Future Capital Kenya

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?

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