Future Capital Kenya

In the last post, I suggested that running a current account deficit is unhealthy. Now, this is not necessarily a bad situation as some would say "the capital that is flowing into the country, will offset any negatives that arise from having a current account deficit". This means that when you sell less than you buy, the money that you borrow to finance this gap can be beneficial. In short, there a lot of intellectually dishonest economists (read IMF and the World Bank) who encourage African countries to run current account deficits and capital account surpluses. 

In fact, a recently "overquoted' study by the World Bank entitled "Kenya at the Tipping Point" states that "The Overall Balance of Payments position has been positive in 2010 and the outlook remains positive" (Whatever that means) it further goes on to state that the capital account remains healthy. Economists usually use such vague terms such as "positive, healthy, medium term and outlook" when they are making false claims, or worse still, claims that they don't have any faith in. Imagine if your long-term boyfriend/girlfriend told you that their "outlook on your relationship remains positive". I'm sure you'd be puzzled.

Now that I have vented, let me get to the gist of this post. The gist is that in a country such as ours, we can only prosper in the long run if we alter our Balance of Payments and export more than we can import. Further to this, we should export more goods than we do services.

To start with, having a positive capital account is not a healthy situation to be in, especially in Kenya. A study conducted in 2007 by Rajan, Prasad and Subramanian reached the following conclusion about the effect of foreign capital in underdeveloped nations;

"Indeed an underdeveloped financial system is more likely to channel foreign capital, not to potentially-highly productive but hard to finance investments in the tradeable manufacturing sector, but to easily collateralised non-tradeable investments like real estate". They further state that "The financial underdevelopment and underdevelopment more generally, could exacerbate foreign capital's contribution to a rise in costs in the non-traded sector and the possibility of over-valuation". 

These findings are clear to any Kenyan on the street, but are extremely vague to a number of foreign economists living in Kenya. Foreign capital does not find its way into productive segments such as road and rail transport, large scale agriculture and manufacturing. It will find its way into real estate and other easy to exit investments, primarily due to a poor property rights system. Consider that our capital flows are primarily aid and loans to the government, not foreign direct investments. Therefore, these loans and aid flows usually find their way into NGO offices or some lucky government bureaucrats. The NGO people will buy their foreign workers expensive houses or rent the houses at exorbitant rents; the government official will buy a plot!. The money, will not find its way into productive areas. The NGO people will write reports upon reports but will never offer anything towards tangible improvements in our welfare. 

If you consider that only 14% of our road network, spanning approximately 64,000 kms is paved and that not a single rail has been added onto our railway system for close to a century, then it is clear that foreign capital is not doing its job. Further, consider a report by Mars group that found that almost 1/4 of our annual budget, heavily funded  through capital flows, is unaccounted for; then any honest economist or thinker, cannot suggest that foreign capital is doing its work. 

Some will talk about remittances, however, it is almost arguable that remittances are overstated due to a simple fact. As much as people living in the diaspora send money back home, people in Kenya also send money to the diaspora, primarily in the form of school fees and some pocket cash. The CBK statistics show remittances as they are, but do not consider Kenyans sending money to the diaspora to pay for fees and up-keep. If you net these two figures, then the value of remittances would fall dramatically.

Therefore, it is clear that in our case; foreign capital does more harm than it does good. What this means for Kenya is that we should direct our efforts towards enabling a current account surplus. Primarily, this will entail providing for food security and investing huge sums towards agriculture. If one considers that the agricultural sector employs close to 75% of all Kenyans, then it is the only logical thing to do. With a strong agricultural base, then agribusiness and manufacturing will then follow suit enabling an improvement in our current account. Further to this, improved food output will reduce the shocks that have become a norm in modern times enabling steady growth in the economy. In 2008, food inflation in S.Africa, a country with a significant agricultural base was only 1.4%, in Kenya it was well into double figures.

Our policy wonks should steer away from IT and finance as drivers for Kenyan growth. These two form part of the "services" account. IT, finance and Business Process Outsourcing (B.P.O) have what economists call a low multiplier effect. Only skilled employees will benefit from the growth of these sectors and thus income inequality will grow. If you look at the income distributions of India and the U.S.A, they are extremely skewed due to thriving, I.T and financial sectors. The sectors that employ the bulk of the population are not catered for (read manufacturing).

For Vision2030 to bear fruit, approximately 75% of our efforts should be steered toward agriculture. Once we have food, then other things can take care of themselves and the "Perfect Storm" that I alluded to, will be better mitigated. Lastly, improved agricultural production will lead to current account surpluses, and a better balance of payments position.