A. Sanghi and D. Johnson data from 130 countries and explicitly assesses the long-term behavior of income distributions, tracking demographic and educational changes over time.

**Wealthier households in Sub-Saharan Africa benefit from demographic changes and wage changes across sectors** The wealthiest 40 percent of households will have higher per capita income growth from demographic changes, but the poorest 40 percent of households will see no benefit. The poorest 20 percent of households will experience slower per capita income growth when demographic changes cause changes in relative wages across sectors. Upper middle income households —those between the 60th and 80th percentile of the income distribution —will gain the most from the wage changes, earning the fastest per capita income growth<sup>8</sup>

**Poorer households are hurt by changes in food to non-food relative prices, but gain overall from Chinese slowdown and rebalancing** Changes in food to non-food prices leave the poorest 40 percent of households worse off: per capita income growth is 2.9 percent compared to the 3.07 percent if China had continued to grow at seven percent. But thanks to greater Chinse consumption, the bottom 40 percent will increase their incomes; the number of people living in extreme poverty will fall by an additional 4.04 million people. The Chinese slowdown scenario increases poverty initially, but the rebalancing reduces poverty enough for an overall drop. More important, the bottom 40 percent in Kenya will see a per capita income increase of 2.7 percent, the highest in Sub-Saharan Africa (Lakatos _et al_ 2015).

# **3 Foreign Direct Investment in Kenya**

Kenya performs poorly in attracting foreign direct investment (FDI) given the size of its economy. Despite a larger economy, Kenya attracts even less FDI than Uganda and Tanzania. Figure 14 shows Kenya’s net inflows of foreign direct investment (FDI) from 1980 to 2014. Kenya’s investment levels dropped to less than 10 percent of GDP near 2000, but has since returned to levels experienced in the mid 1990s. Corruption, poor infrastructure, and poor investment climate have reduced foreign direct investment flows compared to pre 1980 levels. In 2007, Kenya received US $729 million in FDI, but post-election violence in 2008 cut down flows to only US $96 million. Kenya has since recovered, but it only recently surpassed its former peak. Figure 15 shows Kenya’s FDI as a percentage of GDP. The average FDI to GDP ratio between 1980 and 2014 was 0.54. When compared with Kenya’s domestic savings rates, Kenya’s FDI signals a vulnerable current account because of weak domestic savings and investment. Figure 16 shows Kenya’s gross domestic savings as a percent of GDP. From a peak of 22 in 1994, Kenya’s gross domestic savings rate dropped to only 4 percent in 2014. Kenya’s savings rate is much lower than the average in Sub-Saharan Africa of 20.4 percent. One reason for the low savings is Kenya’s large scale infrastructure projects: the Standard Gauge Railway, Lamu berths, and Northern Corridor Integration Projects. Kenya’s high fiscal debt puts it at a sovereign risk level of B1 (Moody’s 2015; KPMG 2013).<sup>9</sup>

> 8

> 9AAA is least risky and D is most risky.

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