How to prevent corruption from arresting economic development

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This article first appeared in my column with the Business Daily on June 12, 2015

Corruption has always been a hot topic for Kenyans but recently it has become a national obsession. We all know that graft is deeply rooted in this country and threatens our economic development. So the focus should now be on: how can we address corruption effectively as a nation?

Firstly, all public bodies that can play a role in arresting graft should not only be more enabled to speedily discharge their constitutional mandate, but also be seen to be doing so. This is crucial because if institutions like the Ethics and Anti-Corruption Commission, the Judiciary, the auditor-general’s office, the Kenya Revenue Authority and even the Kenya Police are seen to be failing in their duty to arrest corruption and seed a culture of transparency in public office, the cynicism in Kenyans will only grow and so will the graft.

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Secondly, those suspected of corruption must be charged and those found guilty prosecuted. This has been said numerous times but Kenyans are still waiting for the day when a high profile public graft case will end with an official being prosecuted and actually facing consequences such as imprisonment. One major problem is that the language of corruption has been politicised and any allegations of graft are interpreted by the accused as witch-hunting.

This is problematic because the politicisation changes the narrative from one where graft is the focus to one where the public postulates as to whether the accused is guilty and/or why they would be “witch-hunted”. The only way this can be arrested is if both leaders allied to government and those who are not are treated in exactly the same manner and undergo the same process. Only then will it be clear that ending graft, and not witch-hunting, is the aim.

Thirdly, ­leverage on technology. We have already seen the role the Integrated Financial Management Information System (Ifmis) played in preventing the fraudulent procurement at the National Youth Service in which Sh826 million could have been stolen. Ifmis flagged the irregularities and allowed action to be taken to prevent disbursement. Kenya should build on this and look up to Chile. Research by the World Bank makes the point that Chile has created one of the world’s most transparent public procurement systems in the world. ChileCompra was launched in 2003, and is a public electronic system for purchasing and hiring. It has earned a worldwide reputation for excellence, transparency and efficiency. In 2012, users completed 2.1 million purchases issuing invoices totalling $9.1 billion (Sh924 billion). We need to study such examples.

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Finally, we have to understand what graft looks like under devolution. The truth is that with devolution, the number of public officials has increased. Therefore, theoretically speaking, there are more fingers in the public money pot and more avenues through which money can “disappear”. It is crucial that we learn the new governance structures, how counties manage and disburse their funds, and the holes that exist that facilitate both petty and grand graft.

Some of these strategies are being deployed such as technology in the use of Ifmis, but more can be done. It is crucial that Kenyans evolve beyond complaining pessimistically about corruption, believing that no improvements will be made. Rather, they should remain vigilant and determined to end corruption. Only then do we stand a chance of arresting this serious social ill.

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

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What the Treasury should do to share county funds fairly

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This article first appeared in my weekly column with the Business Daily, on July 5, 2015

It’s that time of the year again where government arms and agencies grab a piece of the pie from the Treasury. The 47 counties share the funds this way: population is weighted at 45 per cent, poverty index 20 per cent, land area eight per cent, basic equal share 25 per cent and fiscal responsibility two per cent.

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Population, poverty and land area are used to determine the cost of service delivery: the larger the population and land area, the more money is required. The poverty index acknowledges that if a county is poor, it needs more money to pull to the level of other counties. The basic equal share provides a basic, equal amount to all counties and is intended to cover administrative costs. Fiscal responsibility is meant to measure how well a county manages public finances; currently, all receive the same amount.

But is this how allocation should be determined? The International Budget Partnership (IBP) suggests that there are three key factors that ought to be considered during budget allocations: need, capacity and effort.

Need addresses part of the poverty question in that more should be given to those counties that need more, particularly if marginalised in the past. It also addresses the population density and land area as it encompasses what it will cost to deliver ongoing services to county citizens.

Capacity addresses the poverty issue and is rooted in the sentiment that poor counties should get more because rich counties are better placed to pay to meet their needs.

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Effort rewards hard work and is based on the idea that more should be given to those who work harder to advance themselves.

A central problem is that it is not clear in the current formula whether counties are receiving enough money to meet needs of their residents. This is an inherently tricky question because the “need” of counties is affected by issues such as poverty, land area and population density, but there are additional problems such as inefficiency and corruption.

So in time it may emerge that some counties are not getting what they “need” but a careful analysis is required to determine whether this is because they genuinely do not have enough money to meet the needs of citizens or if this is due to issues such as financial mismanagement and poor organisational efficiency. Perhaps to make the revenue allocation fairer the government needs to develop a system of determining what counties actually need.

As IBP points out, in South Africa they measure health facility visits and risk of disease by province to estimate health service costs. They also look at school enrolment to measure education need. Although both of these are highly correlated with population, one can argue that they get closer to meeting actual needs.

However, such measures are flawed in that in remote areas, government facilities may be visited less not because fewer people need the services, but because fewer people can get to the facilities. The fiscal capacity issue is a tricky one as it is premised on the idea that counties that can better meet own needs (through levies) should get less from the government. No county will tell the central government they want less money. Also this fiscal capacity issue may disincentivise counties from raising generation capacity, seeding a further reliance on central government.

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Perhaps focusing on effort can counter the capacity issue because effort rewards those who manage their funds well, premised on transparency and compliance. Effort also measures and rewards the percentage increase in revenue collection over time and will incentivise fiscal independence.

In short, although the revenue-sharing formula will be refined over time, it is important Kenyans begin to engage in these issues so that we can all make informed contributions to future changes in the formula.

Ms Were is a development economist; E-mail: anzetsew@gmail.com; twitter: @anzetse

How Kenya can make use of European Quantitative Easing

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This article first appeared in my weekly column with the Business Daily on June 28, 2015

In December 2013, the US Federal Reserve began to taper its quantitative easing (QE) programme and made a final $15 billion (Sh1.4 trillion) purchase in October 2014. Africa benefited from the QE—the purchase of securities from the market to lower interest rates and boost money supply—as cash was being pumped into the US and the global economy. And because yields in Europe and North America were not attractive, yield hunters with excess liquidity turned to countries such as Kenya. One can argue that is the reason behind Kenya’s Eurobond oversubscription.

Although Kenya benefited from QE, we did not strategise on leveraging QE largely because it had never occurred before. As a result, Kenya could not plan how to optimally tap into American QE. This is not the case with the European Central Bank (ECB) QE, which launched its 60 billion euro-a-month ($66.3 billion) bond-buying QE programme in March this year.

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It is important that Kenya learns from the experience of the American QE to effectively leverage (or not) the European QE. There are both pros and cons with the QE which is expected to seed inflationary pressure, weaken the euro and increase global liquidity.The pros include that excess liquidity will be looking for attractive yields again and since European markets are still depressed, emerging markets such as Kenya with relatively healthy yields will remain attractive.Analysts argue that Europe QE has brought a new round of fresh financial market liquidity to Africa.

However, the attractiveness of Africa and specifically Kenya will be hampered by the recovery of the US economy which will continue to become more attractive to investors. Kenya is still attractive, but the recovery of the US means Kenyan markets are not as attractive as they were when the momentum in the US economy was downward.

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The cons, as some analysts argue, is that European yields are going to rise as a result of Europe QE. It has been noted that there had been an upward movement in US Treasury yields when QE started in the US, thus the same is expected in the euro zone. This means that countries such as Kenya will become even less attractive for yield hunters who will have both recovering US and European economies presenting better yields. We have to present significantly attractive yields to attract investment.

An ongoing issue we need be aware as Europe QE proceeds is that because Kenya was seen as an attractive investment target during American QE, the government was able to attract investment and as a result the country has higher than usual dollar denominated debt.This poses two problems for Kenya that may be mimicked with Europe QE. The first issue is that Kenya is an import economy and typically has to sell shillings to buy dollars in order to make payments. This would not be such a serious issue if the shilling was strong, and this leads to the second issue.

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Recently, the shilling has depreciated against the dollar to the extent that the Central Bank of Kenya (CBK) raised interest rates to try and stem its free-fall. A weak shilling means repayments to dollar-denominated debt will be expensive for government. Thus, if more yield hunters come to Kenya as a result of Europe QE, Kenya may take on more foreign-denominated debt that will be expensive to repay due to a weak shilling.

Thus the combination of being an import economy coupled with a weak and depreciating shilling may halt taking on more foreign-denominated debt.

Europe QE is a mixed bag for Kenya and the strategy should reflect this. Already, the country is relying on robust economic growth (rather than raising exports, for example) to meet debt repayments. With robust growth Kenya can afford to tap into ECB QE liquidity. But without growth and with more debt, Kenya may find itself in a position where debt repayment is impossible.

Ms Were is a development economist. E-mail: anzetsew@gmail.com twitter: @anzetse

Development yet to get right fuel in yearly allocations

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This article first appeared in my column with the Business Daily on June 21, 2015

The 2015/16 Budget of more than Sh2 trillion indicates the government will raise expenditure by 17 per cent. But is the budget pro-development? A useful way of determining whether development is the focus of a Budget is looking at allocations to health, education, water and youth.Health and education are important as they invest in the country’s human capital that often drives economic growth and development. Water is important as a basic human right.

Given that more than a third of the population is youth (aged 18-35), it is important the segment get budget support to build up skills, employability and employment opportunities for Kenya to reap the youth dividend of innovation, energy and affordable labour.

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In addition to this, one should take note of the ratio between allocations and expenditure related to recurrent versus development costs; a pro-development budget has higher outlay for development.

A quick analysis of the key sectors reveals education previously got 26 per cent of the total; in this Budget that figure is 22 per cent. The last budget allocated four per cent to health; it is unchanged. Water (and regional development) got four per cent in both budgets. In the last budget, youth (alongside gender and culture) received less than one per cent, the same as this year.

Juxtapose these percentages with security (15 per cent) and infrastructure and energy (27 per cent), both of which the government openly stated are top priorities.

Although one can argue peace and infrastructure are the foundations of development, but shouldn’t the focus be promoting and defending national economic development? Because without defeating poverty, Kenya will remain weak and vulnerable, no matter how many roads and fighter jets it has.

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The 2015/16 Budget seems to say development-related sectors are becoming less of a priority for government. However, there are some steps the Budget takes that are pro-development; for example, an additional pro-youth element of the budget is rebates to corporate bodies hiring new graduates and supporting them to build the relevant skills and experience.

To qualify, employers must provide internships/apprenticeships to a minimum of 10 youths for a period of six to 12 months. Although this is commendable it may be a misplaced strategy because it doesn’t get to the root of the problem: the failure to offer relevant curricula.

Perhaps, the government should consider deploying strategies to revamp training offered in the first place.

One also has to analyse allocations to recurrent versus development expenditure and audit that spending.

International Budget Partnership (IBP) indicates that in 2013/14, the government allocated 58 per cent of the Budget to recurrent but spent 78 per cent on the same. In 2014/15, recurrent was allocated 58 per cent but IBP projects government will eat into 63 per cent of the Budget.

This year, the recurrent versus development stands at 52 per cent to 48 per cent. In short, in all the past three budgets, recurrent allocations trump development and even worse, actual recurrent is higher than what was allocated. This is a concern.

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Also note that an analysis of Q4 2014 of the budget by the Institute of Economic Affairs (IEA) revealed a failure to spend 48 per cent of the development budget.

So, the government is overspending on recurrent expenditure such as salaries but underspending on development. The government would do well to push for more austerity in recurrent expenditure.

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

Targets Kenya must aim for in Agoa renewal

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This article first appeared in my weekly column with the Business Daily on June 14, 2015

The African Growth and Opportunity Act (Agoa) is set to expire this September. Agoa provides about 6,500 African products with a preferential quota and duty-free access to the United States market. Over the past 13 years, Agoa has been important to Kenya and Africa because unlike economic partnership agreements, the Act is non-reciprocal and unilateral – preferences apply only to African imports entering the US and not US exports into African countries.Basically, African products are allowed to enter the US with limited tariffs which makes them more marketable.

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Kenya has already benefited from Agoa through textiles, spices, coffee, tea, fruits and nuts exports. The textile and apparel industry has reaped significant benefits through Agoa and contributes 85 per cent of the jobs created in the export processing zones (EPZ).

Over the Agoa period, the Institute of Economic Affairs says, the value of our exports to the US increased from $109 million (Sh10.5 billion) to $433 million (Sh42 billion) per annum. Part of that can be attributed to Agoa.Luckily for Kenya, the Obama administration seems keen on renewal. However, it is clear that the partnership will be reviewed. Already there are signals from Washington that the US is getting anxious about its economic position globally. It is in the process of negotiating the Trans-Atlantic Trade and Investment Partnership (TTIP) with the EU which will give EU products top preferential access to US markets.

The US has good reason to grant such access to the EU because the pact will be reciprocal. The negotiation of such a partnership gives clear signals that the US is looking out for itself and Kenya should watch out. Secondly, as Kenya becomes a stronger economy, the baby-sitting treatment Africa has traditionally received aimed at rectifying trade imbalances will happen less. Over the past few years Kenya and Africa have been saying, “Stop giving us aid, we’ve grown up; we’re ready for investment, trade and being treated as equals.” Kenya ought to realise that the US is listening and this new ethos of equal partnership, not preferential access, may inform Agoa’s renewal. Already, there are plans to amend Agoa to put pressure on South Africa to open its market to American poultry producers and Kenya can expect similar changes.

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So what should Kenya aim for in the renewal of Agoa? The first is to push for the maintenance of preferential access with limited or no expectation of reciprocity. This case will be harder to make now than it was 13 years ago, but the government ought to make the case that Kenya should continue qualifying for unreciprocated access.

Secondly, we should push for value addition. In the case of textiles and apparel, for example, Kenya should make the case for adding value to the skins and hides before export. This will add value to textile exports, deliver greater financial returns and support economic growth more strongly.

Thirdly, expand Kenya’s export profile. The Brookings Institute suggests that we should set up a task force to identify products for which the country has a comparative advantage in producing, and then export these through Agoa. South Africa has diversified its exports to include agricultural products, chemicals, minerals, machineries and energy-related products. Kenya can learn from its experience.

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Finally, high transport costs to the US are a non-tariff barrier translating into weak price competitiveness of our products. We need to negotiate a bilateral agreement for air freight transportation via direct flights into the US.

Were is a development economist. Twitter: @anzetse, email: anzetsew@gmail.com

How opposition parties can drive national growth

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This article firs appeared in by column with the Business Daily on June 7, 2015

All ruling parties and coalitions in healthy democracies have to regularly contend with opposition parties. While the Opposition can play a useful role in ensuring government keeps its commitments to the populace, sometimes it can degenerate into verbal brawls that politicise every issue under the sun and, not always constructively.

It would be useful if the Opposition in Kenya engaged with government in a manner that adds value to the information base of the electorate so as to build a culture of interrogation that goes beyond allegations and counter-allegations.  There are a few core roles that the Opposition could play in building a conversation that drives the country in a better direction in regards to economic development.

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One is creating a shadow Cabinet that mirrors the role of Cabinet secretaries of central government ministries pertinent to the economy such as the National Treasury, ministry of Industrialisation and Enterprise Development, ministry of East Africa Affairs, Commerce, and Tourism as well as key economy-related government bodies such as the Central Bank of Kenya.

However, under the current Constitution that is largely presidential, unlike a parliamentary system where ministers are selected from the House—which now makes the Budget—this is currently not very viable.

They can still create something akin to this. There can be a core team of advisors who critique the administration and policies of government in particular departments or portfolio pertinent to economic robustness and development. For example, what is the opposition’s advice and critique on why the value of the Kenya shilling is falling and what should be done to arrest the decline?  How can government effectively service the high levels of foreign-denominated debt it currently holds? How can government manage and eventually reduce the currently prohibitive levels of recurrent expenditure? Even basics should be addressed such as: what should government do to reduce unemployment? How can the upward pressures on the cost of living and inflation be managed? These are all biting questions to which opposition can apply itself.

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To add healthy competition to the mix, the opposition should ideally elect all the members of their shadow teams, with the leader of the opposition perhaps having the final input on who should head the teams. This can be a useful experiment that the opposition can use to test the competence of its members and determine their level of commitment and intellectual dexterity in the docket for which they contested.

Further, this is an effective means through which government can call for engagement and seek specific and constructive input from the opposition in a manner that adds value to the development of the country. The opposition can make clear suggestions to the government with input and new ideas for the benefit of all Kenyans.

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Ultimately, the point is that there is a clear role for the opposition through which they can take on the government to ensure that promises made are being kept. Creating such teams is an effective means through which the opposition can move away from the current verbal battles that tend to be deeply viral and ethnic-based. The interaction can be more constructive. It’s time to evolve, Kenya.

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

Why Africa must keep an eye on new US, EU trade bloc

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This article first appeared in my column with the Business Daily, on May 31, 2015

The European Union and the United States are negotiating the Trans-Atlantic Trade and Investment Partnership (TTIP) which should create the largest free trade zone in the world, accounting for a third of global commerce.

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Of course the question is how will this affect Africa and how can we benefit? Well, as it is currently structured, the rules of origin section of the TTIP will heighten the barriers faced by African countries exporting processed goods to the zone because at least 50 per cent of the value addition in a product must be produced in a TTIP state to benefit from tariff reductions. Such clauses discourage Africa from industrialising yet industrialisation is considered one of the most viable means of pulling millions of Africans out of poverty. Basically it’s the same old bias.

The TTIP also aims to harmonise product standards to a very high level. This is a mixed bag for Kenya which has significant horticultural exports into the TTIP zone. High standards may be a barrier at first as it will be more difficult for poor countries such as Kenya to comply with them; this may lock out African exporters. But eventually it will be of benefit for Africa to produce internationally competitive goods. Why should Africa be allowed to lag behind in the pursuit of excellence?

There are already calls for third party countries, particularly developing economies and Africa, to contribute to the TTIP and make recommendations that ensure they benefit.

But even such a position fails to realise a basic truth: the TTIP is not about creating an equitable and fair world, it’s about strengthening the Euro-American power. So while the specifics of the agreement matter, what the TTIP is truly saying is that the US and the EU are finally admitting and recognising the erosion of their control and influence over the global economic, political and social landscape. The TTIP is an attempt to rebalance the scales and make Euro-America economically all-powerful again.

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The TTIP is an indirect admission by both parties that their influence and clout has been receding in what has increasingly become a multipolar world with the emergence of competition from China, Brazil, India and even Russia in economic and political spheres. It will be interesting to see how China responds to this mega regional trade agreement and whether it leads to consent or contest of the new norms and rules. Africa should keep an eye on this.

So, how will the TTIP affect the continent? Well, we can only really begin to answer that question once we analyse the specifics but there is already one message Africa should get loud and clear: integrate economically.

The TTIP provides yet another compelling reason for the economic integration of the continent. But, as the outgoing president of the Africa Development Bank states, there are far too many regional and sub-regional funding initiatives that they can never gain critical mass and foster continental economic integration. The TTIP should provide an even deeper impetus for Kenya to push for intra-regional integration where the EAC integrates with Comesa and SADC and Ecowas. Integration should become an even stronger mission for Africa. Only then perhaps can Africa begin the process of agglomerating economic and socio-political clout in a New World order.

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