The analogy of a house of cards to me is very appropriate in discussing the recent economic growth circa 2003-2007 and pre-Kibaki growth in Kenya. Economic growth is an ideal every country strives for and is usually the intrinsic mandate of all government efforts. Growth leads to jobs, higher standards of living, higher life expectancies, higher education and even less suffering and misery. However in our case, we have to be very careful as to what factors drive this growth. Here I would like to present a very simple growth model, first posited by an eminent MIT economist called Robert Solow. His model was simple:
Y = f(At Kt Lt)
In this simplified model, he stated that growth in output Y was dependent on At which is a measure of productivity at a given time, Kt a measure of the amount of capital (Buildings, machines, cars, trains) at a given time and Labour at a given time.
From the model, it is the At that we should be interested in. In economic terms, it is referred to as Total Factor Productivity (TFP) and basically shows how much we are getting per worker or machine. If TFP is low in relation to other countries, then our workers and our stock of capital produce less than the same workers and the same stock of capital in other countries. The IMF in a recent study show that Kenya's growth and that of other Sub-Saharan countries has been due to an accumulation of factors rather than an increase in TFP. To better discuss this, I feel an analogy is appropriate. Imagine the economy as a lush field of grass and growth is reflected in how much grass we can cut and harvest off the field. We harvest grass by hiring people armed with sickles to cut the grass. Our growth then in this regard has been as a result of hiring more and more people armed with more and more sickles to cut the grass. The worrying fact is that according to the law of diminishing returns this method of growth is not sustainable.
The law of diminishing returns states that as more and more variable factors of production are added to a fixed factor, production will at first increase at high rate then increase at a decreasing rate before eventually dropping. In the grass case, then production of grass will first increase because of more workers then as workers start jostling for space and arguing over whom gets which sickle, the production will start increasing at a decreasing rate before eventually dropping. TFP in our case would be solved by maybe fertilising the grass so that it grows longer thus justifying the number of workers, buying lawnmowers so as to increase the speed of collection and other such measures.
Clearly then TFP is an important and I would dare say the most important factor in creating economic growth. According to the World Development Report of 2005, between 1960-2000 45-90% of cross country differences in GDP growth were attributable to TFP growth. Added to this, TFP growth in Kenya according to the World Bank grew at an average rate of -1.0 between 1990-2000. Slowing TFP in Kenya has then been the main cause of the massive difference between Kenya's growth and the growth of the East Asian economies. Of the cumulative GDP per capita of Malaysia, Singapore, Korea and Kenya in 1964, Kenya's GDP per capita was 10%. In 2006 this had reduced to 1%.
A study of the factors that affect TFP growth is therefore vital. The IMF in a study conducted in June this year show that good governance, education, good health and inflation are amongst the main causes of differences in TFP.
In terms of governance, it is no secret that the governance in Kenya for the last 40 years has been miserable. Corruption, inefficiency, lack of transparency have been some of the main adjectives used to describe the successive regimes that have ruled the country. Good governance is important as through working institutions and regulations, people can invest in the country and technological and financial innovation can thrive. The poor governance has lead to foreign direct investment flows to Kenya being much lower than those of other countries. FDI as a percentage of GDP in Kenya was approximately 5% in 2006 compared to approximately 18% in Ghana, 28% in Uganda, 30% in South Africa and amazingly 158% in Singapore.
Bad governance has also affected Kenya's exports as a lack of improvement in infrastructure and the tax system has lead to domestic demand exceeding domestic production due to high domestic production costs. This leads to Kenya being a net importer of goods and thus creating a current account deficit. This flies in the face of the mid-term strategy of being a net exporter by 2012. The World Bank usually grade a country's government through six measures namely; voice and accountability, government effectiveness, political stability, regulatory quality, rule of law and control of corruption. Kenya did poorly with voice and accountability scoring approximately 36%, Political stability 15%, government effectiveness 24%, Regulatory quality 45%, rule of law 13% and control of corruption 16%.
If this was your report card after the end of the year, your parents would hang their heads in shame especially for rule of law which should be the cornerstone of any economy that is based on capitalism and allocative efficency.
However as a bright spot, I feel that the current Prime Minister Raila Odinga, has shown commendable leadership taking a strong and often politically unpopular stand on many issues such as the Mau evictions, environmental control and his commitment to improving infrastructure.
In terms of education, it is no secret that our education system needs a lot of work and prayers even. Sound educational policy has been lacking and is reflected in the enrolment statistics and the cost of education in the country. Good education often leads to a higher stock of human capital and thus improved labour productivity. Our education system in my humble view is one that is still based on the colonial role of educating a native population the basics of reading and writing so as to serve in clerical roles for the British. The lack of technological innovation has been a big deterrent to improved TFP. The government has clearly forgotten that early childhood education and technical education are an important part of the educational infrastructure.
My mother who has worked in education all her life always stresses that early childhood education both at home and at school is a make or break time for the child in terms of his/hers approach to learning and knowledge. Between fiscal year 02/03 and 07/08, early childhood education got on average 0.17% of total expenditure on education and technical education got on average 2% of total expenditure on education. Free primary school on the other hand got 52.67%. To make matters worse, of the total expenditure recurrent expenditure was about 92% of the total. Added to this the unit costs of education as a percentage of GDP per capita are high compared to other countries. This means that due to inefficiencies, it is more expensive to educate a Kenyan than it is to educate a South African, Indian or Chinese child at each level of education.
The last factor is inflation. Inflation in terms of TFP usually means that high inflation usually leads to lower investments and savings which are major drivers in TFP growth due to lower real earnings. Kenya has seen high inflation usually due to exogenous (external) shocks that have rendered most wages and salaries useless. According to the Kenya Institute of Public Policy Research and Analysis (KIPPRA), food and beverages contribute approximately 80% of inflation and are subject to extreme shocks such as drought and gross mismanagement of food reserves in the country. Sound policy needs to be enacted to deal with the food issue and consequently inflation so as to improve TFP.
Clearly our economy has been a house of cards, growth has taken it higher and higher but one day when the wind blows or someone bumps into the table, the house will come crumbling down. Governance has to improve through a new proper constitution, improved political good will and leadership and zero-tolerance to corruption. Our education system needs to be ridden of the inefficiency and slack reflected in the high unit costs and high recurrent expenditure on education. Furthermore, the bureaucrats in government need to focus more attention to early childhood education and technical education. Finally the government must realise that monetary policy alone will not fight inflation rather a focus on removing the shocks that affect inflation. Through all these measures, Kenya's growth will finally be sound and stop looking like a house of cards.
Due to difficulties in posting tables and graphs I can email the comprehensive article to anyone interested just express your request to my email address at samora365@gmail.com
House of Cards
Posted by Samora
in Tuesday, December 15, 2009
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Without theorizing anything, Kenya has enjoyed significant growth for the shortest time kibaki has been at the helm of power. You don't require any serious formula to know that actual growth
has realy happened, just look at our roads. The life of kenyans has also improved and this can be proved by the number of highrise buildings coming up in Nairobi and other major towns,compare the expansion of the education sector to what we had in pre-kibaki days , i am talking about universities every where, middle level colleges private acadamies croping everwhere which according to me are serious investments by serious investors.I am not an economist but in my modest understanding,peoples will always result to investment after they had had their stomach fool.
However i will concur with everybody who hold the view that it is not everybody who has benefited from the economic boom.And this can be adequately explained by a simple analogy;When it rains in a canopied forest,it is the heighest trees that will enjoy the shower first, if the rain persist the medium sized tree will also begin to feel the cool of the rain water and finnaly if the rain persist long eonough the grass and the low lying plantation will also receive the rain even if in drops.Inverting Kalembe Ndiles trademark saying;when did the rain stop beating us.The answer is straight forward, just as it was about to start trickling to the grass and low laying plant. In our case the grass and low laying plant stands for low income earners and lower middle class people.Everybody else including the novice will tell you that the factors that led to stagnation of our economy are solely not of our own making.Remember the economic melt down.......
have a melting day
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Thanks for the comment Ken. However, I will have to strongly disagree with you. I do agree that infrastructure development has been done with roads being built all over. However this has happened more so over the last two years. Universities have been chartered and this can only be a good thing in the long run. However if they are mandated by the same ministry that watched over the FPE saga then who knows.
My point is simple, Kenyans have fallen into the trap of comparing ourselves to other worse off Sub-Saharan African countries and gloating. They do this not realising that we started off at the same place with the likes of Malaysia, Singapore and Thailand. These countries economies are now even more than double of ours. The reason is that they increased their productivity and we didn't. Unless we do that, our country is still going to suffer.
I can safely say that Kibaki didn't do much for this country. He liberalised the economy when the global economy was doing well and we just swam in the tide, but structurally a great deal is still the same as pre-Kibaki.