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.

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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.

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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.

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(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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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.

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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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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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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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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

The economics of ‘Afrophobia’ in South Africa

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This article first appeared in my weekly column with the Business Daily on April 26, 2015

Over the past few weeks, Africans have been victims of what can only be termed brutal and bestial attacks at the hand of some black South Africans. The affected were black Africans making many on the continent refer to the phenomenon as ‘Afrophobia’ rather than xenophobia.

Interestingly, economics is at the heart of the attacks; some black South Africans are of the view that many ‘Africans’ have moved into their country and are stealing their jobs.Africans is put in inverted commas because, as anyone who has travelled to or lived in South Africa can attest, South Africans often talk about ‘going to Africa’ as though they are not a part of the continent.

news_bxenophobe-burning-550(source: http://www.newzimbabwe.com/news/images/news_bxenophobe-burning-550.jpg)

The argument that Africans are ‘stealing jobs’ from South Africans is erroneous. A closer look at figures reveals that in 2012, just four per cent of the working population aged between 15 and 64 in South Africa were international migrants. However, the prominence of black Africans in this international immigrant population is pronounced with 79 per cent coming from the continent. Thus African immigrants in South Africa are the most visible immigrant group and are thus an easy target. From an economic point of view, African immigrants are a drop in the ocean and do not wield any influence that can be felt in macroeconomic statistics such as unemployment.

However, it is easy to pick on black people in a country that has a history of picking on blacks. The only difference here is that it is blacks, brutalising others blacks. Understandably Africans are beyond livid asking how black South Africans, after years of anti-apartheid solidarity, funding, technical and military support from Africa, can brutalise Africans so callously. Indeed, as one commentator stated: ‘‘If black South Africans do not want to hear about any moral debt, maybe it is time to agree with them, give them the bill and ask for economic reparations.’’

Some Africans have responded to the attacks by demanding economic action calling on Africans to boycott all products and services originating from South Africa. Some South Africans retort by thumping their chests saying: ‘‘Do what you want, we have been through worse’.’

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Whether that response irks you or not, it must be said that even if Africa were to boycott products and services from South Africa such action is unlikely to make much of a dent in terms of South Africa’s export profile. As it stands, of the countries that make the top 20 export destinations for South African products, only four are from Africa. Over 80 per cent of South African exports end up in countries out of Africa. Clearly, the biggest fault-line emerging in all this is a sense of separation between South Africa and the rest of Africa.

Bear in mind that South Africa has been accused of pseudo-imperialistic posturing in Africa particularly in economic engagement, patronage and down-talking the continent, just like the rest of the world. So this fury from Africans seems rooted in a deeper, longer-held bile for South Africa.

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(source: https://www.facebook.com/photo.php?fbid=10206443527586119&set=a.4093469654212.2177557.1206913842&type=1&theater)

It will take a long time for Africans to heal from this and as a result, South Africa may now be Africa’s pariah state. Again!

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

Is Industrialisation the answer to Kenya’s Economic Problems?

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This article first appeared in my weekly column with Business Daily on Apri1 19, 2015

Industrialisation is often touted as the answer to development in Kenya and Africa as a whole. Industrialisation here refers to the process in which a country transforms itself from a society based on primarily agricultural and natural resource extraction into one based on manufacturing of goods.

There is already indication that the government is grappling with the issue of industrialisation as seen in a proposal, made a few weeks ago, to end the importation of second-hand clothes and vehicles. The argument is that imports should be curtailed in order to foster industrialisation in the East African Community (EAC).

This is import-substitution industrialisation, which is essentially a trade and economic policy which advocates replacing foreign imports with domestic production premised on the notion that the region should attempt to reduce its foreign dependency through local production of industrialised products.

17148876-abstract-word-cloud-for-import-substitution-industrialization-with-related-tags-and-termsThis has been a dominant theme in development economics targeting mass poverty and increasing productivity within a given country or region. It is an inward-looking economic theory focused on bringing developing countries into the prosperity of industrialised nations.In all fairness, this position makes sense in some ways; the intention of ushering in development and self-sufficiency by moving beyond agriculture and natural resource extraction through subsidising vital industries is laudable.

As it stands, non-industrialised countries such as Kenya are dependent on industrialised ones because they have no alternative but to buy manufactured goods which lead to a vicious cycle. Further, industrialisation can be a useful link between rural and urban areas where the outputs of one feeds into the inputs of the other. Successful industrialisation also relies on efficient and functional transport and communications systems. Industrialisation can also lead to creation of better links between rural and urban areas as well as improve transport and communications.

It can also improve Kenya’s export profile, which is a trade deficit country. Indeed, Kenya recorded a trade deficit of Sh86,484 million in January 2015 alone. Industrialisation can also play an important role in creating products which meet domestic needs can be exported to earn forex.

trade_deficit_generic_mediumIn terms of function, industrialisation forces companies to compete with international competitors in terms of quality and price. At the moment EAC governments are seeking to facilitate industrialisation by banning imports of second-hand goods. The upside to this is that it allows new industries the time and space to get their formula right. Yet a ban on imports means that inefficiencies and sub-standard goods will be allowed to flourish, limiting choice and forcing consumers to buy expensive goods of potentially low quality.

Not only is this against the poor but it can also lead to industrialisation supported by protectionist government policy which can cultivate a culture of mediocrity. Industrialisation also poses additional challenges such as whether Kenya has the following: a variety of raw materials to produce finished goods, a constant supply of affordable energy, a large number of engineers, a dependable supply of both skilled and unskilled workers as well as capital goods and money for investment.

Further, the creation of by-products and waste has to be carefully managed to avoid chronic, dangerous pollution from becoming the norm. As Kenya eyes industrialisation as a catalyst for economic development, a cost-benefit analysis must be done to determine how it can be structured to spur sustainable development.

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

This is exactly what terrorist attacks are costing Kenya

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

Almost two weeks ago Kenya experienced yet another horrific terrorist attack credited to militant Islamic group Al-Shabaab. The human loss experienced is immeasurable and Kenyans are still reeling in the aftermath of the massacre.

Terrorist attacks do not only cause loss of lives, they also have long-standing effects on the economy. Terrorism here refers to premeditated, politically motivated violence perpetrated against non-combatant targets by sub-national groups or clandestine agents, usually intended to influence an audience. In general, terrorism reduces consumers’ and firms’ expectations for the future and forces governments and the private sector to invest in security measures and redirect investment away from more productive economic uses.

Weekend of Violence Photo Gallery(source: http://s4.firstpost.in/wp-content/uploads/2013/09/kenya-attack.jpg)

For example, many firms in Kenya spend considerable capital on security costs which is essentially unproductive in that it does not add to their output or improve their product quality. Terror attacks in Kenya have also triggered geopolitical conflict, which is causing further economic disruption by increasing the likelihood of future attacks.

Direct costs of terrorism include the value of assets damaged or destroyed such as plant, equipment, structures and merchandise.  Economic activity is disrupted so lost wages and other forms of income are also part of the direct costs of terrorism. The direct costs of the attacks on Westgate for instance were estimated to cost Sh10 billion. In terms of indirect costs, Kenya’s ability to attract FDI has been hit by such attacks. Indeed, analysis reveals that the presence of terrorist risk corresponds to a decline in the net FDI position equal to five per cent of GDP.

This is attributed to the creation of climate of uncertainty that envelopes the country whenever attacks happen. This prevents potential investors from making new capital investment as they are unsure of the economic implications of the attacks and thus overlook Kenya for more stable economies.

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(source: http://financialjuneteenth.com/wp-content/uploads/2014/12/Investment-opportunities-in-The-East-African-Community-www.financialjuneteenth.com_.jpg)

Indirect costs of terrorist attacks also affect the transportation industry because demand for air travel declines, passenger fares decline, and the inability of heightened airline security personnel to readily process travelers lead to further declines. Tourism in Kenya has obviously been a casualty with travel advisories discouraging foreign nationals from travelling to the country which is particularly bad as often warnings on non-essential travel attract remove insurance cover. Ironically, the travel advisories may fuel terrorism further. How? Well, by contributing to the collapse of the coastal tourism industry, the travel warnings may simply be increasing the joblessness, idleness, poverty, drug use and overall desperation—all well-known catalysts of terrorism.

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Other indirect costs of terrorism could include the pain and suffering of the victims and their relatives as well as the psychological trauma experienced by a stunned nation. Psychological trauma may have negative short-term impact on productivity.

Interestingly in other countries such as the US, the 9/11 attack had a stimulating effect on the economy where monetary and fiscal authorities stimuli were effected to offset the macroeconomic consequences of the attacks.Because of damage accrued, there was a surge in the private sector demand for liquidity which was met by the Federal Reserve cutting short-term interest rates and increasing short-term lending (discounts and repurchases).  Further a $40 billion emergency spending package provided a strong fiscal stimulus.

But sadly developing economies such as Kenya often cannot take such action because they do not have ready access to international capital markets and the fiscal authorities cannot redirect already strained expenditure.

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