Future Capital Kenya

These are interesting times to be a Kenyan, although the times are unrelated to this post, it is still a very interesting time to be a Kenyan. With the ICC, wikileaks and KACC boss PLO Lumumba all with harmonic unison attacking the establishment. It is going to be an interesting two years up till the general election in 2012. For me, one key thing that could be a game changer is the ICC summons. If summons to the six people mentioned in the list are issued, then the ICC has the right to freeze the accounts of the six suspects, this could have interesting effects on Kenya's stock market and real estate industry in large. It will be an interesting event to follow and I will be waiting with both cautious optimism and a tinge of reservation over the next year.

My post today is about insurance. Insurance in essence is the business of hedging risk i.e.transferring risk from the 1st and 2nd parties of a transaction the third party. What this means with an example is in the case of motor insurance, if an accident occurs, the risk of covering the costs of that accident is transferred from e.g the drivers of both cars involved in the accident to an insurance company. However, this transfer of risk is not free as the person who takes out the policy has to pay premiums regularly as stipulated in the insurance contract, the premium can be paid weekly, monthly or even yearly. Furthermore, the insurer has to cede some of those earned premiums to a re-insurer who is the insurance companies insurer.

When the premiums are paid up front to the insurer, the insurer has the advantage of having a lump sum of money without any immediate expenses in the form of claims from the policyholders. Insurers are usually required by regulators to keep some funds to cover claims, the amount is calculated by actuaries who determine the probability of incurring claims and their costs. With the rest of the cash, usually called a float, the insurers invest it in bonds, stocks, real estate, treasury bills and any other fathomable investment given the country they are in. They then reap investment income. In a nutshell insurance companies earn premiums, cede some of those premiums to re-insurers, pay out claims and earn investment income from their float.

However, for someone keen to invest in an insurance company and for the country's welfare in general, it is important to understand the economics of the insurance industry, more so the insurance industry in Kenya. For this some micro-economic concepts would be fitting. To this we turn to "The Sage of Omaha" Warren Buffett in his 1982 letter to his shareholders. Where he characterises the insurance industry in two terms "excess capacity" and a commodity product".

Excess Capacity means that the industry has over-supply, i.e. the industry can produce much more than the demand requires. If a manufacturer of batteries for example has a factory that produces 200,000 lithium iron batteries per year, whereas demand stands at 150,000 batteries. Then there is excess capacity of 50,000 lithium iron batteries. How does this happen with insurers, one may ask?. Well with insurers, excess capacity lies in the underwriters pen. His willingness to underwrite policies. Excess capacity also lies with the insurers ability to raise more capital. However, the former occurs much more frequently than the latter. Underwriters are usually very eager to underwrite policies and earn premiums

The second issue is a "commodity product" or like most economists would say a "homogenous" product. Think of Sugar, when you're sitted at Dormans or Java and would like a bowl of sugar to sweeten your latte, you seldom will ask for a bowl of mumias sugar, you just ask for sugar. There are no defining characteristics that single out a particular kind of sugar from another. Sugar is a commodity product, all sugar producers are producing the same thing and therefore all of them have to by way of marketing, emphasise the uniqueness of their products. All "commodity product" producers have to keep advertising to remind us of the novelty of their product, take Kenyan examples such as crown paints, Safaricom, Zain and most banks who are constantly buying up media space to advertise their goods. The key thing though, is that with commodity products competition is done with price and this is scary for insurers.

The two factors lead to the insurance industry shaping up to be a monopolistic competitive industry. Where a commodity product and excess capacity bring up both price competition and thin margins. What happens now in the insurance industry is that insurers will scamper to lower premiums and incur heavy marketing costs so as to remain competitive. The danger of low premiums is that they often do not cover both the firms expenses and the claims incurred. The combined ratio is a ratio used in the insurance to gauge operational efficiency. It can be calculated as the sum of operational expenses and claims incurred divided by the net earned premiums. A ratio below 100% is healthy whereas one above 100% is very unhealthy. A ratio of 98% shows that the insurer is covering both operational expenses and claims incurred and getting a 2% profit. A ratio of 105% shows that the claims and expenses incurred exceed the premiums earned by 5% and therefore the insurer has to earn an investment income of above 5% to earn a profit.

In Kenya, the industry combined ratio as calculated from the Association of Kenyan Insurers data shows that the combined ratio from 2005 - 2009 are 126.72%, 131.28%, 124.71%, 118.37% and 121.66%. These figures are well above the 100% threshold and are a gauge of mismanagement of the firms. One may question these figures, they were arrived at by dividing (total operating expenses + net claims incurred)/ net premiums earned. The net in this case is adjusting for re-insurance earned and ceded. This further means that insurers have to earn high investment incomes and as the last two years showed, this is risky business given the uncertainty of Kenya's economic and political climate.

What this means is that the overall insurance picture is not at all pretty. Fraudulent claims, over eager underwriters and price competition are all conspiring to weaken our insurance industry. Regulators are constantly changing the rules so as to ensure a better insurance climate, but the cancer still remains.Some of the Kimunya laws such as increasing the capital requirements could help and will take time to produce results. In the mean time, I would urge regulators to take stronger measures to regulate premiums, even if it means reducing competition, as the insurance industry has the capacity to bring the entire financial system to its knees, case in point AIG and the global financial meltdown of 2008. From an investors perspective, invest in insurance companies that have sound underwriting principles and are well managed. At the end of the day, given the adverse nature of the insurance industry's market structure, management is the main competitive edge for Kenyan insurers. Key note, avoid investing in insurers that are heavily exposed to Motor Commercial insurance and WIBA (Workers Injury Benefits Act), both of these are usually very volatile from year to year and are subject to a great deal of fraud.

I have to apologise to the followers of this blog for the long absence. It has been a hectic month filled with traveling and completing my undergraduate studies. I am back in Kenya and enjoying it so far.

Just the other day I was attending an informal interview at a local investment bank, as I waited for the interviewers at the reception, I picked up a copy of "The African Investor". In it, I read an article about family businesses' and their great appeal to Private Equity. The article can be found here is a very interesting read especially the part where the Kenyatta's are given as an admirable example with Uhuru Kenyatta citing his net worth as being approximately 10 billion dollars. If this is the case, then Uhuru could have personally financed the 2009 budget by himself. However, I doubt the figures.

The article raises an important issue, more so about the state of family business ownership and succession issues especially amongst native Kenyans. This is an issue that needs immense research given that most businesses estimated at around  81% of the businesses in developing countries are family owned. With so much of national wealth and livelihoods dependent on the existence and success of these businesses. Kenyans need to be sensitised on this matter. Some of the key issues are;

1. Succession. It is important to have succession policies or plans in place. Replacing legendary managers such as Warren Buffett of Berskshire Hathaway or Walt Disney of Disney Inc is usually a very tough challenge, it is made worse when the incumbents are caught up in a cult of personality where as Prof Jeffrey Sonnenfeld of Yale University states "They develop such a heroic persona and there is so much legend and myth-making that their identity becomes one with the job: they feel threatened that somebody could come along to erode that persona". However, given prudent planning both by the current business leaders and preferably by a third party should lead to smooth succession. A number of Asian owned businesses in Kenya are having intergenerational problems due to conflicting aspirations with the latter generation often opting to pursue different interest other than the family business. Right now, this issue is offering ripe pickings for investors in Kenya. In true African style, myths exist that succession planning will lead to the death of the founders, such thinking really curtails any planning and often leads to the demise of the business. In S.Africa it has been found that only 25% of family businesses make it to the 2nd generation and only 10% make it to the third generation.
2.  Separating ownership from management. In the early phases of the business, it is often the case that the owner will control all key decisions and functions of the organisation. However, as the business grows, it will get more complex. At this stage, it is advisable for the owners to appoint capable managers who will be more qualified to handle the complex business functions. It is often the case in Kenya that owners will still want to retain control of the business functions such as the accounts, logistics, marketing and others more often than not leading to the demise of the business. There are plenty examples of this, with a prominent Stock Broking firm being the main example.
3. The other issue is remuneration, with owner managers, there is a tendency for many to use the company as a personal bank account. This is one of the biggest factors that ensure that most family owned businesses never reach the second generation. Remuneration structures are needed so that the business survives.  It is advisable and good business practice to pay the family member what the market value of that job is worth. However, in different countries tax considerations come into play that will also affect remuneration.

In a nutshell, it is worth mentioning that before the industrial revolution, there were family businesses, before Wall Steet, there were family businesses and if there is anything certain about our uncertain business environment is that there will be family businesses in the future. Their existence and success is crucial for the economy. Why would you care if you do not and will never have a family business, well, this exposes the great gap that needs to be filled in Kenya's financial circles. The need for dedicated business units in banks, investment firms and asset management firms that will focus solely on family business advice and research. Germany, England and South Africa are well ahead of the curve, it's about time that we got in on the act.

The real estate market in Kenya right now, can be said to be booming and booming hard. It was expected that the PEV would put a damper in the growth of this sector but it has proved resilient and come back even harder. Many companies have dedicated new units of their current businesses to focus specifically on real estate, amongst them are CFC Stanbic holdings, NSSF, Liberty Life and Centum. Mega real estate projects have been rolled out and are being rolled out such as Tatu by Reneissance Capital and Thika Greens by Thika Greens Ltd. Such projects are the stuff of ambition, boldness and confidence.

Some of the reasons given by analysts in the real estate sector are that;

1. Kenya currently has a supply gap of over 200,000 housing units per year as demand annually exceeds supply. 
2. "Capital gains and availability of refinancing options in the home loans market is helping young people reap the value of their initial investments" - Business Daily article.
3. An emerging middle class that will provide a consistent base of housing demand for the next coming years.
4. Allied to this is the fact that there is a youth bulge i.e. bulk of the population is aged between 15-24. Potential future home owners.
5. The property market has over the last 10 years outperformed the stock market in terms of returns.
6. Government spending on infrastructure will increase value of property.

Allied to this, Analyst at Mavuno Capital Robert Bunyi commented to me that given that Kenyan corporates are small and badly managed, real estate is the best alternative. Furthermore, the fact that only 6% of Kenyans own their homes, only 14,000 mortgages are issued (CBK data) and that Kenya may be seeing average growth rates of 5-6% over the medium term, the real estate market is the place to be over the next 10-20 years.

However, of all these, the most outstanding statement that could form the basis of this article and the ensuing analysis is that "the majority of real estate investors have been buying houses with a view to selling or letting them at higher prices akin to share trading". SHARE TRADING!!!!.

Having given a snapshot of the situation, I guess my two cents comes in here. In any beginner economics class, demand will be defined as the not only the willingness to purchase a good or service but more importantly the ability. A house is a place in which you live in, a source of shelter. Therefore, majority of end-users if I could call them that, are people who are willing and able to buy a house to live in. Does Kenya then, have this demand. The answer to this is a simple NO. Most of the analysis done in local dailies about real estate, have often quoted demand as the people who are in need of shelter rather than the people who are able and willing to buy shelter.

I have blogged before about the distorted civil service pay in which median level employees only earn 1/52 of what top level employees earn. If we assume a ministers salary to be one million shillings (approx $12,500) per month, then that puts the median civil servant salary at approx Kshs 19,500 ($250) per month. From a blogpost by local blogger bankelele, the average monthly mortgage payment for house that is selling for 10 million Kshs (approx $125,000) would be approximately Kshs, 131,447 ($1,643) more than 6 times what the median civil servant earns. How is he expected to pay for such a house.

Given that the private sector pays considerably more, it is still folly to assume that the median employee, can afford a 10 million Kshs house. Which is very modest by Kenyan real estate standards. That price would get you a maisonette in areas such as Lang'ata, BuruBuru and South B. Whereas with the same cash, one can buy a house in a high class suburb in South Africa.

Many other statistics point to the fact that there is minimal demand for houses from potential homeowners (end-users). Such as;

1. Only 3.6% of Kenyans own computers. (Poverty).
2. The main sources of incomes for adults in Kenya are, 20% family and friends, 18% food crops and around 10-12% retail businesses, kiosks and shops in toi, Gikomba and the stalls in Nairobi. (Poverty).
3. 32.7% of Kenyans are excluded from finanial access both formal and informal.
4. 51.8% of Kenyans get money for daily usage through internal remittances.
5. 60% of the youth's main income source is from transfers.
6. Kenya has a gross saving rate of 10%, compared to Ghana with approximately 26%.
7. And interestingly there are only 15 passenger cars per 1,000 people compared to 108 in S.Africa.

These stats may seem unnecessary but they point to the fact that Kenya is a poor country with weak financial systems that cannot provide the demand for such housing projects.

Creepy parallels can be drawn between what we are witnessing and what recently happened in the U.S.A and other developed countries in terms of real estate. With banks falling over each other to lend to real estate investors, investors treating houses as if they are tradeable stocks, more speculators than home-buyers in the real estate market and ambitious real estate projects. I hate to be a wet blanket, but I would venture to say that if the current trend goes unchecked, these investors will realise that there is no real demand for such houses and stop speculating. This will lead to a dramatic downward correction of housing prices and eventually an inventory overhang in the real estate market. One of my favourite quotes in fiction comes from Thomas Hardy's "Far from the Maddening Crowd" in which he writes that "blandishments and glitter are the female's folly", the current housing market and all the blandishments and glitter could be the investor's folly. Just because stocks and other businesses are underperforming doesn't mean that real estate is a good venture. It is not the better of the two evils.

Opinions?

Just a random blog post. However, before I go further, I would like to thank each and every reader of this blog, it is just over a year since I started blogging and thanks for all the support. It has been a real adventure and I sincerely would like to thank each and every reader of this blog.

Today's post is inspired by an arduous process that every man has to go through in his life, the process of going into a shopping mall with someone of the opposite gender. The dreaded F word (Female). The last few years, I have been put through miles and miles of floor space on malls in two continents and women from all walks of life. Despite their differences, one similarity they have is their approach to shopping. When a man wants a tie from a store, the shopping experience will be pretty straighforward. Get into the mall, walk straight to the tie shop or shop most likely to be selling ties and get a tie. Simple, in fact according to my friend, the bulk of the time spent in the mall will be on finding a proper parking space.

For women on the other hand, it is quite different. Women are much more meticulous. For long, I wondered why they walk aimlessly around malls until it hit me, almost as if it was an epiphany. Women are not just walking aimlessly, they are just making sure that they have exhausted their options. A woman will visit all outlets in a mall that sell clothes and shoes, for some they can even give the global coordinates for a particular section of Truworths. Through her constant visits and prying eyes, she constantly makes judgements on price and quality. Many people say that women are too expensive or sometimes they are just cheap while they shop for bargains. I would like to differ on this, most women are neither cheap nor expensive, they just know how to decide on whether to splurge or go frugal. It is almost a quality/price ratio adjustment that they make in their brains. Once they do this, they will most likely go and sit in a corner coffee shop or juice bar and as they chat about, they will simultaneously decide on what they will buy in the second and last phase of their shopping.

Given that they have decided on their quality/price ratio's they then go with their budgets and shop on whatever it is that they wanted. That is if your frown has not persuaded them to give up on shopping. I must add that I am a pretty good frowner and often convince the opposite sex that the shopping is not worth my wrath. The whole process ensures that the woman leaves the store with little or no post-purchase regret. A warm smile then ensues as she walks out of the mall.

You see it is these qualities that lead me to think that if women took to finance the same way they take to shopping, they would by far be the wealthiest people on earth. The same process is useful. With a fixed or variable float (their budget), they would scour the world of stocks and with their mental arithmetic, they would regularly be making value based decisions on the stocks. Like an investor making price/earning ratio calculations mentally, they then add in other factors like how well would this stock fit in with my portfolio, would it be complimentary or not. We have all had women talk about how they don't have anything that can go with these shoes. The value bit comes in as Warren Buffett is often quoted as saying that "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price" what this means is that value is more important than price. Women understand the value of clothes, that is why they wouldn't blink while buying a 2,000 USD Louis Vuitton bag and at the same time haggle for dollar sandles. If most could adjust this orientation of value towards companies, then they would go far. After the analysis and the shopping, they understand that thay have purchased something good and are happy with it.


For the man on the other hand, although it saves you time. If you spent an extra 10 minutes, you may have noticed a similar shop that sells much better ties at half the price. However, in a nutshell. I am simply saying that women are built with the qualities of a good investor, every woman has a Warren Buffett in her, they simply use it in malls rather than in stock markets.

Recently, there has been a lot of drama about the Nigerian Pastor who was in Kenya to give a "talk" to single women about their marital prospects, or lack thereof. To me, it's crazy that a country's fourth estate should stop all other forms of news reporting and concentrate on the Nigerian pastor and his drones of minions. However, it seems to be that marriage is an important component of the society and even the economy. I will try and analyse it as simply as I can, without delving too much into the economics of it.

The first issue I should raise is that, despite the population figures coming out and proving that indeed there is a 1:1 ratio of men and women, the figures can be deceiving. My main qualm is that the figures don't take into account the prison population. There are more men in jail than there are women and as such this could affect the 1:1 ratio of men and women. However, given that Kenya doesn't have a prison-industrial complex like the USA, this should not greatly affect the gender balance.

The second issue is that, the women who throned KICC to hear from Pastor Ojigbani were working women and they seemed to be financially independent, as are a number of women in today's Kenyan society. This is my main point, the young women who were on average in their late twenties, haven't yet analysed their situation and here is where I step in. If the figures are balanced as the media suggests that they are, then every single woman is balanced out by a single man. If there are x single women in their twenties, then there will be x single men in their 20's. Therefore the solitude doesn't affect women only, it's just that it suits men better as they can "enjoy" life as singles more than women.

The women in Kenya should realise that their roles in society have changed. It is not like before where their mothers got married young and took care of them and their siblings. These days women are undertaking tertiary and post graduate studies and are focusing on their work, as is to be expected in a cosmopolitan city like Nairobi. They should then realise that they won't marry as young as their mothers did and in fact they are likely to remain unmarried into their late twenties and early thirties. A number of my friends have whined to me about the fact that they are single and "need" to find a husband, while they are just in their early thirties. The fact is that women will get married later into their lives as school and work take more of their time, especially given the fact that we live in a world of the contraceptive pill.

I guess for the point to hit home, I should refer to "Sex and the City", the quintessential chic flick, which was a syndicated series. The women, Samantha, Charlotte, Miranda and Carrie grapple with their careers and being single women in New York. Through booze-filled nights out in the town, ice cream sleep overs, shopping sprees in the city and a whole load of tears, they slowly discover themselves. Through their self discovery, they then find ways of making their work lives and their love lives work for them. It is a journey. Only later on in their early thirties do most of them get married, mind you Samantha stays single, but it's her choice. Who says in the third sequel (Lord, I pray that it doesn't happen), she won't get married?. However, in a nutshell, my point is that times have changed and as such our approaches to marriage should change. Women can't blame men for living in pre-historic times as is apparent from their expectations of a wife, whereas it is even more apparent through the Pastor Ojigbani incident that they are the ones living in pre-historic times by being so desperate to get hitched.

It should be noted that there is an element of comparative advantage when people are deciding to get married. Given that marriage is a union of two, then it can be analysed in the same way as bilateral trade. The theory of comparative advantage simply states that people should focus on what they are more good (and I don't mean better) at and get what they need through trade. An example is fitting, lets say a lawyer hires a secretary with paralegal training. The lawyer can type faster than the secretary but is by far more skillful in law than the secretary. The theory of comparative advantage states that even though he is a better typist, he should focus on what is much better at and that is law while the secretary does the typing. In the same way, both men and women should focus on doing what they are more suited to and trade it for what they need. I am not implying any specific roles as they will differ from one couple to another, however it is one way of looking at the union of marriage, besides love.

However, before I digress further, it should be observed that the typical Nairobi woman will have to make a trade off, either get married young and give up her career, concentrate fully on her career and never get married or go the Carrie, Miranda and Charlotte way, find a way for both to work together. The third course of action will take time, and as such women will get married in their late twenties and early thirties. Therefore the women should just relax and let it be, they will become Mrs. Somebody someday.

Signing off, I am just reminding you that from tomorrow, the blog resumes it's normal economic and financial analysis.

The Jeffersons, the poster family of intergenerational mobility

There are a number of issues, that I feel Kenyans need to have articulated to them in a tangible and understandable manner. It is often the case that a great number of useful articles in economics are in the language of econometrics which is just Greek to most. A language where instead of calling an equation 'simple' they call it 'parsimonious'. I hope to be able to read through these articles and journals and share some of the important findings that they present.

My former econometrics professor Prof Nair once told me that if you can't measure it, you're just guessing, and I totally agree, if public policy is in question. I therefore try not to argue if I don't have the facts. The issue in question is one of intergenerational mobility. What this means is that does your parents education and prestige have an effect on your education and thus prestige?. Does the Kenyan dream exist, where one does what the Jeffersons did in the 70's and 80's, moved from their humble beginnings to the East side?.It is an important question to discuss. In a good society, there should be high levels of intergenerational mobility as people move on up, regardless of their background. So having defined it? how can we analyse it? To this we turn to what I would call Kenya's Chicago School. The University of Gothenburg, the training ground of Kenya's current Central Bank governor. If anyone is in doubt of his abilities and knowledge, I would request them to relax because I don't think there is anyone else in Kenya with such a deep understanding of Kenya's economy.

The Chicago School for Kenyan economists

However, back to the analysis, University of Gothenburg economist Anthony Wambugu, carried out a study in 2000, in which he surveyed 200 Kenyan manufacturing firms from Nairobi, Mombasa, Nakuru and Eldoret and around 800 of their employees. In the study he asked them about how far they went in terms of their schooling, their wage rate, their parents education, proximity to their school (when they were schooling) and years of tenure in that company. His aim was to find out if parents education and therefore by proxy family background had an effect on an individuals wages. Through sound but complex techniques he came up with findings that are against intergenerational mobility.

Firstly he found out that the higher the parents level of education, the more the years of education one is expected to complete. It is worth noting that a fathers level of education had more of an effect than a mothers level of education. Secondly, Mr. Wambugu found that an extra year of education post primary generated a 21% rise in income. To cap this statistics, it was also observed that a person who attended secondary school was likely to have a wage that is 67% higher than a person who did not. The effects of tertiary education are not explicitly stated, however in another paper, Mr. Wambugu finds that attending university had the biggest effect on distorting wage inequality. Therefore it is clear that a parents level of education has a clear effect on the number of years of education that a person completes. It is also clear that there are differences in the number of years of education and the wage rate that one is likely to receive.

Higher education leads to higher wages

The third issue is one directly related to a parents level of education and his/her child's earnings. The study found that when parent's level of education is controlled for i.e. held constant, the returns to education would fall by about 22%. Therefore, a parents level of education is likely to increase your returns to education by about 22%. However, the effect of family background goes beyond education. 40% of the workers sampled were found to have found their jobs through their family contacts. Thus the family effect also plays a hand in terms of contacts and connections.The wage differential due to parents education can be explained in a number of ways. The first reason is that higher education would lead to higher wages and therefore the parents can provide a more suitable environment from which to learn and grow. Secondly, a more prestigious background reduces job search costs, what this means is that a job seeker can have extended periods of unemployment as he has the luxury of waiting for the best job offer. Someone of a worse off background would have to take the first job that comes. The third reason is that the parents can sponsor the child to attain tertiary education and thus improve his/her wage prospects.

In conclusion, the effects of your parents education and by extension their wealth has a material effect on your level of education and by extension your earnings. Higher parents education leads to higher personal education and thus higher earnings. To augment these findings, in a 2002 essay Anthony Wambugu found that education reduced the chances of a persons employment in the agricultural and informal sectors, both notorious for their meager wages. For Kenya, there is thus very little intergenerational mobility as your parents education heavily affects your life prospects. Poverty is therefore a recurring theme across generations and it is very hard to make it out. There are of course, some exceptions but they are just exceptions and not the norm. In terms of public policy, Kenya has already taken a step in terms of free primary education, but as the article suggests the real differences come in terms of post primary and post secondary education. These two tiers are both marred in under enrolment and there is where the most effort needs to be put. Moving on up is therefore more of a dream, the Kenyan dream doesn't exist.

A recent article in the East African got me thinking about the flower industry in Kenya. In the article, the chairman of the Kenya Flower Council (KFC) hmmm... Mr. Erastus Mureithi was agonising over the lack of "sector specific incentives" for the Kenyan flower industry, given the discomforting rise in the Ethiopian flower industry. In the article, Mr. Mureithi wants special economic zones with their own special tax treatments and incentives to be set up akin to the Export Processing Zones (EPZ's) that the textile industry benefits from.

I beg to differ on his position, in my humble opinion. The Kenyan flower industry should have the tag "helping unfaithful European men since 1960". What I mean is that the Kenyan flower industry is a good example of our outward looking national psyche. In terms of value addition to the local economy, it is not as significant as they would like you to think. Of course, people in the flower business will suggest that horticulture is one of Kenya's largest single foreign currency earner, however despite that, earning foreign currency is an over hyped statistic in my view. Foreign currency earning is hard to analyse from a welfare perspective, what the KFC should be quoting are the mutliplier effects of their industries and the factor returns to labour and capital. Furthermore, I will want to highlight the effects of import substitution against export substitution in regards to the flower industry.

Data from Kenya Institute of Public Policy Research and Analysis (KIPPRA), suggests that horticulture doesn't measure up to dairy farming as well as beef and poultry farming in regards to the multiplier effect. The multiplier effect measures the effect of a unit increase in the production of one good on the production of other goods, for example if radio production has a multiplier of 4.5, then the production of a radio helps increase productivity in other sectors by a factor of 4.5. This then means that production of a good with a high production multiplier is beneficial since it improves welfare by a higher proportion. From their studies, a unit increase in dairy farming produces a 4.01 increase in production from other sectors, for beef and poultry the multiplier is 3.83 and 3.91 respectively. Horticulture falls behind with 3.70. In terms of the added effect of consumption, the multipliers for dairy farming, beef, poultry and horticulture are 8.44, 7.95,8.86 and 8.46 to be exact. The consumption effect for horticulture therefore is higher than that for beef and dairy production. However, since we are more interested in production rather than consumption, it is clear to see that the government if they are to provide "sector specific incentives" should focus more on livestock than horticulture.

To take the analysis further, one should further analyse the sector given the factor returns to both capital and labour, and for labour we subdivide this into rural and urban labour. A product given our economy would be more beneficial if it had higher returns to labour especially rural labour than higher returns to capital. A higher return to capital shows that only the wealthy capital owners benefit from its production. Given that Kenya is a poor country, higher returns to rural labour are preferred as this will help alleviate poverty. From the Kippra data, horticulture production has higher returns for capital vis a vis livestock production. Furthermore, the labour returns are higher for urban labour rather than rural labour. In terms of livestock production, the return is higher for rural unskilled labour. This then means that livestock production is more beneficial in terms of poverty alleviation as compared to horticulture.

The last issue is one to do with trade economics. The Ethiopian government seems to be more than willing to pump tax payers money to boost their flower industry. If this is the case, then why shouldn't Kenyan flower lovers piggy back on the Ethiopian governments benevolence?. My view is that we should let flower farming be an Ethiopian venture. What Mr. Mureithi is suggesting is what is known as import substitution i.e. setting up trade barriers to replace cheaper imports with local products. By setting up government incentives for local producers, we are locking out cheaper flowers from Ethiopia with more expensive Kenyan flowers. Import substitution is not a good policy. What we should focus on is export substitution, the same policy that has seen the Asian Tiger economies roar as loud as they have over these last couple of decades. The Kenyan government should direct their efforts at developing local industries e.g. manufacturing and Jua Kali so as to increase their exports. This has proven to be a more successful strategy given that international competition demands that we increase our efficiency in production.

In conclusion, we should not spend a dime of tax payer money helping out the flower industry. That would be a waste of resources, if anyone wants to buy flowers, import them from Ethiopia.

First of all, I want to wish everyone a great week ahead and if you can, you should attend the Signing of the new constitution ceremony on August the 27th. It is a shame that I cannot attend it. However, having passed the referendum and celebrated in pomp and fanfare as the newspapers suggest, the honeymoon period should end as soon as possible as the daunting task of rebuilding our country lies ahead of us. Luckily we already have a masterplan in the name of Vision 2030.

The Vision 2030 masterplan was drawn up in the middle part of this decade by the National Economic and Social Council of Kenya lead by Dr. Wahome Gakuru and the other directors at the NESC. It is a long term vision aimed at turning Kenya into a middle income country by 2030. It seeks to achieve this through cross-sector reform and targeting key growth sectors such as I.T, Agriculture and Manufacturing that will help drive this vision. The Vision has been adapted by the current government and will likely given the nature of its popularity, be adopted by future governments. In terms of the key vision, turning Kenya into a middle income country is the main objective. However, such objectives as increasing the literacy rate, improving health care provision and improving our national infrastructure are amongst a raft of other metrics that the Vision will seek to improve.

However, how feasible is this plan? Some friends have called me unpatriotic due to my questioning of the feasibility of this program. I don't agree with the term patriotism, how can one be proud of something that he didn't have any control over. I did not choose to be a Kenyan, I am happy to be one but since I had nothing to do with it, I can't be proud of it. It is like being proud of winning a coin toss. I am backed up by Albert Einstein in his assertion that " Heroism on command, senseless violence and all the loathsome nonsense that goes by the name of patriotism, how I passionately hate them". Having said this, I just want to give my views on how becoming a middle income country by 2030 is a tough task and nearly impossible given the variables that Kenya has to deal with.

A definition of what a middle income country is would be a good start. A middle income country is classified into two categories; first is a lower middle income country and second is an upper middle income country. This is according to the World Bank. The lower middle income country category consists of countries whose GDP per capita ranges from $946 to $3,946 and an upper middle income country ranges from $3,946 to $12, 195. Kenya is seeking to be an upper middle income country by 2030 i.e. get a GDP per capita of 3,946 to 12,195 dollars. For the sake of simplicity, we will analyse the situation by using $3,946 as the bulls eye.

Doubts over Feasibility

Now to why I am doubtful of this Vision. Kenya currently stands at a GDP per capita of  roughly $468.70. This puts us in the lower income category of countries. Our aim is to improve to around $3,946 per capita. The NESC estimate that we will need annualised growth of 10% from 2006 onwards to reach this target. However two factors present will require us to reestimate this growth rate. Firstly; four years have passed since then and we haven't touched double digit growth rates, 2007 saw 7.1%, 2008 was 1.55%, 2009 saw 2.59% and IMF projections state that in 2010 the growth rate will be 4%. The second factor is the implicit and yet wrong assumption that global growth will be zero during this 20 year horizon. The issue is that, since GDP per capita is a relative measure then $3,946 in 2010 is not going to be the same in 2030. What this means is that since the world will record GDP growth then the income categories for different countries will change. This means that the figures will have to be revised upwards in view of Global growth. In lay man terms, if everyone gets rich then the definition of a poor man in monetary terms will have to be revised upwards.

To make the analysis simple, let us take a conservative scenario where global growth over the next twenty years is 3.5%, this is a conservative but yet slightly plausible scenario given the uncertain nature of our global environment. If the rate is 3.5% then the definition of a middle income country assuming equity of growth should then be a country whose GDP per capita ranges from $7,851 to $24,265. Now to make the analysis simpler, let us stick to $7,851. We will now have 20 years to move our GDP/Capita from $468.70 to $7,851 dollars in twenty years. Mind you 20 years is a very short time. Again, as Einstein would say "I never think of the future, it comes soon enough". Now this would leave us with two choices if we want to hit the bulls eye of upper middle income country by 2030. Either we could restructure our economy so as to hit 15.11% annual growth rates or kill off all our newborn babies so that we can avoid population growth. The latter is not acceptable so we are left with the former. A daunting challenge if ever there was one.

Leading us into the future are the sons of former President and Vice President

The challenge is made worse by the fact that our major trading partners in the West e.g United Kingdom and the United States are facing uncertain futures. It is made worse by the fact that the UK is implementing tough budget cuts that will see the British consumer cut down on discretionary spending e.g flowers. Furthermore, Uganda having discovered oil may well see us suffer as it is our largest single trading partner. Allied to these challenges is the fact that the Kenyan manufacturing sector according to the IMF as well has fallen from contributing 40% GDP in the 1960s to only 26%. All factors bar the signing in of a new constitution will work against us. I am not yet sold to the thought of the new constitution being a panacea to all our woes. I just read an article in the Daily Nation that suggests that Hon. Uhuru Kenyatta will be the running mate to Hon. Raila Odinga in the 2012 presidential elections. Given this and many other combinations for the top two, the dynastic nature of our political landscape leaves us with very few reformers who can genuinely tackle the issue of political, social and economic reform that will see us achieve 15.11% growth and therefore the Nirvana that is Vision 2030. I am not a patriot however, a prosperous Kenya is a situation that I would want and hope for.

The Central Bank just recently rolled out the new Credit Reference Bureaus in an effort to spur both financial inclusion and the economy in general. I guess if you improve financial inclusion, you will improve the economy, that goes without saying. Well what are CRB's? this post is dedicated to young Kenyans as it will have the largest effect on them. CRB's are credit information sharing organisations. Their mandate is to basically collect all information through the respective banks of a borrowers payment patterns and regularity. They then build a shared database (shared between the banks) of each borrower so that banks can get a better picture of the borrowers creditworthiness. It's a thing that should have been implemented a long time ago but well, better late than never.

It's important that the Central Bank are doing this. First of all it will help households borrow more, in the past only large companies have been able to borrow at favourable rates as they can hire finance professionals to project future income and thus paint a good picture of their creditworthiness. Well now, borrowers will be directly responsible for their own financial lives. It is a bit like student life, in high school, if you were well behaved and studied hard, then your transcript and recommendation letters will bear witness to your endeavours. The high school will then share this information with any prospective universities and the university will look favourably at the good students. The two institutions share information so as to make better enrolment decisions and the onus falls on the student to work hard and be diligent so as to get to a good university.

Currently there are issues with the implementation of the CRB's as the CRB's will only share data on non-performing loans (i.e. defaulting on loans). Analysts suggest that good information should also be shared and not only the bad info. Before we get carried away, we should note that as good an innovation as this is, it will not be a panacea to our banking problems. In fact the benefits will take a long while to be felt for most as many will still need a long enough time to develop a good track record.

However, the gist of this post is simple. As a bulk of the country is below 40 years of age, this generation will now be directly responsible for their financial lives. Just like students are responsible for getting into a good university, we are responsible for ensuring that we live responsibly with our finances. This generation should avoid loans for stuff that they don't need, borrow for worthwhile projects rather than mere indulgence as this will all come back to haunt you. Soon, many of us will have a credit score, it will be your responsibility to make it as high as possible to avoid financial ruin.

I think the basic principle behind finance in general is to allocate capital to its most efficient use. Most people have to save for a whole year just to buy a car, well it doesn't have to be that way in finance. If you have a cash flow i.e. a regular salary, the bank can lay claim to your cash flow and thus lend you the money. However without decent information as per your approach to credit, they face great risk by just lending you the cash. Now, CRB's will help more people lay claim to their future cash flows (salaries, wages, rents) to be able to borrow money and improve their lives. Just remember that this will only happen if you are a diligent borrower.

Note to the Kenyan readers of this blog, take your credit seriously and by all means avoid default from now on.

Today as I read the Daily Nation (A Kenyan newspaper), the front page headline news was about the MP salaries. It was a piece that tried to explain to Kenyans the severity of the situation in terms of how much of a burden the MP's salaries will be to the treasury, as well as comparing average incomes to the MP's salaries. According to the article, currently MP's earn 79 times the average income in the country and this will rise to 113 times the average income in the country. This is shocking I guess, but I feel that the article has missed an important point. The Daily Nation as well as the Central Bureau of statistics forget that it is statistically incorrect to use average incomes in decision making.

I hope you don't mind a short lesson in statistics. I want you to think back to your high school or even elementary maths where you would, given a sample of numbers, be asked to calculate the average, median and mode of that sample of numbers. The average would include adding the numbers up and dividing them by the number of numbers, getting the mode would be found by getting the figure that appears the most times and getting the median would be found by arranging the numbers in ascending or descending order and finding the figure that appears in the middle. Income statistics are meant to be analysed through the median rather than the mean, the reason is simple. The outlier effect, imagine 20 earners, the bottom 10 all earn 50,000 per month, the following 5 earn 75,000, the following four earn 90,000 while the top earns 600,000. The average income from this sample of earners is 91,750 per month. Is this really representative of the sample? no it isn't it is highly skewed to the person who earns 600,000. The best thing to do if one is to analyse the sample of earners is to take their median income which would be 62,500 per month. This number is more representative of the sample even though it heavily discounts the huge earner.

The Daily Nation article should therefore focus on median salaries instead of average incomes especially due to the severity of Kenya's income inequality that would lead to massive outlier effects. However, I do empathise with them as median income statistics are almost impossible to find in Kenya. I lay the blame squarely on the Central Bureau of Statistics. However before I digress, my point is that the discrepancies would be much more alarming had the article used median incomes rather than average incomes. This extends to house prices to income statistics and other ratio's that measure standards and costs of living. The issue is important as decision making is compromised if people use the wrong statistics as they either get a false sense of security or alarm.

A chilly Friday afternoon, cloud cover, temperature around 16 degrees centigrade and a calm atmosphere around the neighbourhood, today's assignment it to pick the subject from the Airport at 16:30 hours. As simple an assignment as there can be. Due to my prudence, I arrange for a cab to pick me at 15:00 hours, well in advance due to the nature of Nairobi Traffic. I expect to get to the airport latest 15:45 hours. Mind you, the distance from the house to the airport is around 22.5 Kms. Fast forward 10 minutes later, I find myself past Westlands round about and just outside some buildings that are being constructed, if I am not wrong, it is the new headquarters for Standard Chartered Bank. The car comes to a standstill, drivers get out of their cars and start having animated conversations amongst each other as we wait for the gridlock to unlock and for cars to move freely again. As it always happens, we in the middle part of the jam hear that it is the president who is keeping us here, yep, we are waiting for his motorcade to pass. It will be a good 25 minutes before traffic starts moving freely again. 25 minutes is a lifetime to remain in one spot, no movement just stuck in one spot. Finally the cars move again and surely we arrive at the airport late around 16:05 hours. Luckily the flight has been delayed and will arrive at 16:30 hours, it is coincidentally delayed due to a V.I.P's flight having to take off.

Surely at around 16:40, the subject gets out into the departure lounge, I am surprised that the subject managed to negotiate Kenyan immigration in such a short time. We get into the cab with the next stop being the subject's destination and home. However, the subject makes a change to the plan, the subjects wants to pass through Westgate Mall to do some banking as the banks there close late. Sure enough, the change of plans should not worry us much, it will just be a short detour. Flash forward 3 hours and we finally make it to Westgate Mall, yep it took us 3 hours to travel from Jomo Kenyatta International Airport to our intermediate destination Westgate Mall. Luckily we manage to convince the guard that we were delayed by traffic and they let the subject do his/her banking. Forward 35 minutes later and we reach the subjects final destination. A good 5 hours and 35 minutes covering a record distance of 45-48 kilometers in total.

It would be good to understand why I went on talking about my journey to and from the airport. The thing is, it is so sad that the taxi driver had to cancel so many clients and lose out on so much money due to his business environment. When you hear this term "business environment" on T.V as a layman, I want you to remember my story. The story of spending 5 hours in traffic to cover a distance that anywhere else in the world would be covered in 20 minutes. This is what should be thought of as Kenya's business environment. When a trucker can only make 3 rounds a week rather than say 6 rounds, it is because of our business environment, when a local flower delivery shop can only make 2 deliveries per day rather than 7 or 8 it is because of this business environment. When tourists leave Kenya with nightmarish memories and dwindling tourist numbers do not seem to correspond with the vast sums that the Tourist Board are spending on their marketing campaigns, the business environment is to blame. It is criminal that a government whose ministers are currently concerned with raising their salaries, can get away with letting their businessmen and civilians suffer due to a mismanaged transport infrastructure.

I am sometimes a bigger picture thinker, or at least I would like to think of myself as one. Yesterday clearly highlighted the bigger picture in terms of the steps that need to be taken to make Kenya work. The unfortunate cab guy lost at least 4 hours of factor productivity. How many does the average Kenyan lose in a day?

I just got back home from half a year in Malaysia, experiencing Asia and continuing my studies. While I was there I had read about Parliament introducing a Price Control Bill to "shelter" the little man from the vagaries of the excesses of Capitalism. Since getting back, there seems to be no real honest opinion being given about the Price Control issue to the public through the media. The only sound opinion being given has been on Business Daily and we all know that the average person doesn't read that publication. Furthermore, the opinion piece despite being well written was long and I know most people who do not have an understanding of the implications of price controls, will find it beyond their scope.

So a discussion of this issue is pertinent. Price controls are usually set below the market clearing price. This market clearing price is the price that equates demand and supply, this is simple economics and should be pretty straightforward. The main reason that price controls are set is because some basic goods or goods that the authorities deem to be necessities, have market clearing prices well beyond the reach of some people who would need the product. They are usually very useful in the sporting world e.g. World Cup tickets, if the ticket prices were left to the forces of demand and supply, a great deal of S.Africans would miss the games because the market clearing prices would be well above what the current prices are. However the dynamics of sporting events are not the same as those for the food market, because firstly food is not a one off event, people have to eat all the time. Furthermore, the supply of world cup tickets is fixed, there are a limited number of games and seats whereas populations grow and mouths to feed usually grow with time.

The key issue for me is that the implementation of price controls firstly; will not achieve its objectives and secondly will be detrimental to the future of this country. To begin with, the reason prices of basic foodstuffs is such an important issue, is because in this country, erratic weather patterns have played a nasty hand in the supply side of the food equation, this has often lead to large swings in food prices, with the swings being upward more often than not. Recently this has become really obvious, the country suffered from severe droughts in 2008 and this lead to the maize shortage and subsequently the maize scandal. This was followed by periods last year where there were such surpluses in the agricultural sector that we saw milk being poured down drains, this clearly caused a huge uproar. The issue then is not with the price but with the supply, when supply situations are good, we see relatively good prices but when the supply is scarce we see the obnoxious prices that we witnessed in 2008.

Price controls will not deal with this instability, they will not take away the volatility of food availability, they will in fact exacerbate the food volatility. With price controls, apart from the political upheavals that will follow naturally from having government offices deciding on food prices, we are likely to see a situation like that in China during the Great Leap Forward, when the price is too low, farmers will not bother to farm because they are not going to earn anything from their efforts, when the prices are high relatively to the costs, the farmers will over supply. This volatility then won't have gone away it will just move from price volatility to supply volatility.

The second issue is to do with innovation, without ready and predictable markets for agricultural commodities,  we are not going to create any incentive for scientists and farmers to come up with new crop breeds, new fertilisers and other innovations that will assist in eradicating food insecurity. Price controls will really mess up the food landscape. If people think that the situation is bad right now, they will be in for a shock once the price controls are implemented. The market most of the times makes much better choices than government bureaucrats ever can. The solution to this issue will be addressed on an upcoming blog post.

It's nearly 41 years ago to the day, Malaysia witnessed a landmark event in its history. The event is known as the May the 13th Incident or the Sino-Malay Sectarian violence of Kuala Lumpur. Malaysia after getting its independence in 1963, Kenyans keep note of that year, saw increasing economic inequality between the Chinese and the indigenous Malay people. The newly formed Malaysia included Malaya (the Malaysian Peninsular), Singapore, North Borneo and Sarawak. However in 1964, race riots brought about by the perceived inequality between the wealthy Chinese and the poorer Malay. Most Malay were angered by the fact that the government was willing to look the other side placating Chinese interests at the expense of the indigenous Malay. These issues persisted up till the elections of 1969.

In the run up to the elections, there was a great deal of racial rhetoric being fanned by the political parties. The elections saw the Alliance party gain majority in the national parliament. This was all well and good but the key thing was that there was a tie with the Democratic Action Party that was predominantly Chinese for control over the State Legislature for Selangor. Selangor is the richest province in Malaysia. The DAP in a sense claimed victory and on 12th May arranged a procession through Kuala Lumpur to celebrate. The rowdy processions went well up till the point where the procession path diverted into Kampung Baru, a predominantly Malay area. The Chinese while passing through this area were carrying brooms in a sense suggesting that they would sweep the Malay off the face of Malaysia. This invariably stirred the existing tensions. On May 13th individual incidents between the two races lead to an all out race war. Many deaths were reported and a State of emergency was called by the government. The National Operations Council intervened to run the country and it is worth mentioning that Parliament didn't intervene till 1971.

The government that took over from here saw that they could no longer placate Chinese interest at the expense of the Malays and they responded by implementing affirmative action policies that were referred to as the New Economic Policy (NEP) of 1969. Some saw this measure to be draconian as it further entrenched very strong Malay priviledges into the constitution. Years on the affirmative action measures have failed to bear any tangible benefits for the Malay as the inequality still exists. It is so bad that the national statisitcs office does not release official income statistics due to their sensitivity. This has lead to the government lead by the prime minister Najib Razak unveiling a New Economic Model.

What has this got to do with Kenya, you may ask yourself. Well, if the similarities are not yet apparent yet, you may need to look at recent events in Kenya. The Post-election violence would be a good place to start. You see, regardless of the efficacy of the steps that Malaysia took after 1969 to reduce economic tensions, the fact is that they responded to a crisis and averted the break down of a Nation. The social cohesion present in the country has lead to the country being a middle income country and it is now planning to be a developed country by 2020. 10 years earlier than 2030 where we plan on being a middle income nation. The Malaysian authorities can be credited for responding rather than just sweeping their issues under the carpet.

In Kenya, we face the similar situation. We have the choice of staying on the current path and facing similar tensions in 2012 or we have the chance at least to take the monumental leap and create a new constitution. However, there is a great deal of noise over this process and as each day passes the chances of getting a new contitution gets slimmer and slimmer as the noise gets louder and louder.

I am really angered by the Church's position on both the Kadhi courts and the abortion debate. They completely lack perspective and someone can serioulsy question their collective memory and compassion for the country. In terms of Kadhi courts, I really don't get how for people who begin their National anthem by 'Oh God of all creation" can refer to the kadhi situation as something that will favour Islam over Christianity.  Clearly the anthem already shows a national acceptance of biblical creationism and yet the church conveniently overlooks this fact when arguing against the kadhi courts issue. On the note of abortion, the constitution clearly states that abortion would only be legal, if a medical practitioner deems it to be necessary if the mothers life is in danger. I really don't understand what is wrong with this, would they rather a wife, sister, mother or daughter lose their life in order to uphold biblical teachings? If their relatives were in the same situation, would they rather lose their relatives and maybe also lose the child just to uphold the bible?.

For me the church for too long has gotten away with spiritual blackmail to further their ends. They use this same blackmail to get concessions with their schools, universities, construction permits and so on. It is a sense of "if you deny us this, then curses be upon you". I think it is about time for common sense to prevail and a utilitarian sense of doing for the greater good prevail. Let us learn like the Malaysians did and not drive our country into deep problems. The difference between progress and stagnation is adapting and learning rather than sweeping stuff under the carpet. The new constitution is our chance to adapt and learn and hopefully undo a sense of perceived inequalities. We should not look back and regret that we had a chance to change but we didn't.

Recently the world has been treated to the constant images of stranded air travelers in Europe and around the world. Closer to home, we've seen flowers being unpacked and discarded because they can't get to the European markets. All this has happened due to the impossible to pronounce Icelandic volcano whose ashes have been spewing for days. The standstill in global and more devastatingly European transport has lead to a huge bill for travelers, airlines and all the related industries. I am sure Pep Guardiola the Barcelona coach would vouch for this as his team had to travel all the way to Milan from Catalunya by bus, this clearly had an effect on his team's performances. However this is besides the point. The air travel regulatory authorities grounded all the transport due to safety concerns. On the other hand we had the airlines claiming that it could be safe to travel.

The difference between the two in my case boils down to two different approaches to scientific learning. The regulatory authorities were using computer models based on historic data to simulate what would happen if a plane was to come into contact with the ash. From a scientific perspective, it is worth mentioning that volcanic ash is in essence microscopic glass. Therefore if it would come into contact with a jet engine, it would melt immediately. As one would deduce, it would then solidify in the engine leading to pure catastrophe. Hails storms are bad enough, imagine boeing storms across continental Europe.

On the other side of the scientific argument were airlines who posited that they should undertake test flights so as to ascertain the real level of danger posed by the ash clouds. This was an old fashioned approach to science, where observation of real time data would lead to a clear conclusion. The pragmatist in me rooted for the latter approach. The IATA C.E.O. Mr. Giovanni Bisignani was a big advocate of this approach. Luckily some flights have been approved and slowly the world is travelling again.

So where does the economics and finance come in. After studying economics in depth, after sleepless nights trying to not fail advanced econometrics exams, after days in the library reading on stock covariances and correlations, I am of the opinion that it is all misplaced. I struggle to find the practical and real application of most of this issues in real life. It makes me think of the saying "If you give a man a hammer, everything to him looks like a nail". One could seriously make the argument that economists are more interested in applying their knowledge in calculus when studying the maximisation of consumer surplus, than they are in really understanding consumer surplus. A lot of the models have failed miserably in the past and even more so during the last global crisis. Modelling human behaviour is simply impossible and predicting it is even harder. However, economists have made this their life aim. From a statistical perspective, when so many models have failed, we should conclude that we should drop the models, just like statisticians drop variables that are not significant.

On the side of finance, it would take a really strong discussion for me to get the point. Warren Buffet always says that an investor should read annual reports and attend AGM's rather than study formula's with Greek alphabet terms. One example of the irrelevance is when CFA professors teach the Optimal Portfolio Theory. For a better understanding of my opposition to this you can send me an email, but the concept is way beyond lay man understanding. However, it basically makes unrealistic assumptions and even makes more unrealistic conclusions to develop a model that should eventually make money. No wonder the world is up against wall street. Maths should not be used to generate formula's so as to make money. If the Long Term Capital Management crisis of 1998 hasn't taught us anything then nothing will.

I guess where I am getting at is that too much energy is spent on the wrong things, defeating the essence of economics where we should maximise utility. In my view, the curriculisation (new word) of a branch of knowledge has lead to its deterioration. Let's make these two branches of knowledge more practical rather than more theoretical. Theory should be a precursor to knowledge rather than the knowledge itself. Knowledge and observation are the roots of the tree of theory, however nowadays finance and economics theories are like the mountains in avatar, they just float supported by nothing much. We should take the approach of the airlines and not the regulatory authorities.

I am sure all the readers of this blog probably know that I am currently in Malaysia. It has been great to come to the far east albeit just for a few months and see a different side of this earth. However, it has also been a great eye opener in terms of my economic thinking.

 Most economic articles that chronicle or critique Africa's slow pace when it comes to economic development, often draw parallels with the East Asian tiger economies. These are Malaysia, Singapore, Thailand, Indonesia and so on. In all honesty, readers of this blog will realise that I have also joined in the foray and given the parallels.

These parallels are pertinent in that the East Asian economies started their growth from the same level as the African one's did. They are therefore good candidates for comparative analysis as one can see where we African's went wrong. We can analyse why our tourism numbers are so low given similar or sometimes even better tourism sites, we can analyse why our macro economic environments are so unstable, why our business costs are so high, why we do not have running water and many other factors. It is true that most of the tiger economies are in a far better position that we are in all of these measures.

 The Eastwards mentality is becoming so entrenched in our minds, especially when the gains of western style capitalism haven't spread out to everyone. Trickle down economics has not worked, maybe our canopies are too thick and thus the rain hits the canopy, sticks there and later evaporates so as to condense elsewhere. It could be said that this eastward mentality is just another form of anti-capitalism (socialism), in just the same vain as tree hugging is. I have some friends from Zimbabwe who are such staunch supporters of their governments plans to look eastwards when it comes to development, that they can even get violent when one questions the rationale behind it. They often point out to western imperialist designs as to plausible reasons as to why we should favour the east. However as Shakespeare wrote "a rose by any other name would still smell as sweet". The east and especially China is just as imperialist as the West is, maybe just that they are honest about it. However, before I digress this was not the point of the post.

My concerns are that the admiration towards East Asian economies could be misplaced. The socio-political environment here in Malaysia and in most of the surrounding countries would simply not work in any African country. There is a very patronising and paternalistic approach from government towards their citizens. The people are like drones who shall neither speak out nor think for themselves. "Why should they, we give them all they want", seems to be the approach from the leaders. They stay mostly locked up in the government state (Putrajaya in the case of Malaysia) and looked towards like some all knowing demigods. The level of conformity is at times almost tangible. When watching TV a lot of the content is controlled, there are no satirical comedies both in print and visual media that poke fun at the governments. After all that we as Kenyans have fought for in terms of democracy and freedom of speech. So much so that a generation has grown up with people like Gado, Redykyulass and the late Wahome Mutahi who often ridiculed powerful figures in government, are we ready to give it all up, all in the name of looking east?

As my deceased intellectual mentor and role model Milton Friedman (yes, I do set myself lofty standards) would say; "the biggest downfall of the intellectuals is that they undermine the intellect of the common man".  The fact is that a self sustaining capitalist and democratic society, in my view and as is attested by history should allow people to pursue their own happiness. In any means possible so long as they do not infringe on their neighbours rights. This is pure speculation, however, the Tiananmen Square crisis of the late 80's according to most historians arose due to the new found wealth of the Chinese that needed expression through increased personal freedoms. This is amongst the many historical examples that underpin the argument that freedom and wealth go hand in hand. In a previous blogpost, I start off with a quote from Adam Smith that also argues about freedom and wealth. Our aim then as a country and generally as a continent is to find a growth formula that starts off with a liberal political base. As hard as this may be, it is the only option. Looking east will mean that we give up a great deal of our basic freedoms, a situation that is untenable in both the short run and the long run.