Future Capital Kenya

I remember talking to a colleague of mine at university back in South Africa about my possible moves after I graduate. He asked me the question “state or private?” in other words would I work for the government or would I head out towards the private sector? This question baffled me as I could not ever imagine myself being a civil servant. As a Kenyan, the things that come to mind when I think of the civil service are corruption, bad suits and glaring inefficiency. Why would I want to be a part of that? The notion was preposterous.


From this, I was therefore very surprised to find that the government wage bill as a percentage of both GDP and government expenditures are very high compared to both our East African neighbours and the East Asian Tiger economies, the latter ever so important because we hope to become a middle income country by 2030.

Now on to the data available so as to get a clear picture of what is going on in Kenya. The best way that one can compare the wage bills in different countries and regions is to standardise the data by either measuring the wage bill as a percentage of GDP or expenditure. In Kenya, the government wage bill as a percentage of GDP is approximately 8.4%. As a percentage of total expenditure, this is about 31%. This statistics are ever more glaring when one considers that transfers to universities and the military are not included in the wages that the government reports. In middle income countries, the wages are 6.0% and 22.1% percent of GDP and expenditures respectively. In East Asia the wages are 4.6% and 15.1% and in high income countries the wages are 5.9% and 15.6% of GDP and expenditures respectively.

Kenyan civil servants are clearly well paid if one follows the statistics given by the IMF. However are they? If they are, why then do we see droves of civil servants leaving their jobs and opening stalls in the CBD? Why are they all migrating to the private sector after getting their government sponsored education? This is ever more conspicuous when you consider that the number of workers in the civil service has dropped on average by 4%, this according to both the IMF and the World Bank. Clearly then there is a something incongruous between the rising government wage bill and the diminishing civil service.

When we peer through the data further, we see the missing link. There it is raring it’s ugly head, the simple truth that the high ranking civil servants are extremely well compensated with wages that have outpaced inflation. The middle and lower ranking workers are left behind as the rich get richer. The “mbuta” as our prime minister affectionately named them have been lining their pockets at the expense of their subordinates. According to the IMF, the top to minimum ratio is 118:1. This means that the top officials earn 118 times what the lowest earners are earning. This compared to Uganda, Tanzania and Botswana where the ratios are 25:1, 20:1 and 30:1 respectively. This is really a shocking figure. Added to this the top to median ratio is 53:1 meaning that the highest earner makes 53 times the median income in the service. Again compared to Uganda, Tanzania and Botswana with ratios of 7:1, 5:1 and 4:1, the picture becomes pretty clear and even infuriating.

Our pay structures do not reflect productivity but are more so reflections of status in an elitist government. The thousands of university graduates who would join government as cadres and technocrats are not compensated well enough. Their pay does not reflect their productivity and thus the sharpest minds in Kenya will never ever dream of working for their country. The engineers who would have drafted plans to deal with the rising costs of energy are abroad working for big engineering firms, our economists who would have been implementing plans to steer our economy forward are playing the stock exchange and adding little value to the economy. Our lawyers who would be clearing the backlogs of cases pending at the high courts are company secretaries at the big firms.

The government needs to break with an elitist approach to civil service and have productivity based compensation packages. We need to attract our brightest minds to the government if we are ever to dream of having a robust civil service. Hopefully the draft constitution will deal with this through the mooted salaries and remunerations committee. Until then it is distortion galore at the civil service.

If you prefer a short video to understand the Future Capital Series, here it is:

Commerce and manufacturers gradually introduced order and good government and with them the liberty and security of individuals, among the inhabitants of the country, who had before lived in a continual state of war with their neighbours and of servile dependency upon their superiors. (Adam Smith, Wealth of Nations)

The quote above is a good starting point for the discussion. Mr. Smith who is widely recognised as the father of modern economics suggests that improved industry and commerce generally leads to good governance and political freedom. This sentiment is shared by amongst others, the late Prof. Milton Friedman in his book "Free to Choose". I assert that where Kenya is currently in terms of our politics is where England and generally Western Europe and North America was over 300 years ago. In a state where land owners and a few prosperous industrialists run the country to their benefit.

In many cases, we have heard of laws being made to further their commercial interests, government tenders being awarded to friendly businesses as well as just recently when elections are tampered with to the leader's benefit. While the last point could be controversial and even provide fodder for heated debate, there should be widespread consensus that Kenya is run by a few people, our democracy is only semantic and not real. Adam Smith further gives an account as to the political situation back when he was writing his great book circa 1776, in reference to the means of law making and governance he said;

 

Watching Kenyan news this last week has really vindicated my beliefs that Kenyan's have a serious case of amnesia. 10,000 litres of milk were poured out with impunity and just yesterday Maize was rotting in Rift Valley. The milk case was just horrible because as my dear aunt told me on Friday evening. It would even have been more prudent for the milk to be put outside the factory gates for the public to come and consume to their discretion. However before I rant further which is clearly not in the spirit of this blog, one must ask themselves; what's the matter? Analysing this can be voluminous, but I'd like to try with some of John Locke's wisdom.

In the Wealth of Nations by Adam Smith, John Locke is quoted as saying;

All other moveable goods are of so consumable a nature, that the wealth which consists in them cannot be much depended on; and a nation which abounds in them one year may, without exportation, but merely by their own waste and extravagance, be in great want the next. Money on the contrary, is a steady friend, which though it may travel about from hand to hand, yet if it can be kept from going out of the country, is not very liable to be wasted and consumed

The meaning of all this is that commodity dependent countries are not good candidates for sustained growth. Due to the consumable nature of commodities especially in countries where impunity and corruption is rife (KENYA!!!), waste and extravagance will stifle growth. This is nothing new in Africa. However, this is not to say that commodity rich countries cannot thrive, this is merely to say that money, and not commodities is the main driver of growth. John Locke then concludes by stating that "increasing money is the great object of a country's political economy". 

I still feel that this is too shallow an analysis, I will thus follow this post up with part 4 of the Future Capital Series. However, it is something to digest, we should stop with the notion that the more food, copper, gold and oil we have, the more we'll grow. It's a bit like saying that a person with 100 beers worth 80Ksh each is better off than the person with Ksh 6,000. The consumable nature of the beers is no match to the multipliable nature of the Ksh 6,000.

Image courtesy of Daily Nation Online Edition

Recently, I have strongly become of the opinion that economists should legitimize their profession by forming a professional body. Just like the lawyers have the Law Society of Kenya and accountants have CPA and ICPAK. This view was enshrined in me even further after a talk I had with Robert Bunyi of Mavuno Capital. The lack of a professional body leaves the whole profession in the doldrums as there is no sense of accountability over what an economist says in public or even more important who is considered an economist.


The reason I am concerned about this is because of the current economic stimulus programme started by Hon. Uhuru Kenyatta the minister of finance. It is a noble and humane idea to get tax payer money working to build the country, stimulate aggregate demand by filling the hole left by declining private sector demand due to the economic downfall as well as getting money into people's hands. The sad thing though, that economists I feel haven't highlighted, is that the transmission mechanisms for stimulus money in Kenya are broken. The budget was read in June last year and of the proposed Ksh 22 billion, only 3 has been used so far. The rest of the 19 billion is still in treasury waiting for tenders to be completed and signed and a whole lot of bureaucratic procedures to be completed. I am afraid that by the time stimulus money gets into the economy through the projects and ultimately to the people's pockets it could be at least Q2 2011.


What then? By then won't the worst of the downturn have been behind us. Further still won't that mean that we got by the downturn despite the stimulus rather than due to the stimulus? Of the money that gets into the economy, won't it result in unnecessarily high levels of money supply? Won't this then lead to an increase in underlying inflation? Won't CBK then try to reduce money supply to mitigate the increase in underlying inflation? Won't the politicians praise the efforts of the stimulus due to the increased fortunes of their electorate heading into 2012 elections? Won't parliament then have great incentive to pass laws that institutionalise the stimulus and thus lead to an annual fiscal drain of at least 22 billion shillings to the taxpayers?


Won't this all be unnecessary? In my opinion, we need a body of economists who will crystallise debate over such issues and put them in the public domain. In America, stimulus programmes work well because they are quick to transmit to the rest of the economy. They have flexible legislature that can be quickly called to fix the crisis and quicker means to get money to where it needs to be. Here the medicine takes effect way after the patient gets better leaving unnecessary symptoms that when treated will lead to confusion in the patient's body. For me the effects will be high levels of inflation come 2011. Currently we are seeing at least 5% of overall, it could be more then and who knows that coupled with drought could see the level double to 10%. What then?


What's your take?

This post has been long over due. I recently had a talk with Mr. Isaac Njuguna of Zimele Asset Management, a local asset management company to discuss various matters pertaining to the local economy, capital markets and investing in Kenya. It was a really pleasure to meet him. He is a unique fellow, very statistical in his thinking as he often would punctuate his sentences with terms such as "mean reversion", "standard deviation" and "multi-collinearity", often to refer to every day issues. I left very impressed by his grasp of the economy and his intellectual honesty. I will just discuss some of the issues we discussed so that I can share them with a wider audience.

"And this too shall pass away. How chastening in the hour of pride! - how consoling in the depths of affliction! "And this too shall pass away. And yet let us hope it is not quite true"

Abraham Lincoln, Addressing the Wisconsin State Agricultural Society in Milwaukee (1859)

This is such a profound statement, it was actually coined by an Eastern Mornach's wise men. He asked them to come up with a sentence that would be true, relevant and appropriate in all situations of life.

Now to the economics. This too shall pass. The current reprieve customers are facing with falling milk prices... this too shall pass... the current falling food prices... this too shall pass. I don't want to sound like a prophet of doom but considering Kenya's climatic conditions and historical inflation record, this too shall pass. Once the drought is back and the drought will be back for sure, the prices will get to their normal levels. Food inflation according to data that I was privy to from my friends at Herufi House (National Bureau of Statistics) is the biggest driver of overall inflation. I got data that backtracked the new geometric mean inflation data to October 2005 and the effects of the drought were so dramatic. The food index went from 118.67 in December 07 to 158.72 in March of 09. The inflation rate then jumped from 5.6 to 14.6.

Moral of the story, I don't think anyone needs to be told again. "This too shall pass"