political instability

The effect of politics on the economy

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This article first appeared in my weekly column with the Business Daily on January 31, 2016


Politics in Kenya has a ripple effect on the economy. Due the post-election violence that followed 2007 election, the country’s GDP growth fell from a high of 7 per cent to a low of 3 percent. Earnings from tourism halved and according to The Economist, post-election violence led to financial losses in economy of approximately £145 million, around 1% of Kenya’s GDP. Further, studies estimate the post-election violence had long term effects and over the period 2007-2011 per capita GDP was reduced by an average of 86 USD per year, which is massive considering Kenya’s per capita averaged about $980 over that period. Another study suggests that in 2009, per capita GDP in the Kenya was estimated to be about 6 percent lower than if the instability had not happened in the first place.

(source: https://nothingbutmyemotions.files.wordpress.com/2013/02/kenya-pev.jpg)

The World Bank is of the view that political risks to economic growth are ranked equally to growth risks posed by shocks in the global economy such as the debt crisis in the European markets. So what happens in Kenya’s political arena has economic consequences. And the effects are not only related to GDP growth, other economic effects result from politics. The Eurobond debacle that started last year where government was accused of the mismanagement of the proceeds from the Eurobond is bound to make financing for the government more expensive. Yes there are other factors at work such as the recovery of the US economy which will make financing more expensive in general, but it would naïve to assume that the politicization of the Eurobond issue has not negatively affected perceptions of the credit worthiness of the government.

When one has a young economy juxtaposed with a young democracy, there are bound to have a relationship where activity in one affects the other. More mature economies tend to be more resilient to political instability and if politics does have effect it will tend to be more closely associated with changes in policy of economic import. In fact an analyst interviewed on Bloomberg stated that in the USA, the impact of politics on the economy, except when people really mess up, is overrated. This is partly due to the fact, that as studies have shown, economic institutions such as property rights, regulatory institutions, institutions for macroeconomic stabilization, institutions for social insurance, institutions for conflict management are more mature in older economies and these are major sources of economic growth across countries. A young economy has less mature economic institutions with practitioners still figuring out what institutions, regulations, rules, practices and standards can best bolster growth.

(source: http://www.dolfinwise.com.au/wordpress/wp-content/uploads/2013/06/Volatility-in-financial-markets-450×300.jpg)

In terms of democracy and politics, more mature democracies have a longer tradition of arbitration between political parties; they also tend to be defined by ideology which makes economic policy expectations more predictable. Compare this with Kenya which has a culture of personality and tribe driven politics where there is no clear idea of the economic ideology of political parties until that party comes into power. In addition, in Kenya it has often been informally observed that the tribes that constitute a certain political administration may have members that engage in opportunistic behaviour that favour their tribes while ostracizing others; there is bound to be economic fallout from such habits.

The effect on politics on economics is not unique to Kenya however; a study by the Brookings Institution found that political institutions matter greatly for incipient or young democracies, not for consolidated or mature democracies. Why? Well mature democracies have already internalized the effect of political institutions whereas new democracies need the felt presence of political institutions as part of the democratic experience. As a consequence, the impact of politics on economic performance is more visible. With this in mind, it is important that both government and opposition appreciate the import of their role and influence over the economic trajectory of the country.

Anzetse Were is a development economist; anzetsew@gmail.com

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