Month: May 2015

Why a focus on wealth is killing Kenya’s development

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This article first appeared in my column with the Business Daily on May 24, 2015

Kenya has essentially been capitalistic since its inception as a nation-state in 1963. At no point did the country seriously dabble with socialism or communism like some of our east African neighbours. Many are of the view that this ultimately did Kenya good. After all the country is the economic forerunner in the region and a major player in the continent.

To be honest, this thinking is bolstered by the fact that almost every nation on earth has bought into the notion that capitalism is the best economic system humans have devised so far in our history.

capitalism-without-romance(source: https://www.aei.org/wp-content/uploads/2009/12/capitalism-without-romance.jpg)

Some regimes may be more autocratic than others but a core belief in capitalism persists.But has this mass buy-in into capitalism led to a focus on wealth rather than development?

Is economic power a necessary and sufficient precursor to or foundation for development? Further, as the World Bank asks: Is the goal of development merely to increase national wealth, or is it something more subtle?

In Kenya, accumulating wealth has become the life goal of many citizens. So ingrained is this notion that it no longer matters whether one has beaten, robbed or stolen one’s way into wealth. As long as one is wealthy, respect, power and access to opportunities often follow.

The obsession with wealth fuels corruption at both the macro- and micro-level because individuals want to save money or make money by dabbling in what is essentially immoral and/or illegal behaviour. The mantra seems to be “accumulate” rather than “develop”.

Interestingly, even if one is not willing to engage in corruption to accrue wealth, a focus on money alone can lead individuals to sacrifice development for the sake of financial gain.

Money-Obsession(source: http://www.dumblittleman.com/wp-content/uploads/2014/04/Money-Obsession.jpg)

Behavioural ethicality

Studies that explore the subconscious link between money and corruption called behavioural ethicality, illustrate this point. One study by Harvard University found that even subtle exposure to the concept of money, in and of itself, may be a corrupting influence that leads to a focus on financial accumulation rather than ethical good.

This may be explained by the possibility that money triggers a business decision mind-frame and a focus on a cost-benefit analysis where benefit is defined in purely financial terms.

However, in an underdeveloped country such as Kenya, sometimes long-term good may be more expensive in the short term, fail a financially focused cost-benefit analysis but have greater developmental benefit. For example, in order to build capacity to craft basic infrastructure for itself, Kenya may need to make the short-term costly investment of integrating inexperienced engineers into infrastructure projects. This may be expensive and inefficient in the short term because it takes time and money to ensure technical skills transfer truly happens, but it would ultimately be for the greater good of the country as we will have the home-grown capacity to manage and implement projects.

Girl's hands holding globe --- Image by © Royalty-Free/Corbis

(source: http://studentsforliberty.org/wp-content/uploads/2013/01/Africa-Post.jpg)

 A focus on financial efficiency alone often makes government cast aside the greater good achieved from strategies that are costly in the short term but push the country up the development path in the long term. The government tends to adhere to selecting the most financially “efficient” short term solution. The point is not to encourage poor investment decisions but rather highlight that a focus on money and accumulation alone is not serving the country well.

As it stands, the current fixation on money is doing two things: First, exacerbating the culture of corruption at both institutional and individual levels and, second, compromising the nation’s long-term development in order to ensure short-term financial gains.It is time the country grappled with how wealth can used to pursue the goal of development rather than being the end goal itself.

Ms Were is a development economist. Email: anzetsew@gmail.com, twitter@anzetse

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Burundi should ask Kenya about the cost of chaos

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This article first appeared in my column with the Business Daily on May 18, 2015

Last week, there was a coup attempt in Burundi linked to President Pierre Nkurunziza’s bid for a third term.

For heaven’s sake, has the region not learnt that, one, there is a delicate political balance underpinning regional stability and, two, political stability is a prerequisite for economic development? Whether one agrees with Mr Nkurunziza or not is not the issue but, as usual, the region and particularly the people of Burundi will accrue the collateral damage of this political instability.

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(source: http://i.telegraph.co.uk/multimedia/archive/03304/bur-01_3304500b.jpg)

Academic research has established that recurrent episodes of social unrest affect households and their incomes, and that political instability plays a large role in economic underdevelopment. Burundi should dig a little and look into all the research done on how Kenya’s post-election violence (PEV) cost the country, not only in lives, but also economically.

One can argue the economy has not fully recovered. In fact, it would be useful to do an audit of just what PEV cost the economy as an illustrative example for the region. According to The Economist, PEV led to financial losses of approximately Sh22 billion (£145 million), around one per cent of the country’s gross domestic product. Further studies estimate PEV had long-term effects and over the period 2007-2011 per capita GDP was reduced by an average of Sh8,200 per year, which is massive considering Kenya’s per capita averaged about Sh94,000 during the period.

Another study suggests that in 2009, the GDP was estimated to be about six per cent lower than if the chaos had not occured. Further, in 2007 (before the violence) foreign direct investment (FDI) stood at Sh70 billion and dropped almost 75 per cent to Sh18 billion in 2008. The latest figures (2013) put FDI at Sh50 billion. Clearly, Kenya is yet to fully recover.

Studies strongly indicate economic growth for countries with a high propensity of government collapse is significantly lower; even frequent Cabinet changes can reduce the annual real GDP per capita growth rate by 2.39 percentage points according to studies. Internal political instability (not associated with outside threats like terrorist groups) is particularly harmful through its adverse effect on total factor productivity growth and by discouraging physical and human capital accumulation. More specifically political instability cost Kenya international trade and reduced the country’s capacity to earn foreign exchange, especially in the cut-flower sector.

poor trade

(source: http://310627192.r.worldcdn.net/media/k2/items/cache/3f396c7768363e7b7d9739b221e18487_XL.jpg)

During the PEV, the short-term effect was a 24 per cent reduction in flower exports, a 38 per cent reduction in exports for firms in conflict-affected areas and a 50 per cent increase in worker absence. However, there were long-term consequences as well in that flower exports to the EU went from a growth rate of approximately three per cent annually to minus 2 per cent, a loss of Sh4 billion in 2010 alone.

The reality is that the relatively brief PEV led to significant shifts with long-term repercussions for international trade for the country; in the cut flower industry there was a decline in trust in Kenya on the part of the EU.

In short, it is clear Kenya and the region simply cannot afford political instability. It will be interesting to see how the attempted coup in Burundi plays out economically, but it will not be good news.

Ms Were is a development economist; email: anzetsew@gmail.com; twitter: @anzetse

How rampant graft increases inflation rate

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This article first appeared in my column with the Business Daily on May 11, 2015

There appears to be an on-going assumption in the country that once oil prices drop, inflation drops as well. However, despite lower oil prices, inflation hit an eight-month high in April.

Data from the Kenya National Bureau of Statistics shows that inflation rose to 7.08 per cent from 6.31 per cent in March, pushing close to the upper limit of the 2.5 to 7.5 per cent preferred inflation bracket. In fact, despite low oil prices, the cost of living measure increased for three months in a row since February.

Clearly, other factors apart from oil prices inform inflation rates. However, there is one pervasive factor rampant in the country that informs inflation that often is not associated with it: corruption. Corruption here refers to the misuse of public power for private gain where individuals engage in a non-transparent and illegal activity; in short, the institutionalised personal abuse of public resources.

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(source: https://tnwinc-thenetworkinc.netdna-ssl.com/wp-content/uploads/2013/07/at-risk_states-700×300.jpg?a4ac92)

Several studies have shown a significant positive relationship between corruption and inflation particularly in countries with higher graft levels such as Kenya. One study reveals that corruption pushes up inflation. How? Well, if corruption persists it tends to increase government spending. This encourages more rent-seeking, which can trigger a budget deficit and an increase in money supply — and thus push up inflation.

Increasing government spending is one of the direct effects of corruption on inflation rate. So it is important to consider that, as analysts point out, an increase in spending and budget deficit causes money supply to increase and probably hyperinflation. Kenya qualifies both in terms of ballooning government spending and budget deficits — both of which increase through corruption and cause an oversupply of money leading to inflation.

To make matters worse, some studies indicate that inflation can encourage further corruption. The surveys have found that rises in prices increase corruption as the applicable purchase price in public procurement becomes ambiguous. The reasons why are not clear although one can postulate that inflation lowers currency value and thus more corruption is required to accrue the equivalent value of money for the participants. Further, inflation makes it easier for corruption to occur because public officials can invoice more than normal.

inflation

(source: http://sproutmoney.com/files/2014/04/inflation.jpg)

The reason why inflation is so important in developing countries such as Kenya is rooted in the reality that high inflation is akin to a tax on the poor. Indeed the World Bank makes the point that when low-income households are exposed to high inflation, they often have no choice but to cut down on food or other expenses, many of which are vital, such as school fees or health care.

Given the relationship between corruption and inflation, it is a travesty that factors that are within the control of humans — namely, the choice to shun corruption — continue to push up inflation to the detriment of Kenyans, particularly those in the low income band. It is unjust that the poor shoulder the burden of the personal greed of public officials.

In short, it is pretty obvious that there is strong evidence that elucidates the harmful effects of corruption on the economy. The relationship between corruption and inflation adds yet another compelling reason to rein in this monster for the benefit of all Kenyans.

Ms Were is a development economist. anzetsew@gmail.com, twitter: @anzetse

Kenya’s absorptive capacity problem: Can we implement what we plan?

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This article first appeared in my weekly column in the Business Daily on May 3, 2015

A fourth quarter analysis of the Budget by think-tank Institute of Economic Affairs (IEA) reveals that the government failed to spend 27 per cent of its annual budget. The main challenge is the low uptake of the development budget — only 52 per cent of this budget was utilised by the end of Q4. It further reveals infrastructure-related ministries are the slowest spenders.

IEA makes the valid observation that slow disbursement, especially of donor funds, is a core problem as only 51 per cent of donor-financed development budget was released by the end of the financial year. However, there is a deeper story to this under-spending — low absorptive capacity.

Absorptive capacity here relates to the macro and micro-constraints that countries face in using resources, in this case money, effectively. Although donor disbursement may be one issue, we still have to ask: does Kenya have the technical, intellectual and systems-related infrastructure, expertise and culture to competently implement all the development projects we have planned?

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(source: https://technopreneurship.files.wordpress.com/2007/04/absorptive-capacity.gif)

Take a look at some figures. Kenya’s current ratio of engineers is 1: 6,328, nearly three times the ratio of 1: 2,000 recommended by UNESCO. In short, in order for Kenya to meet its development needs in infrastructure, it has to triple the number of engineers. Kenya is getting into a great deal of debt to finance infrastructure in particular. Further, a preliminary look at this year’s Budget reveals that energy, infrastructure and ICT will take 16.6 per cent of the Budget. But does Kenya have the capacity to implement these ambitious plans?

It appears even if every engineer were employed to work on infrastructure projects, there would be a shortfall. And this is assuming all engineers trained are competent enough to manage the projects. So what is the government’s answer to this? Outsourcing ad nauseum. But there are serious problems with chronic outsourcing. Firstly, it hides Kenya’s skills deficit and, secondly, it pumps money out of the country.

The first point is obvious: if Kenya continues to rely on others to build our roads, the country will continue to lack the skillsets and capacity to competently build roads by itself. But since the roads are being built, the country doesn’t truly feel the weight of incompetence in this area and therefore does not have a sense of urgency to rectify this problem.

Secondly, companies implementing projects locally make a profit, sometimes after loaning Kenya the money to do the projects in the first place. Essentially Kenya is borrowing money from a country like China then paying it to do the project. This makes no sense because the country is getting into a vicious cycle as follows: Kenya doesn’t have the capacity to implement large-scale projects → Government outsources but fails to ensure skills transfer → Hides/ exacerbates the skills deficit → Kenya doesn’t have the capacity to implement large-scale projects.

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(source: http://www.bloomengine.com/cycles/vicious-cycles-logo.gif)

The government should use development projects led by foreigners as structured training opportunities for newly qualified professionals as well as incorporate seasoned professionals into the management structure of projects. Kenya cannot continue to so fundamentally rely on outsiders to do the basics for us such as building roads. But sadly, the government seems happy with outsourcing all the large-scale projects. It is time Kenya faced the absorptive capacity problem squarely and developed a clear strategy to foster sustainability.

Ms Were is a development economist. Email: anzetsew@gmail.com; twitter: @anzetse