvement in people’s lives. But to make meaningful progress in this area, companies must pursue financial inclusion in their core business, not just as part of their corporate social responsibility strategies.”

Weak Infrastructure Limits Financial Inclusion

SEDA also finds a strong association between financial inclusion and three SEDA dimensions – civil society, governance, and infrastructure. The role of infrastructure is particularly noteworthy – BCG’s research finds that countries with poor infrastructure are struggling to expand financial inclusion.

The study also assesses the significant impact of improvements in financial inclusion for women around the world. Giving women control over family finances results in increased household spending on food and education. And expanding access for women is good business, as research has shown that women have lower default rates than men.

The Foundations for Financial Inclusion

The report finds that two factors are critical to improving financial inclusion: a regulatory structure that provides safeguards but allows innovation and a solid infrastructure, including communications networks and payment systems.

With those two elements in place, private-sector innovation flourishes. The pace of innovation is reflected in a surge in investment in financial technology firms, from $4 billion in 2011 to $22 billion in 2015. And new technology is allowing the development of novel business models that allow companies to make money delivering financial services to previously unprofitable customer segments.