Why Do Ideas Matter in the Management of Economic Policy in Kenya?
Category: Economic Policy
By: Leo Kipkogei Kemboi,
Many different tools are used by governments around the world, including the government of Kenya, to manage their economies which are collectively referred to as economic policies. They consist of taxation, budgeting, job creation, and monetary policy (money supply and demand) among other policies[1]. Because there are tradeoffs in every policy decision made, the key decision-makers in economic policy are responsible for choosing the right set of tools to achieve the best economic results.
To put things in perspective, fiscal policy is one of the crucial and divisive aspects of managing economic policy. Kenya’s fiscal policy options have been limited by the Jubilee Administration’s deemed unsound economic policy choices. The IEA has raised significant concerns over the past eight years regarding Kenya’s fiscal policy and its effects, which are already being felt.
It is important to examine the economic and political ideas of any administration because their execution has fiscal policy implications. That is why the IEA Kenya examined the economic plans of the Azimio La Umoja Coalition, Roots Party, Agano Party and the Kenya Kwanza Coalition. The framing of ideas related to economic policy and implementation remains consequential. Kenya has learned from history that failing to carefully examine economic plans can always cause the economy to slow down or contract, as well as cause Kenyans to suffer quickly.
The main objective of the IEA’s Constitution, Law, and Economy programme (CLE) and one of the main motivations for writing this article is to examine the interactions between legal, economic, and political issues and how they affect Kenya’s economy. The most contentious law passed each year, for instance, is the annual appropriations, which Kenya’s government uses to be able to levy and collect taxes that determine fiscal policy. As a result, both the intended and unintended consequences of a massive economic policy of this nature should be investigated and used as a guide for future economic decision-making.
The Jubilee Administration engaged in a fiscal expansion in 2013, spending more money than it could raise and resulting in ongoing deficits. The spending tenet was to put more money into Kenya’s infrastructure so that it could draw in foreign direct investment. It was claimed that the main factor affecting total factor productivity was a lack of/inadequacy of infrastructure. Undoubtedly, this was not the only explanation for Kenya’s low total factor productivity. Additionally, with leaking public finance management, increased spending primarily through procurement fraud and other forms of corruption increased fiscal slippage.
The Jubilee Administration did not approach Kenya’s economic policy by focusing on the right issues. The main objective of economic policy, as advanced by decision-makers, is to influence and mobilize capital allocation to maximize benefits for the nation. The Jubilee Administration did not abide by this maxim. To illustrate this, we examine the current economic picture.
The current economic picture
As explained above, Kenya is currently entrapped in a debt cycle characterised by massive fiscal deficits. In the long run, Kenya has always been conditioned to low total factor productivity, inflation has averaged 5% over the past ten years, a growing labour market with little formal sector employment, erratic tax changes, widening income inequality, and a vulnerable public finance management system[2], and large levels of dependency. Additionally, due to onerous regulations, scant economic data produced by the government, a stagnant stock market, and election-year politics, investors frequently adopt a wait-and-see attitude[3], a managed exchange rate[4]and a weaker economy in general. The fact that Kenya’s formal labour market is so small suggests that the majority of Kenyans are employed in the informal economy. This demonstrates how the structure of Kenya’s economy has not changed, with the majority of the country’s economy still being conducted informally as shown by the tiny size of the formal labour market.
Additionally, the devolved units face financial constraints as a result of non-neutral public finance disbursement mechanisms that favour national government entities over devolved governments[5], an incomplete transfer of functions[6], an incomplete operationalization of the Equalization Fund, and the likelihood that Covid19’s effects on the economy have not yet subsided[7]. There is strong evidence that financial intermediation in Kenya is slowing down[8] and the introduced regime for interest rate control has made the issue worse[9],[10]. When considering Kenya’s economic issues, it is evident that those responsible for economic policy are not held accountable for any actions, if any, taken to address these resulting economic policy issues[11].
Ideas and Economic Policy
These economic issues result from improperly managed fiscal policy and unintended side effects of poorly managed economic policy. Ideas have a big impact on how governments choose their policies. However, policymakers still employ a lot of strategies that haven’t worked in the past, and even some good ideas aren’t always implemented.
The French author Ernest Dimnet once said, “Ideas are the root of creation” and the heart of innovation is ideas. Understanding the role of government and effectively allocating resources are important concepts for all Kenyans, not just for political actors, because they have the power to change history, either by bringing about increased welfare and prosperity or by bringing about the economic doldrums like unemployment and the current fiscal crisis that Kenya is experiencing.
Kenya’s public finance system as mandated in the Constitution has different instruments which are derived from conventional thinking and are recognized in the Constitution which include direct spending, subsidies, waivers, taxes and public debt. How this was deployed by the Jubilee administration confirms the claim that ideas have consequences.
Three key points—lack of evidence in economic policymaking, the prevalence of “zombie” ideas, and poor mechanism designs—can all be used to explain the current state of public finance management.
- Little or no evidence in economic policymaking- The majority of ideas put forth in the last ten years have been based on assumptions or arbitrary choices made for political reasons. The economic analysis of the Standard Gauge Railway and the six-lane highway connecting Mombasa to Malaba is a great example. The government approved the project even though research from numerous organizations and individuals showed that the cost of building the railroad could never be recovered from operating it. As a result, the project became a sunk cost. The opportunity cost of this project is the lack of resources for the six-lane highway, whose economic analysis revealed that it would be a cost-effective logistics solution.
- Zombie Ideas- According to Peters and Nagel (2020)[12], “zombie ideas” are ideas that persist despite being refuted repeatedly. It is challenging to declare that any idea has failed categorically and that there are legitimate doubts regarding what qualifies as policy failure (McConnell, 2010)[13]. A good illustration is an intervention in boosting food security through Galana Kulalu. Evidently from economic policy, food security is a demand-side issue which in this case is income level. Instead of concentrating on demand-side issues, the government kept funding supply-side strategies that had already failed.
- Bad Mechanism Designs- The central claim of the Jubilee administration was that infrastructure should be built and investors will come popularly christened as “Build and they will come”. The primary economic policy did not address the structural problems affecting Kenya’s economy, such as slowing exports, declining total factor productivity, and rising government red tape, among others. The focus was largely on the government being spread out too thin in the quest to build infrastructure Because of the currency shortages brought on by the use of monetary policy action to support the shilling, the failure to implement export promotion programmes is now biting.
Conclusion.
When binge borrowing started, the concern at the moment was that it would crowd out the private sector from the credit market, and could substantially slow down the economy. A weaker economy would not only have negative implications on the government revenue, forex, labour market, dependency levels, and general welfare of Kenyan citizens.
It is obvious that poor economic decisions always have disastrous effects. Lack of evidence in economic policymaking, the prevalence of “zombie” ideas, and inadequate mechanism designs are the three issues that urgently need to be fixed.
References
[1] “Economic Policy,” 2021. https://eur-lex.europa.eu/EN/legal-content/glossary/economic-policy.html#:~:text=Economic%20policy%20covers%20a%20wide.
[2] Analysis of the Auditor General Reports on the Financial Statements for National Government Published by Institute of Economic Affairs,2019.
[3] Omondi, Dominic. “Why the Stock Market Hype Has Fizzled Out.” The Standard, February 16, 2020. https://www.standardmedia.co.ke/business/news/article/2001360597/why-the-stock-market-hype-has-fizzled-out.
[4] Whitehouse, David. “Kenya’s Shilling Management Is Flirting with Disaster.” The Africa Report.com, May 22, 2019. https://www.theafricareport.com/13216/kenyas-shilling-management-is-flirting-with-disaster/.
[5] Kimanthi, Kennedy. “Kenya: How Delayed Funding Messed up Counties,” April 8, 2020. https://allafrica.com/stories/202004080473.html.
[6] Muchui, David. “Kenya: Governors Threaten to Go to Court over Transfer of Devolved Functions,” January 10, 2016. https://allafrica.com/stories/201601111464.html.
[7] Kemboi, Leo Kipkogei. “The Impact of COVID-19 on the Kenyan Economy.” papers.ssrn.com. Rochester, NY, September 4, 2020. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3687260.
[8] Beck, Thorsten, and Michael Fuchs. “Structural Issues in the Kenyan Financial System: Improving Competition and Access.” World Bank Policy Research Working Paper 3363, 2004. https://openknowledge.worldbank.org/bitstream/handle/10986/14185/wps3363.pdf?sequence=1&isAllowed=y.
[9] Alper, C. Emre, Benedict J. Clements, Niko A. Hobdari, Rafel Moyà Porcel, and Division Chief. “Do Interest Rate Controls Work? Evidence from Kenya.” IMF Working Papers 2019, no. 119 (May 31, 2019). https://doi.org/10.5089/9781498313957.001.A001.
[10] Odour, Jacob, Stephen Karingi, and Stephen Mwaura. “Efficiency of the Financial Market Intermediation Process in Kenya: A Comparative Analysis.” KIPPRA Discussion Paper No. 122, 2010. https://repository.kippra.or.ke/bitstream/handle/123456789/2266/efficiency-of-the-financial-market-intermediation-process-in-kenya-a-comparative-analysis-dp-122.pdf?sequence=1&isAllowed=y.
[11] Kemboi, Leo Kipkogei. “Making Kenya’s Economic Policymakers Accountable.” (2022).
[12] Peters, Brainard Guy, and Maximilian Lennart Nagel. Zombie Ideas, 2020. https://doi.org/10.1017/9781108921312.
[13] McConnell, Allen. Understanding policy success: Rethinking public policy. Bloomsbury Publishing, 2010.
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Why Do Ideas Matter in the Management of Economic Policy in Kenya?
| Post date: Fri, Sep 16, 2022 |
| Category: Economic Policy |
| By: Leo Kipkogei Kemboi, |
Many different tools are used by governments around the world, including the government of Kenya, to manage their economies which are collectively referred to as economic policies. They consist of taxation, budgeting, job creation, and monetary policy (money supply and demand) among other policies[1]. Because there are tradeoffs in every policy decision made, the key decision-makers in economic policy are responsible for choosing the right set of tools to achieve the best economic results.
To put things in perspective, fiscal policy is one of the crucial and divisive aspects of managing economic policy. Kenya’s fiscal policy options have been limited by the Jubilee Administration’s deemed unsound economic policy choices. The IEA has raised significant concerns over the past eight years regarding Kenya’s fiscal policy and its effects, which are already being felt.
It is important to examine the economic and political ideas of any administration because their execution has fiscal policy implications. That is why the IEA Kenya examined the economic plans of the Azimio La Umoja Coalition, Roots Party, Agano Party and the Kenya Kwanza Coalition. The framing of ideas related to economic policy and implementation remains consequential. Kenya has learned from history that failing to carefully examine economic plans can always cause the economy to slow down or contract, as well as cause Kenyans to suffer quickly.
The main objective of the IEA’s Constitution, Law, and Economy programme (CLE) and one of the main motivations for writing this article is to examine the interactions between legal, economic, and political issues and how they affect Kenya’s economy. The most contentious law passed each year, for instance, is the annual appropriations, which Kenya’s government uses to be able to levy and collect taxes that determine fiscal policy. As a result, both the intended and unintended consequences of a massive economic policy of this nature should be investigated and used as a guide for future economic decision-making.
The Jubilee Administration engaged in a fiscal expansion in 2013, spending more money than it could raise and resulting in ongoing deficits. The spending tenet was to put more money into Kenya’s infrastructure so that it could draw in foreign direct investment. It was claimed that the main factor affecting total factor productivity was a lack of/inadequacy of infrastructure. Undoubtedly, this was not the only explanation for Kenya’s low total factor productivity. Additionally, with leaking public finance management, increased spending primarily through procurement fraud and other forms of corruption increased fiscal slippage.
The Jubilee Administration did not approach Kenya’s economic policy by focusing on the right issues. The main objective of economic policy, as advanced by decision-makers, is to influence and mobilize capital allocation to maximize benefits for the nation. The Jubilee Administration did not abide by this maxim. To illustrate this, we examine the current economic picture.
The current economic picture
As explained above, Kenya is currently entrapped in a debt cycle characterised by massive fiscal deficits. In the long run, Kenya has always been conditioned to low total factor productivity, inflation has averaged 5% over the past ten years, a growing labour market with little formal sector employment, erratic tax changes, widening income inequality, and a vulnerable public finance management system[2], and large levels of dependency. Additionally, due to onerous regulations, scant economic data produced by the government, a stagnant stock market, and election-year politics, investors frequently adopt a wait-and-see attitude[3], a managed exchange rate[4]and a weaker economy in general. The fact that Kenya’s formal labour market is so small suggests that the majority of Kenyans are employed in the informal economy. This demonstrates how the structure of Kenya’s economy has not changed, with the majority of the country’s economy still being conducted informally as shown by the tiny size of the formal labour market.
Additionally, the devolved units face financial constraints as a result of non-neutral public finance disbursement mechanisms that favour national government entities over devolved governments[5], an incomplete transfer of functions[6], an incomplete operationalization of the Equalization Fund, and the likelihood that Covid19’s effects on the economy have not yet subsided[7]. There is strong evidence that financial intermediation in Kenya is slowing down[8] and the introduced regime for interest rate control has made the issue worse[9],[10]. When considering Kenya’s economic issues, it is evident that those responsible for economic policy are not held accountable for any actions, if any, taken to address these resulting economic policy issues[11].
Ideas and Economic Policy
These economic issues result from improperly managed fiscal policy and unintended side effects of poorly managed economic policy. Ideas have a big impact on how governments choose their policies. However, policymakers still employ a lot of strategies that haven’t worked in the past, and even some good ideas aren’t always implemented.
The French author Ernest Dimnet once said, “Ideas are the root of creation” and the heart of innovation is ideas. Understanding the role of government and effectively allocating resources are important concepts for all Kenyans, not just for political actors, because they have the power to change history, either by bringing about increased welfare and prosperity or by bringing about the economic doldrums like unemployment and the current fiscal crisis that Kenya is experiencing.
Kenya’s public finance system as mandated in the Constitution has different instruments which are derived from conventional thinking and are recognized in the Constitution which include direct spending, subsidies, waivers, taxes and public debt. How this was deployed by the Jubilee administration confirms the claim that ideas have consequences.
Three key points—lack of evidence in economic policymaking, the prevalence of “zombie” ideas, and poor mechanism designs—can all be used to explain the current state of public finance management.
- Little or no evidence in economic policymaking- The majority of ideas put forth in the last ten years have been based on assumptions or arbitrary choices made for political reasons. The economic analysis of the Standard Gauge Railway and the six-lane highway connecting Mombasa to Malaba is a great example. The government approved the project even though research from numerous organizations and individuals showed that the cost of building the railroad could never be recovered from operating it. As a result, the project became a sunk cost. The opportunity cost of this project is the lack of resources for the six-lane highway, whose economic analysis revealed that it would be a cost-effective logistics solution.
- Zombie Ideas- According to Peters and Nagel (2020)[12], “zombie ideas” are ideas that persist despite being refuted repeatedly. It is challenging to declare that any idea has failed categorically and that there are legitimate doubts regarding what qualifies as policy failure (McConnell, 2010)[13]. A good illustration is an intervention in boosting food security through Galana Kulalu. Evidently from economic policy, food security is a demand-side issue which in this case is income level. Instead of concentrating on demand-side issues, the government kept funding supply-side strategies that had already failed.
- Bad Mechanism Designs- The central claim of the Jubilee administration was that infrastructure should be built and investors will come popularly christened as “Build and they will come”. The primary economic policy did not address the structural problems affecting Kenya’s economy, such as slowing exports, declining total factor productivity, and rising government red tape, among others. The focus was largely on the government being spread out too thin in the quest to build infrastructure Because of the currency shortages brought on by the use of monetary policy action to support the shilling, the failure to implement export promotion programmes is now biting.
Conclusion.
When binge borrowing started, the concern at the moment was that it would crowd out the private sector from the credit market, and could substantially slow down the economy. A weaker economy would not only have negative implications on the government revenue, forex, labour market, dependency levels, and general welfare of Kenyan citizens.
It is obvious that poor economic decisions always have disastrous effects. Lack of evidence in economic policymaking, the prevalence of “zombie” ideas, and inadequate mechanism designs are the three issues that urgently need to be fixed.
References
[1] “Economic Policy,” 2021. https://eur-lex.europa.eu/EN/legal-content/glossary/economic-policy.html#:~:text=Economic%20policy%20covers%20a%20wide.
[2] Analysis of the Auditor General Reports on the Financial Statements for National Government Published by Institute of Economic Affairs,2019.
[3] Omondi, Dominic. “Why the Stock Market Hype Has Fizzled Out.” The Standard, February 16, 2020. https://www.standardmedia.co.ke/business/news/article/2001360597/why-the-stock-market-hype-has-fizzled-out.
[4] Whitehouse, David. “Kenya’s Shilling Management Is Flirting with Disaster.” The Africa Report.com, May 22, 2019. https://www.theafricareport.com/13216/kenyas-shilling-management-is-flirting-with-disaster/.
[5] Kimanthi, Kennedy. “Kenya: How Delayed Funding Messed up Counties,” April 8, 2020. https://allafrica.com/stories/202004080473.html.
[6] Muchui, David. “Kenya: Governors Threaten to Go to Court over Transfer of Devolved Functions,” January 10, 2016. https://allafrica.com/stories/201601111464.html.
[7] Kemboi, Leo Kipkogei. “The Impact of COVID-19 on the Kenyan Economy.” papers.ssrn.com. Rochester, NY, September 4, 2020. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3687260.
[8] Beck, Thorsten, and Michael Fuchs. “Structural Issues in the Kenyan Financial System: Improving Competition and Access.” World Bank Policy Research Working Paper 3363, 2004. https://openknowledge.worldbank.org/bitstream/handle/10986/14185/wps3363.pdf?sequence=1&isAllowed=y.
[9] Alper, C. Emre, Benedict J. Clements, Niko A. Hobdari, Rafel Moyà Porcel, and Division Chief. “Do Interest Rate Controls Work? Evidence from Kenya.” IMF Working Papers 2019, no. 119 (May 31, 2019). https://doi.org/10.5089/9781498313957.001.A001.
[10] Odour, Jacob, Stephen Karingi, and Stephen Mwaura. “Efficiency of the Financial Market Intermediation Process in Kenya: A Comparative Analysis.” KIPPRA Discussion Paper No. 122, 2010. https://repository.kippra.or.ke/bitstream/handle/123456789/2266/efficiency-of-the-financial-market-intermediation-process-in-kenya-a-comparative-analysis-dp-122.pdf?sequence=1&isAllowed=y.
[11] Kemboi, Leo Kipkogei. “Making Kenya’s Economic Policymakers Accountable.” (2022).
[12] Peters, Brainard Guy, and Maximilian Lennart Nagel. Zombie Ideas, 2020. https://doi.org/10.1017/9781108921312.
[13] McConnell, Allen. Understanding policy success: Rethinking public policy. Bloomsbury Publishing, 2010.
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Introduction Like Kenyan Presidents before him, the 5th President of Kenya, Willian Ruto has pledged to introduce a fertilizer subsidy. In this, the new price will be Ksh. 3,500 for a 50kg bag of fertilizer, against the market price of Ksh. 6,500 with effect from the 3rd week of September 2022[1]. This means that the […]
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The objectives of Kenya’s trade policy are to advance the nation toward a more liberalized trading environment, enhance and expand overseas markets for Kenyan products and services and further integrate it into the global economy. These policy objectives are being pursued through bilateral and regional trade negotiations as well as participation in the multilateral trading […]
The Unintended Consequences of Kenya’s Policy Against Substitutes for Breast Milk
Kenya has always emphasized the importance of infant nutrition by supporting and encouraging breast-feeding of infants as the best start in life. Kenya’s policy intends to provide assistance at each stage of an infant’s development. This includes nutritional counseling and education, as well as encouraging high-quality and nutritious age-appropriate foods. Exclusive breastfeeding of infants is […]
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Following claims of scarcity of the US dollar in Kenya as a result of disruptions in global supply chains, the Central Bank of Kenya directed commercial banks to ration dollar purchases in April 2022. Global financial markets experienced severe volatility in the six months to April following the intensification of the Russia-Ukraine war. During this period, […]
Foreign aid and the challenges in Kenya
By Chiara Müller – She is a intern at the IEA-Kenya. Globally, foreign aid is one of the largest components of foreign capital flows to low-income countries. Over the past four decades, sub-Saharan African countries, including Kenya, have received foreign aid to alleviate poverty and address underdevelopment. In 2020, global foreign aid amounted to $194.1 […]