This article first appeared in my weekly column with the Business Daily on October 23, 2016
Last week I participated in a panel discussion at the KRA Tax Summit on tax policy and economic development. Current fiscal policy is defined by a widening gap between expenditure and revenue generation putting a spotlight on the country’s tax regime and how to expand tax collection. While there are steps that can be taken to generate more revenue more effectively, several issues have to be acknowledged first.
Firstly, Kenya’s low GDP per capita means that incomes for millions are so small that tax cannot be effectively extracted from them. Linked to the poverty issue is dependency where those who are financially able often voluntarily support friends and relatives who are not because Kenya does not have a robust welfare system through which taxes are redistributed to those who need support. Thus the reality is that those who are taxed actually have low lived disposable income which presents a moral dilemma because in other countries taxes paid provide welfare services. In Kenya not only do millions pay tax, they are also the welfare system for millions of others. These high levels of dependency can be argued to be a form of tax that Kenyans pay for living in a country with no welfare system.
Secondly, the focus on the need to expand revenue generation needs to be coupled with pressure to reduce public expenditure. The fiscal deficit is not narrowing and is above the preferred government ceiling of 5 percent. It is crucial that government recurrent expenditure and excess spending is curbed so that less debt financing is required in annual budgets.
Additionally, one cannot make plans to expand the tax base in Kenya without addressing concerns around the management of public finances. There is little incentive for Kenyans to be tax compliant because of the reality that many feel that the management of public funds is wanting.
Finally, many feel they do not receive services from government commensurate to taxes paid. So until Kenyans feels public finances are being managed responsibly and there is a clearer link between taxes paid and services rendered, tax compliance will not be a priority for many.
That said there are steps that can be taken to generate more revenue and indeed it is important that more revenue is generated to narrow fiscal deficits. A key strategy that has to be developed is structural and should target the informal economy. The aim is not to tax informal businesses but rather support their growth and development. At the moment the informal economy is defined by many micro-firms making micro-profits. I do not think the KRA has the muscle required to extract taxes from so many businesses; the effort would probably not justify the amounts extracted from the informal economy.
Thus government should develop a strategy focussed at making informal businesses more productive and profitable. Key elements of this support would be to provide the sector with proper transport, energy and water infrastructure, technical and business management training, and financing. Once informal firms are more profitable a conversation then can start about formalisation and pulling them into the tax net.
Indeed what I have found is that when informal firms grow in size and profits there is a tipping point that is reached that creates motive to formalise. The motive to formalise is usually rooted in the need to access larger investment and contracts, and grow profits more aggressively. Thus it is possible that if government supports the growth and development of informal firms, many will reach that tipping point, self-formalise and become tax compliant.
Government should not view informal businesses as mischievous tax evaders, rather they should view these businesses as future tax payers. Target the informal economy with support and the sector will not only be an important employer, it will become a key source of revenue the government is so eagerly seeking.
Anzetse Were is a development economist; email@example.com
This article first appeared in my column in the Business Daily on October 16, 2016
Last week South Africa’s President Zuma made a state visit to Kenya highlighting the relations between the two countries. Beyond the agreements that have been reached, there are key lessons each country can learn from the other in terms of fostering robust and sustainable economic growth.
One key lesson for Kenya from South Africa is education; South Africa’s literacy rate is about 98 percent, Kenya’s is about 82 percent. But the real disparities reside in tertiary education. Currently only 4 percent of Kenya’s student population make it to tertiary education; in South Africa this figure is 20 percent. In terms of leading universities on the continent, South African institutions regularly top the list. In the Times Higher Education Ranking of the top ten universities in Africa, half are South African; and none are below number six. Only one Kenyan university (University of Nairobi) features in the top ten, and at number eight.
Beyond ranking, a key concern of the Kenyan education is curriculum relevance. A report released by the World Bank this year stated that tertiary education in Kenya is characterised by a persistent mismatch of skills between what is taught and the requirements in the labour market. This is not to say that South Africa is perfect but at least there is an active, public interrogation of curriculum with active participation from government. Kenya could certainly learn from South Africa here.
A second lesson for Kenya from South Africa is manufacturing and industry. South Africa is the continent’s most industrialized economy. Manufacturing contributes about 15.2 percent to South Africa’s; while in Kenya this figure has been stuck at 10 percent. This is not to say South Africa’s manufacturing sector is perfect, but Kenya could learn about increasing diversity in manufacturing. Manufacturing in South Africa is diverse constituting of numerous industries such as agro-processing, automotive, chemicals, ICT and electronics, metals and, textiles, clothing and footwear. Kenya’s manufacturing sector is dominated by food and beverages which constitute up to 70 percent of the sector according to some estimates. Again, Kenya can look to South Africa and learn how to diversify the complexity and build the role of manufacturing in the economy.
Now let’s look at what South Africa can learn from Kenya. East Africa is a bright spot in Africa largely because region is not commodity reliant. As the biggest economy in East Africa, Kenya’s resilience against the commodities slump is an important lesson for South Africa. A senior researcher at the South African Institution of International Affairs argues that the importance of commodities to South Africa’s economy cannot be overstated as they generate approximately 60 percent of South Africa’s foreign exchange earnings through exports. Indeed, the analyst makes the point that the commodities slump poses serious economic problems for South Africa, not only because of the extensive connectedness between mining and the rest of the economy, but the financial services sector was built on mining.
A look at South Africa’s export profile reveals that the top exports of South Africa are gold, diamonds, platinum, and iron ore. The commodities slump has fundamentally negatively affected the economy particularly in managing the current account deficit. South Africa’s economy shrunk by 1.2 percent in the first quarter of 2016; juxtapose this Kenya’s robust growth Q1 growth of 5.6 percent. South Africa could learn from Kenya better buffering its economy from commodities slumps.
The second lesson for South Africa from Kenya is black entrepreneurship. Given the complex history of South Africa and the legacy of apartheid, the face of South African private sector does not reflect the racial composition of its population. In fact there is a story that some in South Africa say that if whites knew how much money they would make by ending apartheid they would have voted against it a long time ago. And while programmes such as Black Economic Empowerment sought to rectify economic racial inequality, all it seems to have delivered is a few blacks contributing to white owned companies and hopping from company to another collecting dividends. South Africa has an important lesson to learn from Kenya in building black entrepreneurship. Indeed, some estimates state that the South African economy could grow by five percent in the future if the government and private sector invest R12 billion into 300,000 black-owned small businesses.
Kenya understands the power of black entrepreneurship and as an article in the Mail and Guardian states, perhaps the most meaningful economic change for millions of South Africans can come from a focus on developing small enterprises.
Anzetse Were is a development economist; firstname.lastname@example.org
This article first appeared in my weekly column with the Business Daily on October 9, 2016
There is a little known branch of economics called Economic Geography which Kenya could pay attention to in order to garner new insights on factors that inform social and economic development. Economic Geography is essentially the study of location, distribution and spatial organization of economic activities across a region, and the implications to development. The pertinence of the field of study lies in how the development of Kenya and Africa, or the lack thereof, can essentially be seen as a function of geography. Some within this field argue that the underdevelopment of the continent is a case of ‘bad latitude’ and that income disparities within and between regions can be explained by erratic climates, poor soil, low agricultural productivity and infectious disease which then mutually reinforce each other in a ‘vicious cycle of destitution’.
Jeffery Sachs makes the point that one of the reasons Africa has such a high burden of disease is because we do not have a winter; and winter essentially makes it impossible for most infectious agents such as parasites, viruses and bacteria, to survive. As a result, countries such as Kenya face chronic onslaughts of high levels of infectious agents because of our geographical location.
If Africa were located in European climes, some argue, it would be Africa and not Europe that would have economically dominated modern history. One study even goes as far as saying that if Zimbabwe were located in central Europe, the resulting improvement in its market access would increase its GDP per capita by almost 80 percent.
A country’s geographical location also pins down its position on the globe with regards to other countries and centres of power. This determines the importance of a country in international relations that in turn affects economic development. Some argue that one of factors that fed the Trans-Atlantic slave trade is the proximity of the eastern coast of the USA and the western coast of Africa. If these regions had been further away perhaps a different area would have suffered the horrors of slavery. In Kenya a similar argument holds; the choice of Nairobi as the nexus of power by the British may have informed why regions in and around Nairobi are more economically developed than those in the outer regions such as North Eastern. Perhaps had the climate in North Eastern been more to the liking of the British, Kenya’s socioeconomic landscape would be vastly different.
Another point made by economic geography is that the sheer size of the African continent negatively affects its economic development. Africa is massive; indeed one can comfortably house China, Japan, India, the USA, Eastern Europe, Italy, the UK, France, Portugal, Germany and Italy in Africa with room to spare. The implication of this on the cost of building infrastructure and ensuring access to all points of the continent is obvious. Indeed a study argues that halving distance between Zimbabwe and all its trading partners would boost its GDP per capita by 27 percent. In short there is the argument that if Africa were the size of Europe, it would be much easier and cheaper to build infrastructure and interlink the entire continent; a factor that would catalyse economic growth and engender closer socio-political ties.
Africa’s geography has also been the foundation of its economic strengths; vast reserves of minerals and metals have been the backbone of the African economy. Sadly, these reserves have deteriorated into Africa’s ‘resource curse’ where rents from minerals in African often tend to accrue to elites and fail to trickle down to the poor. Therefore, there is an interface between geography and human behaviour. Political instability, the chronic mismanagement of funds by some African governments coupled with Africa’s position in the international division of labour also explain the continent’s limited growth and development, not just its geography.
Nonetheless economic geography provides a perspective of analysis, of which Kenya could make great use.
Anzetse Were is a development economist. Email: email@example.com;
This article first appeared in my weekly column with the Business Daily on October 2, 2016
It is no secret that Kenya has a serious unemployment problem. Kenya’s official unemployment rate stood at 9.2 percent in 2014 and a report released by the World Bank this year put Kenya’s youth (aged 15-24) unemployment rate at 17.3 percent compared to 6 percent for both Uganda and Tanzania. Unemployment rate refers to the share of the labour force that is without work but available for and seeking employment. Therefore those who are under-employed or (poorly) self-employed are not captured in this figure. If both these categories were included, the number would be much higher. Some put the unemployment rate at 40 percent.
Education is linked to unemployment in Kenya. At the moment, the education system is failing Kenyan youth miserably. In terms of primary and secondary education, FSD points out that although Kenya implemented universal primary education additional costs of uniforms and books prevent many from attending school. And even when families who are able to pay for primary school costs they often cannot afford the fees to pay for secondary school. Secondary schooling is expensive and rarely accessible in underserved areas.
The Brookings Institution points out that 62 percent of Kenyan youth aged 15-34 years have below secondary level education, 34 percent have secondary education, and only 1 percent have university education. As a study by the Jomo Kenyatta University of Agriculture and Technology (JKUAT) points out, skills are a crucial path out of poverty; indeed education makes it more likely for Kenyans to not just to be employed, but to hold jobs that are more secure and provide good working conditions and decent pay.
As it stands, Kenyan youth are barely making it to secondary school and thus are relegated to never having an opportunity to have a job that is stable and well remunerated due to the high qualification requirements of formal employment. Further, often poorly educated Kenyans are too poorly equipped to competently manage small businesses leading to low levels of productivity and profitability that characterise the informal economy. In short, the lack of access to education relegates millions of Kenyans to a cycle of poverty as they do not qualify for ‘good’ formal jobs and often do not have the skills sets to be effectively self-employed.
Sadly even of those who do attain tertiary education, most are ill-equipped to be absorbed into employment due to the disconnect between what is taught at universities and what the labour market actually requires. The JKUAT study makes the point that the commercialisation of tertiary education in Kenya has led to overcrowding in the institutions due to the increase in enrolment and this ‘massification’ policy by universities is characterised by degree programmes that do not address the job market. University administrations compromise the quality of education by accepting students without improving facilities to absorb them and seem focused on financial gain when expanding education programmes. As a result, millions of Kenyans are poorly trained and become frustrated graduates who cannot find employment.
Another report released by the World Bank this year stated that tertiary education in Kenya is characterised by a persistent mismatch of skills between what is taught and the requirements in the labour market. Kenya’s post-secondary qualifications are not adequately skilling young people, and thus many graduates are unable to find jobs due to their poor skills sets, despite the achievement of tertiary qualifications. Indeed, according to the World Bank’s Enterprise Survey for Kenya, about 30 percent of firms surveyed stated an inadequately skilled workforce as the most important constraint inhibiting growth.
Clearly the education system in Kenya is creating a mass of young people who do not have the skills required for employment or self-employment. In this failure Kenya is not only exacerbating the unemployment problem, the country is failing to leverage the demographic dividend of a young and active labour force. It is crucial that this failure in the education system is addressed if Kenya is to achieve Vision 2030.
Anzetse Were is a development economist; firstname.lastname@example.org
This article first appeared in my weekly column in the Business Daily on September 25, 2016
Last week I attended an event organised by International Budget Partnership (IBP) Kenya that analysed whether National and County budgets share resources fairly. IBP made the point that one of the key drivers of constitutional reform was to enhance the fair distribution of resources in the pursuit of equity.
IBP defines equity and fairness in the context of budget as constituting six principles: need based on the idea that people who need more should get more; capacity considers the extent to which a person/population can meet their own need; effort is rooted in the idea that people deserve more when they make more of an effort; efficiency that argues that resources should be allocated where they will be used most effectively to increase total welfare; basic minimum principle that everyone deserves at least some minimal share of resources and finally, fair process where resource allocation outcomes are decided in an open and transparent way and justifications are given for decisions.
These principles are by no means exhaustive and do not include elements such as fiscal responsibility, however IBP’s analysis of county budgets with these principles in mind revealed glaring problems. First of all, budgets in Kenya are dominated by the notion of equal share. In the case of the Constituency Development Fund (CDF) in which KES 35.2 billion were dispersed in 2015/16, 75 percent of the fund is shared equally among the 290 constituencies and only 25 percent is distributed based on the proportion of all poor people in Kenya that reside in a particular constituency. The massive portion in equal share is fundamentally problematic because the current CDF provides each geographical unit with a similar amount regardless of the size of the population in the constituency. So in densely populated areas, much less is received per person (per capita allocation) than in sparsely populated areas. An example, is Kitutu Masaba and Mwatate which both have a poverty rate of 50 percent, yet there are three times as many poor people living in Kitutu Masaba than in Mwatate.
Even in cases where proportions are used, problems emerge. Allocations are made to Level 5 hospitals which have a regional catchment area and serve as referral hospitals for more than one county, yet are managed by individual host counties. So a conditional grant was introduced to finance Level 5 hospitals. According to IBP, in 2015/16 the single criterion for allocating the grant among the 11 hospitals was the bed occupancy rate. The concern is that given the wide variation in the actual number of beds in each facility, using bed occupancy rates introduces a distortion. For example, both Meru and Nakuru had occupancy rates of 77 percent so both were allocated KES 356 million. Yet Meru has 306 beds and Nakuru, almost double this amount with 588 beds.
Finally the issue of process in budget allocation, particularly at county government level, is worrying. Political power and considerations routinely trump the fair distribution of resources at county level. In some cases, county cabinet secretaries skew allocations towards their village areas at sub county level. Thus communities with no representative in county level cabinets are financially marginalised. In some counties, budget allocations are based on lists of projects drawn up by Members of County Assemblies (MCAs). How those projects were chosen, why they were chosen, whether they are in line with County Development Plans is not clear. And allocating funds based on MCA lists facilitates nepotism and fiscal indiscipline. Further, presently at county level, little or no justifications are made as to why resources have been allocated as they have been.
Clearly there are fundamental problems with how public funds are allocated in Kenya. A key step that would make budget making a tool that facilitates equitable development is to reduce the amount allocated in equal share and rather base most allocations on well thought through weighted criteria. Further, given the mismanagement of funds especially at county level, the principle of fiscal discipline should carry considerable weight and reward demonstrated responsible use of resources.
Anzetse Were is a development economist; email@example.com
This article first appeared in my weekly column with the Business Daily on September 18, 2016
There appears to be an on-going assumption that publicly funded infrastructure investment will spur economic and social growth and development in Kenya. In fact, the government is so certain of this that they are getting into substantial debt in order to finance infrastructure projects. Indeed according to the International Budget Partnership, Kenya’s 2016/17 national budget 30.4 percent of total gross expenditure was allocated to energy, infrastructure and ICT. Infrastructure investment in this article refers primarily to investment in energy and transport infrastructure.
There are several arguments that support massive infrastructure investment. The first, no brainer argument is that Kenya’s and indeed Africa’s infrastructure needs are so dire that any investment in the sector is bound to have positive effects. According to the Africa Infrastructure Country Diagnostic, the continent’s infrastructure spending needs stand at about $93 billion per year. Clearly, there is a need for this investment.
Additionally, the lack of infrastructure can be argued to be eating into economic growth. Some estimate that the negative effect of poor power supply alone reduces per capita growth by 0.11-0.2 percentage points in Africa. Further, other studies show that infrastructure investment increases the growth potential of an economy by increasing the economy’s productive capacity by lowering production costs or providing opportunities for human capital development for example.
Infrastructure is also tied into social development. According to a report by European Commission, good quality infrastructure is a key ingredient of sustainable development because countries need efficient transport, energy and communications systems. So some argue that not only does infrastructure boost economic growth, it can lead to a better quality of life for citizens as well.
This all sounds very impressive but massive and aggressive infrastructure investment carries sizeable risks. According to the London School of Economics emerging research seems to suggest that the magnitude of infrastructure’s contribution (to growth) display considerable variation across studies. So the notion that infrastructure is directly linked to or even engenders economic growth is not cast in stone. Indeed recent literature tends to find smaller effects on links between infrastructure investment and economic growth than those reported in the earlier studies. So perhaps estimates that have previously linked infrastructure investment to economic growth and development may be overstating the causal effects.
Further, it is assumed that government is making the right infrastructure investment decisions for Kenya and that the contracts are being given to the right people. The Economist makes the point that even in countries like the USA public investment is wasted on inflated contracts with politically connected suppliers. The same magazine also makes the point that even in countries like the USA whose public financial management is considered to be more transparent with lots of bureaucrats to conduct cost-benefit analyses, identifying the most beneficial investments is hard. These problems are magnified in countries like Kenya where there is limited information on how infrastructure projects were chosen, how the cost benefit analysis was done and how contractors were or will be selected.
Finally, the manner in which the infrastructure plans are implemented will inform if Kenya will truly gain from this investment drive. A study by FONDAD argues that in order for infrastructure investment to truly stand a chance to create economic and social development shifts, they have to be done with great economic scrutiny at the selection stage, integrity in procurement, efficiency in implementation, effective post-completion management to ensure maintenance and efficient operation and, continuing accountability to users. Does Kenya tick all these boxes?
It is clear that infrastructure investment is a priority for government and the continued emphasis in government spending in this docket will continue. Bear in mind that, as KPMG states, a significant portion of these infrastructure projects are debt financed. It is therefore crucial that Kenyans are cognisant of the need for infrastructure investment but risks associated with aggressive infrastructure investment, and direct the warranted scrutiny at related projects.
Anzetse Were is a development economist; firstname.lastname@example.org
This article first appeared in my weekly column with the Business Daily on September 11, 2016
The growth in the use of mobile phones in Kenya and indeed Africa has created a mobile economy that is estimated to have generated 6.7 percent of GDP in Africa in 2015. According to GSMA, an association that represents the interests of mobile operators globally, mobile technologies and services contributed about USD 150 million of economic value on the continent. Closer to home, mobile subscriber penetration in East Africa hit 46 percent in 2015 and smartphone adoption is due to hit 54 percent in 2020. Kenya is well aware of how access to mobile phones has deepened financial inclusion through the provision of access to financial transactions. Indeed a study by CGAP, an organisation that seeks to promote financial inclusion, indicated that in Kenya, mobile money transfer has overtaken even informal financial groups as the most used financial service. CGAP found that even in more rural areas, 61 percent of people were registered mobile money transfer users while only 51 percent and 36 percent were using informal financial groups and banks respectively. Indeed by 2014, 58.4 percent of all Kenyan adults had a mobile account and approximately 90 percent of all senders and recipients of domestic remittances used a mobile phone.
In my view the emergence of the mobile economy and specifically mobile money, mobile banking and mobile lending intersects with the informal economy and indeed enables this section of the Kenyan economy. About 82 percent of Kenyans in employment are employed by informal businesses and organisations across the country which indicates that most Kenyans seem to derive their livelihood from the informal economy. And although the informal economy is not without its challenges, such as serious productivity problems, it is an important part of the story of Kenya’s economy.
There are three ways through which the mobile economy intersects with and enables the informal economy. The first is through facilitating financial transactions that enable informal businesses to receive payments for goods and services from clients and customers. Many informal businesses have a mobile money facility through which they can receive payments in a more secure and convenient manner than cash transactions.
Secondly, mobile money allows informal businesses to communicate with and make payments to suppliers and distributors. This allows informal businesses to manage and coordinate activity and transactions with numerous parties in their value chain across the country. It would be useful for more research to be done on this issue in order to better understand the extent to which the mobile economy has informed improvements in efficiency and productivity in informal firms and how this can be leveraged further.
Finally, the mobile economy has created an avenue through which informal business people can apply and qualify for loans through their mobile phone. Indeed, it is not unheard of in Kenya for informal businesses in large informal markets to borrow money at the beginning of the business day to purchase stock, and pay the loan off at the end of the day after the sales of the day are complete. Mobile lending offers a convenient alternative to travelling and applying for normal bank loans, particularly for businesses operating in more remote areas far away from brick and mortar banking halls. Further mobile lending may allow informal business people who may not qualify for loans from mainstream banks, to get access to mobile micro-loans thereby boosting informal business activity.
Perhaps the mobile economy, and specifically mobile money and mobile lending, intersect and enable the informal economy effectively because it accommodates informal financial behaviour. However, there is clearly a need to better understand the relationship between the mobile economy and informal economy. Of particular interest would be on how mobile tools and applications can be used to improve the productivity and profitability of informal businesses.
Anzetse Were is a development economist; email@example.com