Friday, 6 May 2016

A Stagnating Or Transforming Economy?

Economic growth and economic development are two sides of the same coin, similar in various aspects but deeply and widely different in terms of the binding economic logic and principles. Economic development is a consequence of economic growth and therefore the former cannot happen without the latter taking place. This is the point of convergence but the divergence juncture is manifested in economic growth not being dependent on economic development implying that entities such as regions or countries may experience economic growth without the necessary structural transformation. It is within this context and prism that Kenya’s economic trajectory needs to be dissected and analyzed to ascertain if structural transformation is a fallacy, to give an indication of economic retardation, or if it is a reality to reflect an economy that is experiencing fundamental changes in the underlying tenets that are tied to economic development.

It is a fact that Kenya has made significant strides since independence as far as the state of the economy is concerned. The challenge has been the pace of structural transformation because at the moment we are still struggling to institutionalize as well as operationalize different and at times diverse mechanisms to eradicate poverty. Economic growth has never been a long-lasting solution to poverty eradication but may be a rapid rate of economic growth because it catapults and triggers the requisite transformation.

The slow paced rate of economic development is attributable to certain key economic factors which include and not limited to relatively low volume of exports, relatively high volume of imports, relatively high rates of consumption that have shadowed and dwarfed the levels of national savings and investment, an escalating level of the total public debt, increasing incidences of low productivity jobs, misappropriation of public funds, among other factors.

A notable characteristic of an economy that is experiencing structural transformation is the overall structure in terms of the sizes of the sectoral components. Economic development is hence characterized by the dominance of the manufacturing and services sector with the agricultural sector being somehow the least contributor of the total national output. However, the fact remains that these sectors are interlinked on several fronts.

Kenya’s economy is quite far from experiencing the supposed transformation. One feature of East Africa’s  largest economy is the prevailing imbalance between the volume of exports and imports traded. In addition, our exports seem to be on a lull. The Kenya Economic Update report released by the World Bank in March 2016 pointed out that in fact Kenya’s exports as a share of the Gross Domestic Product(GDP) has been on a downward spiral from 25.7% in the 1990s to 16.4% in 2014. The report further documents that comparison countries that had the same level of exports at that particular time have their exports share at 30% of the GDP at the moment. 

This anomaly has been occasioned by ineffective outward-looking policies and strategies. The outward-looking and inward-looking strategies in form of export promotion and import substitution strategies seem to be terribly slow despite several measures that have been instituted by the successive governments. The establishment of the Export Processing Zones(EPZs) was thought of as a game changer in enhancing the quality and quantity of the products to be exported but the pace has been quite sluggish. Our exports are mostly inferior implying that they are mostly primary products that have very little or no value addition at all. Competing globally is a tall order considering that other countries exporting similar products have a competitive advantage because of the incorporation of the aspect of value addition. 

According to the World Bank there has been a decline in the volume of products that are exported to the traditional markets of the East African Community and the United Kingdom. It is believed that this decline has been due to several factors. Firstly, the World Bank documents that the start of a fully fledged EAC customs union which disallows preferential access for goods that are produced under various export promotion schemes has partly occasioned this particular decline. The second factor is the prevalence of the non-tariff barriers to trade for instance like the banning of khat(miraa) in the UK. Thirdly, the economic slowdown experienced in countries like the UK and Egypt has also been a major cause.

However, this particular economic happenstance has been compensated by the emergence of new export destinations such as the Americas, Asia (especially China) and Australia. The period between 2010 to 2015 witnessed the volume of exports to the Americas grow by 12% and as a consequence Kenya’s trade with the USA now exceeds that with the UK. This growth of trade with the USA has been mainly driven by the Africa Growth and Opportunity Act(AGOA) which promotes and grants preferential access to commodities.
Out of the total volume of imports to our economy in 2015, 62% of them were mainly from China while Kenya’s exports to China were below 10%. Kenya and Africa in general need to re-define their economic relations so that they obtain good deals that seek to promote rapid growth through trade. China’s hunger to become the world’s largest economy through attainment of the largest output has driven her to find a suitable market in Africa but methinks this is another form of neo-colonialism fronted by the Mandarins. Recall Walter Rodney’s monograph, “How Europe Underdeveloped Africa”….as Africa and Kenya we risk undergoing an economic haemorrhage not because China is expropriating our resources in any way but because we are importing their products in large quantities and exporting almost insignificant quantities to China. This has also resulted into incidences of dumping with extremely cheap and counterfeit products finding their way into Kenya.

Another economic juggernaut that threatens the transformation of Kenya’s economy is the rising level of the public debt. Apparently, the public debt stands at Kshs.3.2 trillion which has been occasioned by a poor debt management framework by the current administration. This year’s Economic Survey report points out that the economy grew by 5.6% in 2015 to register an output value of Kshs.6.224 trillion. This implies that the public debt to GDP ratio is 52% which  The National Treasury officials would term as a sustainable debt. Out of the Kshs.3.2 trillion, the domestic debt is Kshs.2.8 trillion and the external debt stands at Kshs.1.4 trillion. 

In as much as The National Treasury and the IMF would classify the debt as sustainable, we ought to have in mind that this classification is neither edged nor anchored on a puritan approach but it is rather based on a populist agenda and global geopolitics. The populist agenda is driven by the need to be politically correct and in any case who would want to work at the Treasury if you are totally politically incorrect. You dare tell the king that he is naked, you’ll bid goodbye to your daily bread. The IMF on its part, is a tool used by the Western world especially by the USA to check on China’s economic influence in Africa because depriving and denying a large mass of individuals the necessary economic independence through the collective debts implies that the entity responsible for the economic deprivation benefits mainly in two ways: first by securing friendly environments in which their multi-national corporations(MNCs) can operate and secondly by offering loans and grants which is a bait so that if the country is in need of development funds it can always knock at their door. 

These MNCs propagate capital flight thus enriching the parent countries at the expense of the host countries. For the loans, they generate interest which will be paid for a long period of time. This is what engulfs Kenya and it is the reality. If in any case the public debt level is sustainable as claimed then it is quite dumbfounding that the government experienced a cash crunch late last year. This is an indication that the public finance approach has to be re-looked.

The need to finance a number of development projects as a result of campaign promises and drafting of ambitious budgets by the current administration have largely contributed to the rising levels of both the domestic debt and the external debt. Since 2013 we have had ambitious budgets that have necessitated deficit financing. The problem therein is the inability of the Kenya Revenue Authority to meet its revenue targets which means that the administration has to borrow both locally and internationally to bridge the financial gap. Borrowing locally implies that the crowding-out effect will take place thus limiting the growth of the private sector hence limited job creation. Borrowing internationally means that issuance of sovereign bonds and government to government loans will not be an option. The main challenge with the current state of loans is that a significant percentage is used to service the existing debts a situation referred to as Ponzi games; of cyclically borrowing to service other existing loans. 

It would be better if the budgetary deficits are reduced. The Budget Policy Statement for the current fiscal year 2015/2016 has a deficit of about 8.7% of the GDP. Even if the government borrows to offset this particular deficit be rest assured that a good proportion of the loans will finance part of the existing loans so as to show the creditors the ability and intent of repayment. Therefore, the above situation means that not all projects would be completed on time and this often results to the so called white elephants/ headless chicken. A good example is the recent termination of the Greenfield Terminal Project designated as one of the Vision 2030 flagship projects. And in addition it is due to the deficits and escalating debts that another key project, the LAPSSET Corridor is being developed at a very slow pace.

A major subjugation of the much anticipated structural transformation is the relatively low level of national savings and investment. The gross national savings currently stand at 14.1% of the GDP while the investment level is at 23%. Quite low considering that Kenya joined the much coveted category of middle-income economies. This has an implication that ours is an economy that thrives on consumption, a situation that is mainly driven by the much hyped middle class. Kenya’s middle class is overrated as it cherishes and treasures consumption at the expense of investment. Very unwise indeed. I understand that one of the drivers of economic growth is the domestic demand fueled by the middle class but for sustained growth and development then the domestic demand patterns and levels have to be synergistic with remarkable levels of domestic investment. It is therefore true to state that the claims of a sprouting middle class is a fallacy and the reality of the matter is that Kenya’s middle class is quite small.

An economy that is undergoing structural transformation is one that is able to create more jobs in the formal sector than in the informal sector. The Kenya Economic Survey 2016 report revealed that in 2015, the economy was able to create 841,600 jobs out of which 128,000 were created in the formal sector while 713,600 jobs were created in the informal sector. This asymmetry in job creation needs to be seriously checked. We cannot pride ourselves that the economy is doing well through the creation of more informal jobs than the formal ones. 

Informal jobs are low productivity jobs because they are deficient of the necessary value addition. Structural transformation dictates that high productivity jobs should be created and for your information creation of the formal jobs is primordial in reducing the poverty levels and the subsequent reduction in income inequality because such would mean more savings and more investments. Creation of more formal jobs can only happen if the economy is hinged on exporting large volumes of value added products, importing a significantly and relatively lesser quantities of imports and most importantly having higher levels of gross national savings.

Ignoring the role played by effective/efficient financial prudence and/or transparency and accountability in enhancing structural transformation is economic misapprehension. In Kenya’s case for instance, losing an average of Kshs.500 billion per year through embezzlement and misappropriation is a big worry. Finances allocated for development projects are sometimes artificially inflated and this constraints the capitation streams. Even for the loans that are borrowed to finance them be rest assured a significant percentage goes into wrong pockets. Losing 8% of the GDP to corruption slackens the pace of transformation.

Despite being one of the most resilient economies in Sub-Saharan Africa in the face of the recent economic dip, Kenya has a lot to do to experience tangible structural transformation. Having more value added exports, very low volume of imports, dealing effectively with the public debt, creation of high productivity jobs, relatively higher levels of gross national savings are just some of the fundamentals that cannot be ignored to position the economy on a virtuous cycle from the vicious cycle. And once on a virtuous cycle structural transformation will be a reality.

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