The Cruelty of Poverty

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This article first appeared in my weekly column with the Business Daily on February 4, 2018

I have been reflecting on poverty and several truths have been made self-evident. Some may find what will follow irritating and say it builds the ‘Africa is poor’ narrative. But the truth is that far too many Africans are, in fact, poor. And poverty is ruthless. It is ruthless mentally, psychologically, spiritually and physically. Poverty prevents people from planning and strategising for their life due to overwhelming immediate concerns. Poverty not only kills people physically, it decimates psychologically, spiritually and mentally.

We routinely read about millions living under the poverty line and in reading such figures, poverty makes human life a statistic. Often ‘living under the poverty line’ means knowing that it’s your job to make sure you and your loved ones survive for the day.

Food distribution in Samburu. FILE PHOTO | NMG

(source: https://www.businessdailyafrica.com/analysis/ideas/Cruelty-of-poverty-and-hope-for-a-better-future/4259414-4291068-aj9xgi/index.html)

Poverty can also make it difficult to tap into the physical potential, as well as intellect and innovation capabilities of millions. Yet many are told that poverty is the fault of the poor.  In my view, you cannot be lazy when you are poor. You cannot ‘sleep in’ and have a ‘lazy day’ when there are hungry children in the house. Sick, tired, beaten down, discouraged, millions still wake up to hustle for their family. Then we are told that the poor are lazy. This is not only blatantly false, such thinking brutalises the poor.

Indeed the pervasiveness of such fallacious thinking has created the feeling in many circles that those in poverty are not fully human. Think about it. Many are embarrassed, ashamed and discouraged by always having to ask others for help. We are all complex and proud humans. It is self-important to think this is not the case for the poor.

Image result for poverty Africa

(source: https://blogs.worldbank.org/africacan/files/africacan/images/africacan-measuring-poverty-and-inequality-sub-saharan-africa-knowledge-gaps-and-ways-address-them-540.jpg)

Perhaps I am preaching to the choir because for many of us Africans, poverty is not a story. In many cases, either we are poor, or we are trying to help our friends and loved ones out of the trap of poverty. Yet as the African middle class narrative gains traction, many say there are Africans making a good living and wonder why such Africans cannot save. Perhaps consider the sheer volume of people many Africans support. Poverty leads to very high dependency ratios and many forgo saving to support loved ones out of difficult situations.

That said, I am encouraged by our grit and strength. We continue to reach out and care for others. We have an ability to be focused, hardworking and untiring despite the odds we face. We have a resolute determination to improve our situation. And improve it we will, not only because that is our collective desire, but because we have no other choice.

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


Are we building pro-poor infrastructure?

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This article first appeared in my weekly column with the Business Daily on November 19, 2017

Last week I attended a conference that had infrastructure development in Kenya at its heart. Several interesting points were made by some of those who attended that provide important food for thought as Kenya continues on the path of aggressive infrastructure development. The topic of conversation was the Standard Gauge Railway (SGR) and the issues that are beginning to emerge as it starts activity.

The first point made was that it can be argued that the way in which the SGR has been built is anti-poor, and by anti-poor I mean it functions in a manner that locks out low income individuals and traders from accessing passengers. The SGR is lined by electric fences on either side and the stations are built in a manner that prevents hawkers and traders from selling their wares to those inside. In the past when the train snaked through the country, train stations were a hive of business activity, a point at which passengers could buy various items from local traders. The stations were built in manner that allowed easy access to and from trains. This is no longer the case. The SGR is built in a manner that does not allow local traders or mama mbogas anywhere near the stations or train. Is this fair? Is it fair that the SGR seems to be locking out low income traders from a potential client pool? What does this mean for income growth for local and low income traders?

A modern SGR train. FILE PHOTO | NMG

(source: http://www.businessdailyafrica.com/image/view/-/4193670/medRes/1814174/-/maxw/960/-/113vafl/-/sgr.jpg)

The second issue is how the SGR is barricaded by electric fences on both sides where all locals can do it watch is swish by, looking at the rich who can afford the service while they remain locked out of any development that could have been brought to peri-urban and rural villages along the line. It should be noted that the poverty question is already negatively affecting the SGR. A few weeks ago, it was reported that have people have stolen materials worth KES 1.2 billion from SGR line in the last five months; the most targeted items are steel bars, electricals and signals facilities. It would be naïve to fail to consider that poverty is a motivating factor behind why individuals are stealing SGR components, presumably for resale. While I am not suggesting that such theft should be justified or enabled, the reality is that poverty is causing individuals to make that theft in the first place. It would be interesting to find out if the old railway line had/has the same problem; and if not, why not?

The third issue is that we have not unpacked how SGR will affect the trucker’s economy. To be clear, I am of the view that development should be embraced and potential game changers such as the SGR are important but there ought to be serious consideration given to the knock-on effects so that the economic station of Kenyans is improved, not compromised by new developments. It is estimated that an average of 4,000 trucks are on the roads transporting various goods in and out of the East Africa region. While the SGR will be important in decongesting Kenya’s roads and hopefully making the movement of goods cheaper, informal traders and small and medium enterprises (SMEs) will be hit. Those who will lose jobs include truck drivers (an estimated 8,000), and informal businesses and SMES who sell spare parts to, and repair and maintain trucks. All these Kenyans will lose their jobs or have their businesses negatively impacted. How will this be managed?

Image result for mama mboga kenya

(source: http://biznews.co.ke/2017/08/28/graphs-how-mama-mboga-butcheries-and-bakers-are-affected-by-the-plastic-bags-ban/)

So the question remains: Is the infrastructure we’re building pro-poor? Does it build or diminish commerce and trading activity along its path? Does it build or compromise income sources of the poor? Given the high levels of informality in business activity in Kenya, we ought to be cognisant of the effects of infrastructure built in a style that locks out indigenous enterprise.

The issues raised above are difficult with no easy answers but they are realities with which we have to grapple and resolve so that future projects avoid or address potential negative effects of new infrastructure development in the country.

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

How poverty impedes development in Africa

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 This article first appeared in my weekly column with the Business Daily on October 29, 2017

The fact that Africa struggles to meet development goals is not a secret, but an understanding of the role poverty plays in this process is less common. Africa seems to be caught in a vicious cycle where a poor status of development across a cross section of criteria exacerbates poverty and poverty negatively affects the ability of Africans to meet development goals.

According to the organisation World Hunger, in 2012, 47 percent of the population of sub-Saharan Africa, lived on USD 1.90 a day or less; below the poverty line. 22 percent of the world’s human development is lost due to inequality; the figure is 32 percent in Sub-Saharan Africa. There are several means through which poverty curtails Africa’s ability to develop.

Image result for poverty Africa

(source: http://www.borgenmagazine.com/wp-content/uploads/2014/04/africa.jpg)

Firstly is the role of poverty in economic growth. Poor Africans do not have the savings required to invest in activities that would boost their income. Further, poor Africans are seen as high risk and thus are routinely denied access to credit streams that would enable them to improve their financial status. Thus being poor, makes it harder to get the financial support required to get out of poverty.

Secondly there are effects of poverty on health and education. Higher levels of income reduce infant mortality, and better education in terms of primary and secondary school enrolment rates are positively associated with higher levels of income. But the reality is that poor people often cannot afford the healthcare they require, nor are they able to educate their children to basic levels of education. Thus the fact that almost every 1 in 2 Africans are in a state of poverty means that half of the continent has a fundamentally compromised ability to afford access to healthcare and education; a reality that then makes the prospects of rising out of poverty more difficult. Poor health compromises one’s ability to physical work and exerts a great toll on income growth. Poor education ensures that millions of Africans are vulnerable, stuck in low paying jobs, often in the informal economy that routinely undercompensate. Poverty itself makes it difficult for Africans to rise out of poverty.

Finally, poverty negatively affects human development itself. Research has found that exposure to poverty in early childhood impacts brain development. Damaging effects can range from poor cognitive outcomes and school performance, stunted development, limited future productivity as adults and intergenerational transmission of poverty, to a higher risk for antisocial behaviours and mental disorders. According to UNICEF, nearly half of all children in sub-Saharan Africa are living in extreme poverty; children are twice as likely as adults to be living below the poverty line. And because more children live in poverty, they are much less likely than an adult to be able to cope with extreme poverty because of stunting, infant mortality, and compromised early childhood development.

Image result for poverty Africa

(source: http://www.essaywow.com/wp-content/uploads/2014/12/lndikumana0723.jpg)

The good news is that this can all change. For example some of the negative effects of poverty on children’s brains can be mediated by support of the children’s caregivers. It is time Africa developed a strategy on how the negative effects of poverty on development can be systematically eliminated.

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



The MFI Question on Interest Rate Capping

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This article first appeared in my weekly column in the Business Daily on August 14, 2016

As a development economist I have a natural interest in Microfinance Institutions (MFIs) because they have been an important story in Kenya’s financial inclusion story. In a previous article I argued that interest capping for banks in general is a dubious bet rife with risk that may harm Kenyans and the economy more than it can help. But a key question has emerged in this debate: Are interest rate caps going to be applied to MFIs should it be effected?

This question is pertinent for two reasons firstly the ‘common man’ (mwananchi) in whose interest MPs apparently passed the bill tend to borrow more from MFIs than commercial banks. Secondly due to the business model of MFIs, interest rates and more importantly annual percentage rates (APRs) are particularly high. Indeed last year (which is the latest year where such data readily available), Central Bank of Kenya (CBK) data showed that micro-lenders were on average charging 22.6 percent on loans compared to 16 percent by banks; more in this later. Finally, there is a growing grey area that prevents the classification of entities as either strictly commercial banks or strictly MFIs. If one looks at the CBK list of what is classified as commercial banks, some on that list brand and market themselves as MFIs and target similar customer groups as MFIs. Thus if such ‘commercial’ banks will potentially be affected by interest rate capping, why shouldn’t MFIs in general? Further it could be argued that the demographic group that tends to borrow from MFIs are low income and thus, of everyone, need capped interest rates the most. But as you will see, capping MFI interest rates is just as bad an idea as capping interest rates for commercial banks.

(source: https://sherialaw.files.wordpress.com/2015/04/fmi.jpg?w=636)

The MFI question is important because if only commercial bank interest rates are capped, it may engender a shift of loans from the MFI docket to the commercial bank docket as Kenyans seek the best deals possible. However in that shift, thousands of low income Kenyans may leave a docket that was designed with them in mind particularly with regards to loan size, into one that does not have them front on centre. So either Kenyans will be trapped with MFIs with much higher interest rates but the right loan size, or they risk moving to a bank that has a lower interest rate but does not have a loan size which is manageable or relevant thereby locking them out of credit. This seems like a raw deal for mwananchi either way.

On the other hand if the interest rate cap applies to MFIs it will compromise their ability to serve low income Kenyans. This is because MFIs typically process very many small loans when compared to commercial banks because low income Kenyans can typically service only small loans. Because of this, MFIs tend to have higher overheads in terms of outreach, and processing costs and overheads is a key component that informs interest rates. Larger overheads place upward pressure in terms of interest rates offered. Secondly, is the issue of non-performing loans (NPLs) where again the argument is that as MFIs target a less financially secure and less wealthy income group, the risk of NPLs is higher than a commercial bank that focuses on corporate clients for example. Thus again, upward pressure is exerted on interest rates in MFIs.

(source: http://d2ouvy59p0dg6k.cloudfront.net/img/original/kenya_village_bank_2.jpg)

These factors partially explain why the CBK data showed that micro-lenders (MFIs) charge more on loans than regular banks. Thus if capping interest rates apply to MFIs there will be pressure to lower overhead costs which may compromise how many loans can be processed which will likely translate a lower volume of loans being awarded thereby contracting credit supply particularly for low income Kenyans. Further, MFIs will be less able to take on riskier clients as there will be very limited wiggle room in terms of NPLs. So again, how does the ‘common man’ benefit from interest rate capping?

There is need for more clarity on which institutions will be affected by interest rate capping in order to better manage potential ramifications so that Kenyans, especially low income Kenyans, get the best deal possible.

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

This is how to get the informal economy into the tax net

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This article first appeared in my weekly column with the Business Daily on June 19, 2016

The informal economy has been a theme of mine this year and since the budget speech, even more so. The government seems to have caught on to the financial potential of tapping into this sector for revenue generation purposes, and understandably so. The informal economy is estimated to contribute to 34 to 35 percent to the country’s GDP and currently generates over 80 percent of jobs created in the country on an annual basis. My concern is that what will happen is a heavy handed reflex from government to over-regulate and intimidate informal economy players into paying taxes. I think this would be the wrong approach due to several reasons.


(source: http://cteast.co.nz/wp-content/uploads/sites/12/2015/05/pay-income-tax-online-02.jpg)

Firstly, the Kenya Revenue Authority (KRA) has already taken a step in the right direction by introducing itax and making it easier for individuals and businesses to pay taxes. As a result, some informal economy players who found the tax process too difficult to comply with voluntarily registered and started paying taxes. Another useful initiative the KRA is doing to facilitate tax compliance is working with county governments to recruit informal economy businesses who have established business premises such as in malls or office buildings, to pay taxes. To be clear, there is a difference between facilitating compliance and intimidating people and businesses into it. Thus I think the KRA should continue to focussing on facilitating tax compliance and scaling up their efforts on sensitising the general public on how to file taxes as well the benefits of doing so; benefits such as having a paper trail of tax compliance that make it easier for small businesses to qualify for financing or become suppliers for government contracts.

Secondly, there should be a distinct effort by government to improve the efficiency, productivity and profitability of the informal economy. As it stands, informality tends to overlap with poverty and low income. Due to the fact that it is often the poorly skilled who find themselves stuck in the informal economy as the qualifications for employment in the formal economy often serve as automatic disqualifiers, informal economy players need to be supported in building their ability to manage and scale up their businesses, as well as making their businesses more profitable. Therefore, government bodies should work with county governments to seek input from informal economy players on the factors they think constrain the growth of their informal businesses. There is already a sense that training in areas such as bookkeeping, business management, and market access strategies would be valuable for this sector. Thus rather than aiming to squeeze out as much as possible from a sector that is still largely defined by poverty, government should support informal businesses to become more profitable. This would likely then make more in the informal economy willing to pay their share of taxes because as it stands, most feel they are too broke to pay taxes as they are already struggling to get by.

Finally, the government should give tax amnesties to informal businesses that register and start the journey towards tax compliance.  Government should give such business at least a three to five year tax amnesty period. The reason why this amnesty is so important is that it not only allows small businesses to develop the capacity to comply, it also provides a time period over which support to the informal businesses, such as that detailed above, can be deployed. This amnesty would also allow government to collect much needed information and data on the informal economy that can be used to better support the sector. Government could then, for example, use such data to establish realistic tax bands for small businesses.

(source: http://cdn.theglobalist.com/wordpress/wp-content/uploads/2014/10/Jua_Kali_0008-resize.jpg)

In short, the informal economy is too valuable a sector of the economy to me intimidated out of existence or pushed further underground by threats of punishment for failure to comply with tax obligations. The priority should be for the KRA to continue facilitating tax compliance as other arms of government work to support players in the sector to become more profitable. Only then can a realistic conversation about more robust tax compliance occur.

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

The welfare conundrum

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This article first appeared in my weekly column with the Business Daily on March 28, 2016

As African economies continue to grow and become richer than they have been in modern history, the question of government providing social security or welfare nets for the especially poor and marginalised becomes important. Poverty levels are still dire on the continent; the number of Africans living in extreme poverty, defined as living on $1.25 or less a day, stood at 414 million people in 2010 or 48.5 percent of the African population according to the World Bank.

These high levels of problems pose several problems with regards to the continent’s development. The most obvious is that those living in extreme poverty also tend to be malnourished and are unable to access and afford medical care, education as well as basics such as water and adequate shelter. As a result not only are they unable to live productive and dignified lives, their circumstances make it difficult them to be productive members of society as they are saddled with chronic, debilitating (but often treatable) illnesses, poor living conditions, illiteracy and the lack of opportunity to improve their lot. Clearly those living in extreme poverty need far more support than they are currently getting and frankly the issue of providing more support to this demographic group is one that ought to be front and centre for African governments not only because it is the right thing to do, but is also the smart thing to do.

https://i0.wp.com/i.telegraph.co.uk/multimedia/archive/02226/poverty_2226036b.jpg (source: http://i.telegraph.co.uk/multimedia/archive/02226/poverty_2226036b.jpg)

The consequence of on-going, chronic poverty on the continent creates an additional dynamic; very high levels of dependency on the middle class African. Ask any African in the middle class and I can assure you they will tell you they support friends or family members in paying schools fees, medical bills, funeral costs and monthly stipends for day to day living. Even those who are not among the extreme poor, those who have even attained university degrees for example, are often unemployed and the high levels of unemployment means that otherwise able and capable Africans are relegated to relying on monthly stipends from friends and families. These high levels of poverty and dependency translate into low lived disposable income and savings on the continent. Middle class Africans cannot and do not save sufficiently because they ARE the social security net. They are the unemployment bureau. As a result many Africans do not save adequately which negatively informs economic growth.

There is however, an interesting consequence to Africans relying on each other to the extent on which they do. It creates, amplifies and spreads social capital. Social capital, which can be defined as the networks of relationships among people who live and work in a particular society that often enable society to function more effectively than it otherwise would, is abundant in Africa. The extent to which Africans have to trust friends and family, the levels of generosity in many Africans who give to friends and family even though they too are struggling, is precious social capital. Would Africa lose this social capital if government stepped in with a robust welfare net? Would social capital be eroded where, instead of giving your cousin USD 100 to get through the month, you told him to go and stand in line at the unemployment bureau? Would the generosity of buying your elderly aunt a bale of rice every month disappear if she went to an impersonal government agency and got food stamps instead?

(source: http://www.pocketfullofliberty.com/wp-content/uploads/2013/11/food-stamp-actual.jpg)

In fact it is an interesting question to ponder as to the extent to which government funded welfare nets contributed to the erosion of social capital in developed economies. Of course there are cultural realities that have led to more individualistic societies in developed economies but perhaps impersonal government agencies offering social services means there is no real need for citizens to take care of distant relatives and friends.

I am not suggesting that African governments use such theorising to fail to provide welfare services for their citizens; it is their duty to do so. But the conundrum for Africa will be how to retain high levels of social capital on the continent even if or when governments step in with robust welfare services.

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

The Kenyan economy continues to exhibit key weaknesses that must be addressed

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This article first appeared in my column with the Business Daily on March 13, 2016

On Tuesday last week the World Bank launched the Kenya Country Economic Memorandum with the theme ‘From Growth to Jobs & Prosperity’. Apurva Sanghi Lead Economist and Program Leader at the Bank made three core points during his presentation.

The first is that economic growth in Kenya is volatile, non-inclusive and marked by stagnation in agriculture and industry. In terms of volatility Kenya’s growth has been volatile since independence and domestic shocks such as political instability (especially during election years) affect GDP growth more than external ones.

The second point was that growth is not inclusive and the country continues to register high poverty levels, the estimates of which sit between 36-42% in 2016. Further, job creation has been marginal and slow, clearly only able to absorb a fraction of the working age population that enter the labour market each year. Further, of the jobs created, the vast majority have been informal jobs.

(source: http://www.businessdailyafrica.com/image/view/-/2765356/medRes/770583/-/maxw/600/-/swae72/-/jua+kali.jpg)

Another important point made by Sanghi was that economic growth in Kenya has been led by services which has been resilient with clear stagnation in agriculture and manufacturing.  Services exports are catching up with goods exports and this is partly because the sector is less dependent on raw materials and not truly affected by changes in commodity prices. In terms of agriculture, the main factors informing the stagnation include over-involvement of government in maize and sugar markets which keep prices high. In terms of manufacturing, it has marginal contribution to GDP, and Kenya has dropped 8 places in the rank of economic complexity of goods produced by the sector; in fact Kenya’s top exports are among the least complex. Sanghi also mentioned that achieving the Vision 2030 GDP growth rate target of 7% has thus far been elusive with the country reaching 7% only four times since independence. In order for Kenya to grow more robustly and with less volatility, both savings and productivity have to increase, the performance of both manufacturing and agriculture need to improve, and public investment management by government has to improve.

How feasible is this? Well with regard to savings numerous factors negatively inform Kenyan saving habits among which is the reality that there is no real social security net in Kenya. Yes government has a cash transfer system for the very vulnerable and poor but the lived reality for most Kenyans is that they cannot usually rely on government when they fall ill or lose a job. As a result, middle income pockets of Kenyans are under immense pressure for it is the middle and upper class that finance costs such as school fees, hospital bills and funerals for friends and relatives. Coupled with high dependency ratios linked to high levels of unemployment and underemployment, Kenya’s middle class has limited lived disposable income which of course makes saving very difficult.  I have thus long held the view that the hype about the spending power of the African middle class is Panglossian.

(source: http://i.telegraph.co.uk/multimedia/archive/02181/expatrate_savings_2181869b.jpg)

In terms of productivity, the report itself makes the point that levels of productivity vary greatly between sectors and within sectors. Further, most Kenyans are employed in the informal sector which is characterised by low productivity due to a myriad of factors such as poor management skills, poor education levels and the lack of access to finance, technology and innovations. Therefore, the question on which government ought to be focussed is how to increase productivity, particularly in the informal sector. This is not necessarily synonymous with pushing for the formalisation of the informal sector but rather, supporting Kenyans trapped in the primarily low income informal sector by skilling up the population in informal labour, developing apprenticeship programs and loosening finance into the sector.

Finally, public investment must improve with a preponderance of development rather than recurrent expenditure. Public investment strategies must be devoid of corruption in order to ensure government spending is strategic and effective.

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