Instead of roads, give people money to spend

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BY SHADRACK MUYESU

As it is, Kenya is a lower middle-income state, a status that, it must be emphasised, is as a result of economic manipulation in rebasing rather than meticulous planning or working systems. Markedly, the economy continues to grow albeit at a slower rate. We all agree however, that we are far behind and need to grow faster.

Public spending on infrastructure is the way we have chosen – a novel idea really, the best even, but with this comes the question of cost. The money we need to fund our projects can only be raised by adopting one of two choices; We can multiply production, create surpluses and thus improve our export revenues, or we can just borrow and bank on returns from wise investment. The former route which has been advocated for by renowned economists such as Robert Bates and Seymour Lipset and Michael Lipton means restructuring our goals to make food security and tourism our immediate priorities, while leaving grand highways and high-rise buildings for a later date.

According Robert Bates, when a society is predominantly rural, then the surplus necessary for industrialisation must come from the rural sector; this means the commercialisation of agriculture and the export of finished products as opposed to raw materials.

Cheap pricing and adequate production can, however, not be achieved naturally since we still suffer from an acute lack of technology, which condemns per unit production costs to remain high. An unpopular yet effective way of maximizing production is through coercion. People can simply be forced to plant and save more. It can also be indirect in the application of agricultural subsidies and taxes. While coercion was so successfully applied to catapult industrialisation in latter industrials, African and indeed successive Kenyan regimes have been reluctant to invoke it for fear of the risk of political incorrectness and urban revolt – a phenomenon best captured by Michael Lipton’s Urban Bias theory.

While successive governments have seemed to favor subsidies, they are not the kind that would spur growth.  The norm has been to decree lower prices for consumer goods and to provide consumer subsidies. This is wrong

Subsidies

According to Mr Timothy Oduol of the World Bank Group- Kenya, an intervention should be one that affects either the supply or the demand side – not both. Subsidising production is best for long-term growth. In our case, however, Government not only affects the supply, it also alters the money that can be spent on those goods (demand). In some instances it also makes some forms of trade illegal. Take agriculture for instance, farmers benefit from subsidised inputs and above-market prices from government. This forces millers to offer even more attractive prices to compete with government for farmers’ maize stocks. It puts inflationary pressure on consumer prices, which forces the politically correct government to further subsidise consumption. The net effect on production is zero.

While a basket of goods going for much lower than its market value is not a bad thing, where subsidies are funded by taxes, more subsidies mean an increase in the cost of living. Unfortunately ‘Wanjiku’ is used to subsidies. There is no way Government can plug the budget deficit and feed her appetite without borrowing.

Furthermore consumer subsidies are very expensive, and when incorrectly applied, they hardly have the desired benefit. Subsidising fertiliser has, for instance, not helped smallholder farmers. This is because they face huge costs in accessing the fertiliser. On average, they travel up to 40 km to get to the nearest depot. On top of this, the quantities used by smallholders aren’t big enough to incentivise them to access subsidised fertiliser.

At first glance, the correct thing to do would be to correct the subsidy policy. An even better thing to do would be to do away with subsidies altogether – let the market drive itself. While I have argued for the former, saying that not having to worry about subsidies would leave government with some money of its own to spend (thereby reducing the reliance on loans), upon reflection, I realize I was wrong. A government not only has a God-given mandate to provide the best for its citizens, it also has a constitutional duty of protecting its most vulnerable. This is why, political correctness aside, subsidies cannot be done away with. What is required are policies that will put money in the pockets of the people.   

Take money from the people and give it to government

The biggest threat to this alternative is the subsisting rate cap. It’s been two years since its introduction and I think, we can all agree that the positives are very few, if any.

The shocks to the system have manifested in the profit and loss statements of banks forcing them to rethink strategy – both in the long term and short term so as to cope with the changes.

As it is, the only beneficiaries of the current situation are Treasury, large companies and the wealthiest individuals. Instead of taking a risk with the small borrowers, banks are now taking money from people and handing it to government through the purchase of long-term securities. People are encouraged to save, but they can’t borrow. Compare the situation to a few years back when banks were literally hawking loans.

We all know what happens when a man not used to fortune suddenly stumbles upon riches. In Kenya, far from reducing dependence on external loans, new money has given government a false sense of security that has caused its appetite for foreign debt to balloon. The worst bit is that, according to the Auditor General, more than four-fifths of what is borrowed is eaten up by misappropriation, recurrent expenditure and corruption. Large Companies and Individuals benefit because banks are unwilling to take risks on Small Market Enterprises and the Middle Class individuals who have a bigger impact on the economic outlay of a country.

The results are manifold. To cope with the changes in the immediate term, banks and small to medium sized employers have been forced to downsize. Banks employees have been laid off as banks restructure and shed off branches all across the country leading to loss of over 1000 jobs according to the Kenya Bankers Association. And it’s not just the banks, everywhere, people are losing jobs. It is also harder for Kenyans to get employed or even start a business – no one wants to take a risk with them. Meanwhile, from the cost of data to fuel, taxes are shooting up.

Amidst all these we have new shining roads that are leading to nowhere. In places such as Baringo, good roads stretch for kilometers in a wilderneness where there isn’t a hint of life or wealth on either side of the road. In other places, with virtually no vehicles using them, roads have been reduced to a platform for drying grain.

Give money back to the people

From the foregoing, a few things must happen fast. For starters, government has to leave the domestic market to Wanjiku. This can only happen with the repeal of the rate cap law.  At this early stage I will say, if government cannot curb its appetite for debt, let it borrow outside. Let Wanjiku have money to spend, at the very least, she will spend on Kenyan goods. At best, SMEs will become viable and attractive again.

Secondly, it should introduce Loan Guarantee Programmes by partnering with the Local (County Governments and National Government) and international organizations such as the United States AID, the United Kingdom AID, the African Development Bank, the World Bank and the International Monetary Fund. Foreign diplomacy should be channeled towards lobbying these partners to provide risk mitigation to commercial lenders such as KCB or Equity with respect to debt service payment if they offer loans to a specific segment of the economy for example manufacturing and energy- not asking for more loans.

Thirdly, measures must be put in place with a view of increasing the bank spread. Bank Spread is the difference in interest between the interest the banks receive from the borrowers and how much the bank pays depositors. Simply put, there is a difference between what banks give out and what it receives in percentage. Instead of capping interest rates, government might consider ensuring that more is paid out on savings. It’s an indirect method of coercing saving.

While doing so, government should focus more energy on maximizing agricultural production. Subsidy programmes should be towards enhancing production, not consumption and certainly not both. Building shiny roads will only make sense when people have something to transport.