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Fiddling, while Kenya burns

The Jubilee administration gambled on mega-infrastructure projects to expand the economy. It has borrowed heavily to finance them. Over the past five years, it has conjured up a misleading set of economic data that paints a rosier picture than the grim reality now confronting the country. What is this fantasy in aid of? By DAVID NDII

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Fiddling, while Kenya burns

After all the hullaballoo, and the brazen manipulation of the vote on Uhuru Kenyatta’s presidential veto of parliaments proposal to defer VAT on fuel for another two years, you would be forgiven to think that the government scored big in the battle to shore up its terrible and rapidly deteriorating finances. It did not. Much to the contrary, the melodrama was an inconsequential sideshow.

Alongside the president’s memorandum, the Treasury tabled a supplementary (i.e. revised) budget that which elicited screaming headlines: the government had “slashed” by a whopping 55 billion shillings from Sh. 3.026 trillion to 2.971 trillion. A critical reader would immediately have noticed that a 1.8 percent reduction hardly qualifies to be a “slashing” — trimming would have been accurate. Of note, the supplementary budget the Treasury did not provide a complete budget revision, but only a high level expenditure summary with five budget lines.

But the Treasury also published its regular Budget Review and Outlook (BROP) paper that contains the detailed budget data. As is customary with our National Treasury, the numbers in the two tables are not identical. Even the numbers in different tables of the BROP are not identical, although the differences are not material— it’s mostly sloppiness, and occasionally, sleight of hand. I follow the BROP figures (See table below) as they are more comprehensive and also the more up to date of the two, if only by two days. Two things to note.

Government Fiscal Projections FY 2018/19 - 2021/22

First, the expenditure cuts are less than the revenue forecast which is revised downwards by Sh. 96 billion, while expenditure is revised downwards by Sh. 83 billion. Even though the 10 billion difference is not such a big sum, it’s unclear why the government would go to such lengths to table an austerity budget that increases the deficit.

More significantly, the revenue forecast is still unrealistic. The budget was based on revenue growth of 31 percent, comprising of 30 percent and 36 percent increase in tax and non-tax revenues respectively, which has now been scaled down to 25 percent, with tax and non-tax revenue forecast down to 24 and 28 percent respectively. These forecasts are out of touch with reality. Tax revenues increased only three percent and non-tax by 12 percent for a total revenue increase of four percent. This, as we will see shortly, is not an anomaly—it is a significant trend.

The budget was based on revenue growth of 31 percent, comprising 30 percent and 36 percent increase in tax and non-tax revenues respectively, which has now been scaled down to 25 percent, with tax and non tax revenue forecast down to 24 and 28 percent respectively. These forecasts are out of touch with reality.

In its current financial circumstances, it is not just sensible that the government be prudent, it is imperative. There will be no harm done if revenue exceeds target, but unrealistic revenue forecasts result in government spending money it does not have. This is how the government ends up accumulating pending bills, which, according to the private sector lobby KEPSA, are now in the order of Sh. 200 billion.

Trend growth gives you a revenue forecast of Sh. 1.55 billion. An optimistic one, assuming a most favorable economy and factoring in tax rises, would double the growth rate to 8 percent, still comes to Sh. 1.62 trillion. I would work with Sh.1.6 trillion.

In its current financial circumstances, it is not just sensible that the government be prudent, it is imperative…Unrealistic revenue forecasts result in government spending money it does not have…The government ends up accumulating pending bills… now in the order of KSh 200 billion.

Herein lies the problem. The Sh.1.6 trillion revenue forecast is Sh. 250 billion short of the revised recurrent budget. Interest cost (Sh. 400 billion), pensions (Sh. 90 billion) are non-discretionary (i.e. mandatory) and the wage bill (Sh. 444 billion) which does not give you much room to manoeuvre already add up to Sh. 930 billion. This leaves a balance of Ksh. 660 billion to fund counties (Sh. 367) and the national government’s operations and maintenance (O&M) outlays (Sh. 530 billion) totaling Ksh. 960 billion.

The only question here should be where the axe falls. There are only two options either the axe falls on the national government, or to share the cuts with the counties. The latter is obviously more sensible than the former. The equitable way of doing this is to net out the counties wage bill which is about Sh.140 billion, and share the balance proportionately. This math works out to 33 percent of the national governments O&M budget and the transfer to counties net of wage bill which translates to national government O&M budget of Sh. 202 and counties Sh.78 which means that the transfers to counties reduce from Sh. 376 to Sh. 218 billion. This is the reality that the government has refused to face. It should also be readily apparent that the tax measures that the government rigged through parliament are not a solution to its financial woes.

The Jubilee administration bet the farm on mega-infrastructure projects to expand the economy and has borrowed heavily to finance them. Infrastructure investments are supposed to crowd in productive private investment which in turn expands the tax base, which in turn generates the revenue to pay the debts. But far from increasing, the tax take is falling. The preliminary data treasury has published shows a sharp decline to 15.4 percent last financial year, down from 17 percent in the previous one. A 1.6 percentage-point decline in a year looks improbable— it is more likely that they have over-estimated GDP. This and the reason why, will be confirmed shortly. Still even the one percentage-point decline from 18 to 17 percent in five years is itself a serious problem. It translates to a forgone revenue of Sh. 77 billion in FY16/17 (see chart below). If we assume that the 15.4 figure is an underestimate and instead apply a revenue yield of 17 percent last year, the revenue yield gap drops to a more plausible Sh. 80 billion. Why?

Revenue to GDP ratio, % (LHS) and implied revenue gap Sh. billion (RHS)

Revenue to GDP ratio, % (LHS) and implied revenue gap Sh. billion (RHS)

First, a lot of the borrowed money was stolen outright and many, perhaps all the projects have been done at highly inflated costs. We still do not have any physical evidence of what we spent the proceeds of the first eurobond, Sh.190 billion (US$ 2.2 billion) proceeds of the first eurobond issue on. Government claims that the money was channeled into the development budget and absorbed in one financial year. Not only is it simply not possible to build things at that rate, the funding for all the projects done for that year is accounted for without the eurobond money. This is the reason that the special audit of the eurobond has never come out.

A lot of the borrowed money was stolen outright and many, perhaps all, of the projects have been done at highly inflated costs. We still do not have any physical evidence of what we spent the proceeds of the first Eurobond on…

The national investment rate has remained stagnant at about 18 percent of GDP, against a requirement of 25-30 percent of GDP. We also know that credit to the private sector collapsed suddenly three years ago, and has been comatose since. The credit market has become a pyramid scheme, where interest on government securities is re-invested in government securities. As with all pyramid schemes, this one too will come to grief.

In short, the reason why the revenue yield has declined is because the productive base of the economy has not expanded. The Jubilee administration bet the farm on a state of the art milking machine, even built a brand new shed to go with it, and now expects the cows to produce more milk. It is the same cows. And now the debt repayments and electricity bills are eating into the working capital forcing the farmer to cut back on feed. They now lament that the milkman (KRA) has a new machine but is still unable to produce more milk.

But the National Treasury’s growth projections are as panglossian as ever. In the original budget forecast, the nominal GDP expands from 7.7 trillion in FY16/17 (the latest actual data) to Sh. 12.6 trillion in FY20/21 a growth of 64 percent or 17 percent per year. Nominal GDP is the denominator used to calculate budget financial ratios. This translates to a real economic growth rate of 7.4 percent per year (this is obtained by applying an inflation adjustment known as GDP deflator. I have applied the average deflator for the last five years). Average growth rate for the last five years—5.56 percent. Growth has topped seven percent only once in the last thirty years— 2007. Now comes the remarkable part. In the revised projections, nominal GDP has been adjusted upwards to just under Sh. 13 trillion in FY20/21. It is conceivable that the mandarins are factoring higher inflation— one hopes so because otherwise it translates to a delusional eight percent per year growth rate. The reason for the sharp fall in the revenue ratio last year is now clear— GDP has been inflated on purpose.

What is this fantasy in aid of? Their purpose is to reduce the budget financial ratios without budget cuts. This way, they are able to “get away” with fiddling with the actual budget figures and still achieve “fiscal consolidation.” This year, the deficit in the revised budget is adjusted upwards by 14b from 603 to 622 billion but it as a ratio to GDP it declines from 6.3 to 6.1 percent on account of GDP being adjusted upwards by 321 billion. In FY21/22 the nominal GDP projection is jerked up 17 percent which excluding an inflation surge, brings the real growth rate for the period to 8.4 percent. This enables the mandarin to “bring down” the budget deficit 3.4 percent, even as expenditure grows by Sh.750 billion. A serious sensible projection would have projected 5 percent real growth. A 3.4 percent of GDP deficit based on this would have required expenditure to be adjusted downwards by Sh. 400 billion, or revenue to rise by similar amount or a combination of the two.

The budget, both the original and supplementary one, is best summed as “do nothing” strategy. If you are not up to changing reality, change the numbers.

We are compelled to wonder who this tomfoolery is meant for? It is not the public, they don’t get to see these numbers, let alone read and understand them. It cannot possibly be the IMF, the credit rating agencies or the markets. If anything, this is nothing short of showing the markets a middle finger. That to my mind, leaves only one constituency— their political bosses. The mandarins are telling them what they, the political bosses, want to hear.

My first column calling out the Jubilee’s administration fiscal recklessness, published in August 2014 was subtitled “Lessons from Ghana”.

Three days ago, the Ghanaian government announced that it was planning to issue $50 billion “century bonds” over the next few years, starting with a five to ten billion issue by the end of the year. A “century bond” is a bond with a hundred year maturity. Only three developing countries—China, Mexico and Argentina_ have sold century bonds. Ghana’s issue will be the biggest. A 10 billion dollar issue is a fifth of Ghana’s GDP and would cost a billion dollars in interest a year. The markets did not like the news. Immediately, the yields on Ghana’s eurobond yields shot up (which is another way of saying the value of its bonds fell) and the Cedi fell 2.6 percent. The Financial Times summed it up thus: “In capital market terms, this is no this is not just a moon shot, it’s a mission to Mars.” The FT story was headlined, “Someone tell Ghana this it isn’t 2017 anymore.”

If you are not up to changing reality, change the numbers. We are compelled to wonder who this tomfoolery is meant for? It is not the public, they don’t get to see these numbers, let alone read and understand them. It cannot possibly be the IMF, the credit rating agencies or the markets. If anything, this is nothing short of showing the markets the middle finger. That to my mind, leaves only one constituency— their political bosses. The mandarins are telling them what they, the political bosses, want to hear.

Argentina issued its century bond last May. The issue was oversubscribed four times. A year down the road, Argentina is in the grip of another financial meltdown. Inflation is raging at 3.5 percent a month, the Central Bank has raised the benchmark interest rate to 60 percent and the Peso, down 52 percent on the dollar this year, is still falling. What changed? In 2015 Argentina elected a new president who promised to impose macroeconomic discipline. Argentina’s legendary fiscal laxity has led to eight debt defaults, including the biggest sovereign default in history in 2002. The markets took the new president seriously. Earlier this year, he showed signs of backtracking — revising inflation target upwards and lowering interest rates. Market sentiment turned. Argentina had plenty of foreign exchange reserves, but within weeks it was looking for lifelines everywhere including its perpetual nemesis the IMF which it has approached for a US$ 50 billion bailout.

Someone needs to tell Jubilee this isn’t 2017 anymore.

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David Ndii

David Ndii is one of Kenya's leading economists and public intellectuals.

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Sanitising Moi in the Age of Kenyatta, and the heroics of official revisionism

The revival of Moi Day marks a high point in Jubilee’s rehabilitation of the retired autocrat. Refashioned as a kindly, old gentleman who held the nation together in trying times, for Mzee Moi’s victims the latest attempt to celebrate official criminality is testimony of who exactly Mr Kenyatta sides with. By RASNA WARAH.

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Sanitising Moi in the Age of Kenyatta, and the heroics of official revisionism

Sometime in the early 1980s, my father, who owned a photo studio on Moi Avenue in Nairobi, became a life member of the KANU party. The 1000-shilling membership came with a certificate and pins, the kind worn on coat lapels, with Mtukufu Rais Moi’s image on them. My father dutifully framed the certificate and hung it strategically in his studio where his customers could see it. In the studio’s window, he placed a large photo of His Excellency sitting at his desk in State House – a photo he had taken shortly after Moi’s inauguration in 1978.

At that time, many Kenyan Asian businessmen became life members of Kenya’s ruling (and only) political party. It was a way of showing loyalty to a president who was becoming increasingly insecure about his grip on power. For Kenyan Asians, who have always been uncertain about their citizenship, and who have on occasion been threatened with expulsion, demonstrating loyalty to Moi was a kind of insurance, a survival tactic.

In those days, the overriding concern among Kenya’s Asian minority was that Kenya could go the way of its neighbours, such as Somalia and Uganda, and become a military dictatorship. The abortive coup staged by the Kenya Air Force on 1 August 1982 had left Asians fearful; many Asian-owned shops had been looted on that day and some of the poorer Asians living in neighbourhoods like Ngara and Pangani had been robbed and physically assaulted by looters who had taken advantage of the chaotic situation.

Barely ten years before the coup attempt, in August 1972, President Idi Amin had expelled 70,000 Asians from Uganda. There were fears then that Kenya might also “do an Amin” and get rid of its economically prosperous Asian community. So when the coup in 1982 failed, Kenya’s Asians were more than relieved. For them, Moi had averted an economic and political catastrophe that could have adversely affected their business interests, and they were grateful to him for that.

Because Moi had entrenched a patronage system where sycophancy was encouraged, wealthy Kenyan Asian businessmen and industrialists made it a habit of visiting State House and making donations to Moi’s favourite causes. This financial support was often rewarded with government tenders or with assurances that the donors’ economic interests would be protected.

The devastating consequence of this system was that it enabled corruption among some unscrupulous members of Kenya’s Asian community, who began using their close connections to Moi and senior government officials to enrich themselves and their benefactors by using dubious means. Crooked Asian tycoons, like the Goldenberg scandal’s architect, Kamlesh Pattni, and Ketan Somaia (who is currently serving a jail sentence in the UK for fraud) flourished during this period.

Because Moi had entrenched a patronage system where sycophancy was encouraged, wealthy Kenyan Asian businessmen and industrialists made it a habit of visiting State House and making donations to Moi’s favourite causes. This financial support was often rewarded with government tenders or with assurances that the donors’ economic interests would be protected.

It was, therefore, not surprising that when it became clear that Moi’s reign was coming to an end, a panic set in among many Kenyan Asians. What kind of future would they have in a post-Moi era? Would the new rulers punish them for their past crimes? How would they secure their business interests? Would the whole community pay the price for the economic crimes of a few? (They needn’t have worried: corruption had by then become a way of life in Kenya, and members of the Mwai Kibaki administration, like those in Moi’s government, were adept at using Asian businessmen as front men to carry out its own grand corruption schemes, such as Anglo Leasing.)

When it became clear that Moi’s reign was coming to an end, a panic set in among many Kenyan Asians. What kind of future would they have in a post-Moi era?

After a brief venting period, where Kenyans were allowed to express their anger at what Moi had allowed the country to become, a process of sanitising Moi began. The historical revisionism argued that while Moi had proved to be a dictator, he had in fact been a benevolent one, one who supplied primary school students with free “Nyayo” milk, the one who brokered peace deals with troublesome neighbouring countries, the one who ensured that Kenya remained an “island of tranquility” in a strife-torn region – a line of reasoning that Kenya’s Asian business community had also adopted to explain why they supported Moi.

This process of sanitising Moi has been escalating since Uhuru Kenyatta and William Ruto (both protégés of Moi), assumed power in 2013. President Uhuru makes regular visits to his political godfather in his Kabarak home, and images of the man who held an iron grip over the country for 24 years have begun appearing more frequently in the media. Moi is increasingly being portrayed as a kindly old man who once held the country together. His prophecy that Kenya would disintegrate into tribal factions under multipartyism even appeared to come true after the 2007 elections when the country appeared to be on the verge of civil war. Twelve years after KANU was ousted, on Moi’s 90th birthday in September 2014, local newspapers carried glowing tributes to the aging dictator, prompting Daily Nation columnist Macharia Gaitho to wonder whether about the shortness of Kenyan memories.

After a brief venting period, where Kenyans were allowed to express their anger at what Moi had allowed the country to become, a process of sanitising Moi began… This proces…has been escalating since Uhuru Kenyatta and William Ruto (both protégés of Moi), assumed power in 2013… It reached a crescendo this month when Moi Day was celebrated. The official reason given was that the day had not been de-gazetted…

This whitewashing reached a crescendo this month when Moi Day was celebrated, albeit amid controversy. The day has not been observed since the new constitution was promulgated in 2010. (The constitution does not recognise Moi Day as a public holiday.) The official reason given for its return was that the day had not been de-gazetted and so technically and legally, Kenyans had no choice but to recognise it. So, millions of Kenyans who had planned to be at work or school on 10 October had to stay at home because the government ordered them to. Many wondered: of all the public holidays that this government chose to recognise, why would it choose the one that brought back painful memories for so many Kenyans?

Younger Kenyans who came of age in the Kibaki era have little recollection of the Moi days and the retrogressive policies that stunted the country’s economic growth and development by several decades. I once asked a 30-something what he remembered most about Moi, and his answer was simple: the free milk his school got every Tuesday and Thursday, thanks to Baba Moi. He seemed vaguely aware that Moi had done some bad things, but he was not exactly sure what those things were.

While it is true that Moi allocated a large chunk of the national budget to education, and schools bearing his name flourished, he also entrenched mediocrity and corruption within the civil service that allowed the country’s institutions to decay. The “Kalenjinisation” of all arms of government, the wanton grabbing of public land, the siphoning of public funds through friends and cronies, the looting of Kenya’s treasury and other forms of economic sabotage became endemic during his tenure. Moi also oversaw austerity measures imposed by the World Bank and the IMF in the 1990s that led to the deterioration of public services, such as health. By the time Moi left office in 2002, the country was virtually on its knees.

For the people who paid a heavy price for opposing the Moi regime, the declaration of Moi Day as a public holiday was like a slap in the face. Some of these people, like the environmentalist Wangari Maathai (who defied his regime and was beaten black and blue for opposing the construction of a tower at Uhuru Park), my journalist friend, Wahome Mutahi (who spent one year in jail on trumped-up charges of sedition), and opposition leader Kenneth Matiba (who was arrested and tortured and developed a debilitating illness as a result) are now dead, but among the living, there are still those who bear the wounds Moi’s government inflicted on them. I am thinking in particular of the thousands of Kenyans who were tortured or illegally detained by Moi’s men because they were suspected of being dissidents belonging to underground movements like Mwakenya or because they resisted Moi’s authoritarian regime.

For the people who paid a heavy price for opposing the Moi regime, the declaration of Moi Day as a public holiday was like a slap in the face.

The genius of the Moi system is that it normalised everything. Nyayo House, which housed both the Immigration Department and Kenya’s slick new TV channel, KTN, was a site of unspeakable torture. In the torture chambers in the basement, Special Branch officers worked on the detainees. The most dreaded of them was James Opiyo. His name still sends shudders through his victims’ spines. Upstairs, people formed orderly queues for new passports on the ground floor, or read the news on the top floor. They were aware of what was happening in the basement. No one mentioned it or thought it was weird.

‘The Nyayo House basement was no ordinary police cell. In the water-logged rooms detainees stood naked for hours on end. One victim, George Odido, told the Truth, Justice and Reconciliation Commission that he was left submerged in one foot of water for three days without food, and in total silence. Because of the fear of drowning, the detainees did not sleep. Many were crippled for life or suffered severe psychological trauma. Some of these detainees’ fake trials took place in the middle of the night, where compromised judges would hand them harsh jail sentences for crimes that they had not committed.

The genius of Moi was that he made everything look normal even when it was not. He turned Nyayo House, which housed both the Immigration Department and Kenya’s slickest new TV channel, KTN, into a site of unspeakable torture. In the basement of detainees Special Branch officers worked on them. Those applying for passports or reading the news were aware people being tortured downstairs…no one mentioned it or thought it was weird.

We must also remember than it was during Moi’s tenure that the Wagalla massacre in Wajir took place, a shameful “security operation” that resulted in the death of an estimated 4,000 ethnic Somalis in Kenya’s north-east. Moi was president when Foreign Affairs minister, Robert Ouko, was assassinated. And despite his rhetoric of ethnic harmony, his leadership saw the killing and expulsion of thousands of Kikuyus in Rift Valley Province prior to the 1992 and 1997 elections. Not to mention the many anti-government protestors who lost their lives at the hands of the police during demonstrations, such as Saba Saba.

There was also collateral damage. There were the mysterious deaths of people linked to Ouko’s death, including that of Hezekiah Oyugi, the head of Internal Security and one of the main suspects in Ouko’s murder, and Philip Kilonzo, who was the Commissioner of Police when Ouko was killed. One does wonder: if Moi’s government was capable of orchestrating the deaths of his own people, people who were loyal to him, then how many of his opponents were also made to “disappear”?

The Nyayo House basement was no ordinary police cell. In the water-logged rooms detainees stood naked for hours on end. One victim, George Odido, told the Truth, Justice and Reconciliation Commission that he was left submerged in one foot of water for three days without food, and in total silence. Because of the fear of drowning, the detainees did not sleep.

For all those who suffered physical or emotional torture, illegal detention or financial ruin at the hands of Moi, the reinstatement of Moi Day is a painful reminder of not just what they lost during his rule, but also of how his shadow still lurks over Kenya.

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Knowledge and Growth: What Paul Romer’s Economics Nobel Prize says about Africa’s infrastructure obsession

If knowledge and human capital are the engines of economic growth, what is the role of the foreign investment and infrastructure edifices that our governments are obsessed with? By DAVID NDII.

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Knowledge and Growth: What Paul Romer’s Economics Nobel Prize says about Africa’s infrastructure obsession.

The Nobel Prize season is one of the things I look forward to, not least because there is a prize in economics. But the more important reason is that it is always a welcome reminder that humanity’s most important work is not done by the powerful, the moneyed and the celebrities that hog the daily limelight, but by the people of ideas and ideals. And in these dog days of an apocalyptic time, it could not come often enough.

This year’s economics Nobel Prize was shared by William Nordhaus and Paul Romer for contributions to natural resource economics and economic growth respectively. The commonality between their work is rather technical and I shall not go into it, but it has to do with developing methods of analyzing the interaction of the economy with complex phenomena — in Nordhaus case, climate, and in Romer’s, knowledge. The latter is the subject of this column.

Romer pioneered what is now known as new or endogenous growth theory. Hitherto, economists treated knowledge and technical progress as “exogenous”, that is, something that occurred outside the economic system. This was quite awkward since it was quite obvious that research and innovation were fundamental elements of the economic system.

This year’s economics Nobel Prize was shared by William Nordhaus and Paul Romer for contributions to natural resource economics and economic growth respectively. The commonality between their work…has to do with developing methods of analyzing the interaction of the economy with complex phenomena — in Nordhaus case, climate, and in Romer’s, knowledge.

Another seminal contribution was made by Robert Lucas, the 1989 Nobel Laureate. There is an interesting backstory to his prize. Seven years before, his ex-wife had inserted a clause in their divorce settlement that entitled her to half the prize money if he won it. The prize came 21 days before the provision lapsed. Romer’s prize has an interesting backstory too: he is the second chief economist of the World Bank to leave the institution acrimoniously only to be awarded the Nobel Prize shortly thereafter— the other one is Joseph Stiglitz.

Paul Romer’s model emphasizes the role of knowledge in long run economic growth; Lucas model emphasizes human capital. The two are intimately related but are not the same thing, although many people, including economists, often conflate them. Let me illustrate.

I came across a trending story—about a young Philippino inventor who had just successfully tested his passenger drone in the provincial city of Batangas, Watching the video, his geek-in-a garage drone is as good as those that have been showcased by tech companies with lots of venture capital money. In fact, it looked more fun to fly than the ones I have seen before. And the guy is not even an engineer. And he built it in a garage. An Australian company was sufficiently impressed to propose a commercial partnership. It was then brought to my attention, pleasantly so, that a young Kenyan, Morris Mbetsa, has built and tested one—he tweeted me video footage.

“How to build a passenger drone” i.e. the science and engineering is knowledge—that’s Romer.. The ability of a geek in a garage in Batangas and Ong’ata Rongai to use that knowledge to build a drone in a garage in Banda is human capital— that’s Lucas. One can think of Romer’s model as explaining how the world becomes more prosperous; Lucas’ as explaining why we see developing countries catching up with rich countries. When the Wright brothers made their maiden flight in 1903, it was hard to imagine a native in the colonies somewhere in Africa or Asia making a viable attempt to manufacture an aircraft. A couple of decades ago it took an entire national industrial project to make “Nyayo Pioneer”, the ill-fated contraption that stalled on the track in Kasarani stadium on the occasion of its launch. All the same, from the look of things your future personal transportation could well be made in Kariobangi.

How to build a passenger drone’ i.e. the science and engineering is knowledge—that’s Romer.. The ability of a geek in a garage in Batangas OR Ong’ata Rongai to use that knowledge to build a drone in a garage in Banda is human capital— that’s Lucas.

If knowledge and human capital are the engines of economic growth, what is the role of the foreign investment and infrastructure edifices that our governments are obsessed with?

The title of one of Lucas’s less well known papers on the subject, published in the 1990 edition of the American Economic Review, poses the following question: Why doesn’t capital flow from rich to poor countries? The article links investment, human capital and growth in a simple and intuitive manner. Suppose there are only two countries, a rich and a poor one – let’s call them America and Bangladesh. Average monthly factory wages in the two countries are $1800 and $60 respectively – that is, wage in America is 30 times more than in Bangladesh. At first, they do not trade. Each country makes its own clothes. Suppose they decide to trade?

Let us say it takes a worker one hour to stitch together a pair of jeans. In America, the labour cost for this is $11.25. In Bangladesh, it would cost $0.325. Even if productivity in Bangladesh was only a third of America, it would still cost a dollar to stitch the pair of jeans in Bangladesh. Let us say Made in America sold for $50. The retailers could sell Made in Bangladesh jeans at $45 dollars and still make $5 more. Off-shoring garment factories to Bangladesh would be very profitable. This would continue until Bangladeshi wages rise to the point where cost of production is the same in both countries. As it happens, the wage figures cited are quite close to what the actual wage costs in America and Bangladesh are. And indeed Bangladesh is now second to China in garment exports, earning US$ 28 billion last year, and employing over four million people.

The garment making industry makes a good example because it is a very basic skill that we can reasonably expect people with little or no education to learn quickly and do as well as better educated ones. Using similar analogy with US and India, but with more sophisticated data and mathematics, Lucas demonstrated that at the time he was writing, the return on capital in India would have been 58 times more than in the US. This then begs the question: with profitable opportunities of this magnitude why are poor countries not inundated with investment?

But once you move from low tech manufacturing like stitching garments, offshoring becomes a little more challenging. It takes armies of engineers and techies to manufacture commercial jetliners and all manner of scientists to do pharmaceutical research. Using very basic measures of education attainment, Lucas’ model demonstrates that once differences in human resource base are taken into account the potential returns to capital in India reduce to just 4% above the US.

In a previous column, I used similar data to show how initial differences in human capital may give answers to the questions that can’t seem to stop Africans from scratching heads: how it is that countries we are told we were “at par” with at or shortly after independence took off, and we did not. In 1970, the Kenyan workforce had an average of two years of education per person, and was the highest in the region. South Korea’s had six, Singapore five and Malaysia four years per person. In fact, South Korea’s education attainment was higher than several European countries including Portugal (3), France (4.8), Spain (5.6) and Italy (5.6) years per person. South Asia by contrast was in the same league with Africa—India (1.6), Pakistan (1.6) and Bangladesh (1.4). Sri Lanka is an outlier with 6.4.

Education attainment data provide only a rough approximation of human capital, even though the data have proved to be quite robust in economic research. The World Bank has recently published its latest national wealth accounts, in a report titled The Changing Wealth of Nations. National wealth accounting is a new statistical initiative that responds to the shortcomings of gross domestic product (GDP) as a measure of economic performance. As many readers will know, GDP and its derivatives are measures of production and expenditure, which in business accounts correspond roughly to annual turnover. As currently constructed, national economic accounting does not produce the equivalent of balance sheets, that is, the assets and liabilities of a business. To illustrate, the Jubilee administration has borrowed KSh 3.5 trillion but there is no account where we have recorded the value of assets acquired with these loans. One of the assets financed, the SGR railway, has cut through the Nairobi National Park. We ought to be able to revalue the park to reflect the loss of both economic and ecological value caused by the railway, but there is no way of doing that in the GDP system. This is what national wealth accounting seeks to remedy.

This latest version, which provides wealth accounts for the year 2014 has what the Bank says is the “first sound estimates of human capital”. With wealth accounts we are able to compare the relative importance of different assets in a nation’s wealth directly. What do they tell us? First, that human capital accounts for two-thirds of the world’s wealth. Second, the wealthier the country the higher the proportion of human capital in its wealth portfolio. It ranges from 40 percent in low income countries, to 70 percent in the high-income OECD countries (See chart below). In the wealthiest region, North America, human capital accounts for 77 percent of total wealth, compared to half of national wealth in Sub-Sahara and South Asia. The Middle East/North Africa is an outlier with only a third of its wealth in human capital on account of the region’s unusually high oil wealth.

National Wealth, 2014 US$ Per Person

National investment rates in most developing countries are between 15 to 25 percent of GDP while expenditures on education and health (both public and private) are between 5 and 10 percent of GDP. Roughly, this suggests that a dollar invested in people generates five times as much wealth as a dollar investment in other assets. This should not surprise—think of a million shillings invested in an engineering degree against the same amount invested in a rental apartment.

Human capital accounts for two-thirds of the world’s wealth. […] the wealthier the country the higher the proportion of human capital in its wealth portfolio. It ranges from 40 percent in low income countries, to 70 percent in the high-income OECD countries… In the wealthiest region, North America, human capital accounts for 77 percent of total wealth, compared to half of national wealth in Sub-Sahara and South Asia. The Middle East/North Africa is an outlier with only a third of its wealth in human capital on account of the region’s unusually high oil wealth.

Eight years ago, the African Development Bank (AfDB) published a report in which it estimated that Africa has an infrastructure financing requirement of US$ 93 billion a year to the year 2020. The figure was subsequently adjusted upwards to $120 billion a year— a cumulative figure of 1.2 trillion dollars. Consequently, less than two decades after the HIPC (Highly Indebted Poor Countries) debt forgiveness initiative many African countries are now hurtling towards a second debt crisis.

It is stated in the AfDB report that the purpose of building on this scale is to crowd in the investment to create jobs. Texas Instruments was the first Western company to invest in Bangalore. I came across a photograph of the first equipment Texas Instruments delivered to its first facility, in a bullock cart. Texas Instruments was attracted by Indian workers, not its roads. In fact, there is no account of India’s tech boom that does not mention the Indian Institutes of Technology (IITs). It is now said that IIT graduates are now India’s leading export to the US.

Eight years ago, the African Development Bank (AfDB) published a report in which it estimated that Africa has an infrastructure financing requirement of US$ 93 billion a year to the year 2020…The figure was subsequently adjusted upwards to $120 billion a year— a cumulative figure of 1.2 trillion dollars. Consequently, less than two decades after the HIPC (Highly Indebted Poor Countries) initiative many African countries are now hurtling towards a second debt crisis.

In all the documents and discussions I have encountered, there is no acknowledgement that Africa does not have the skills—the engineers, architects and builders—to scale up building on anything close to this scale of investment, and to maintain it subsequently. Let us do the math. An engineering degree on the continent is at most $25000. The $120 billion annual “infrastructure deficit” budget works out to six million engineers. That is a whole passenger drone industry right there. And of course, once we are zipping in drones, we will not be needing so many roads.

In all the documents and discussions I have encountered, there is no acknowledgement that Africa does not have the skills—the engineers, architects and builders—to scale up building on anything close to this scale of investment, and to maintain it subsequently.

There is no evidence in economics that infrastructure investment contributes to economic growth.

This conclusion by the Asian Development Bank is typical:

“The main conclusion is that a number of countries in developing Asia have significantly improved their basic infrastructure endowments in the recent past, and this appears to correlate significantly with good growth performances. However, the evidence seems to indicate that this is mostly the result of factor accumulation (a direct effect), while the impact on productivity is inconclusive.” – Stéphane Straub and Akiko Terada-Hagiwara (2010) “Infrastructure and Growth in Developing Asia” ADB Economics Working Paper Series No. 231.

Mwalimu Nyerere: Development which is not development of the people may be of interest to historians in the year 3000. It is irrelevant to the kind of future which is created. Thus, for example, the pyramids of Egypt and the Roman roads of Europe, were material developments which still excite our amazement. But because they were only buildings and the people of those times were not developed, the empires, the cultures, of which they were a part have long ago collapsed. The Egyptian culture of those days—with all the knowledge and wisdom which it possessed—was quickly overthrown by foreign invaders because it was a culture of a few; the masses were slaves who simply suffered because of the demands of this material development, and did not benefit from it.

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#MeToo: Memories of Sexual Assault are NOT a Figment of Women’s Imagination

Listening to Christine Blasey Ford’s heart-rending testimony before the US Senate triggers traumatic memories for RASNA WARAH.

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#MeToo: Memories of Sexual Assault are NOT a Figment of Women’s Imagination

The claim by President Donald Trump and others supporting the appointment of Judge Brett Kavanaugh to the US Supreme Court that it is impossible for a woman to remember every detail of a sexual assault that occurred more than 30 years ago cannot go unchallenged. Every woman who has experienced a sexual assault of any kind remembers every detail of the encounter. She may not remember the day it took place, or what she was wearing or even the exact location, but details of the assault itself usually remain indelibly etched in her memory.

Women watching Dr. Christine Blasey Ford recounting the details of what she claims was a sexual assault by Judge Kavanaugh when they were both teenagers were warned that watching her speak at a US Senate hearing might trigger their own memories of similar incidents. Indeed that is what happened to me. As I watched Ford give her testimony, I found myself recalling events that I had long buried somewhere in my mind.

I remembered 1985, when I was a university student in the United States. I had just got off the bus and was walking to my apartment in Quincy town on the outskirts of Boston when I noticed a black sports car parked next to a curb and the white man in it jerking himself off while looking at me with a grin on his face. Having never been “flashed” before, I found myself paralysed and unable to move. I did eventually muster my legs to run to my apartment. I do not remember the exact day or time this happened, but I do remember the man’s face. He must have been in his 30s or 40s and had dark wavy hair and small beady eyes. I never told anyone about this incident (until now) because I dismissed it as one of those things that deranged men do to frighten or intimidate women.

Women watching Dr. Christine Blasey Ford recounting the details of what she claims was a sexual assault by Judge Kavanaugh when they were both teenagers were warned that watching her speak at a US Senate hearing might trigger their own memories of similar incidents. Indeed that is what happened to me.

A year or so before, I had almost been raped by a man who was driving me home from a party. I didn’t know the guy very well, as I had only met him for the first time at the party. On the way back to my dorm in Boston, he stopped at an empty parking lot and proceeded to unzip his trousers. He then took out his penis and ordered me to suck it. I said no, and then lit a cigarette and threatened to burn his penis with it. I think I managed to scare him. He quickly dropped me off on a street that was nowhere near my dorm, yelling obscenities and calling me a tease. I didn’t tell anyone about this incident either because I blamed myself for allowing a man I barely knew to drive me home. But for years afterwards, I did wonder if my lighter and cigarettes had helped me ward off a rape.

I remembered 1985, when I was a university student in the United States…a black sports car parked next to a curb, the white man in it jerking himself off while looking at me with a grin on his face…I never told anyone about this incident (until now)… I dismissed it as one of those things that deranged men do…

In those days, the term “date rape” had not been popularised in American college campuses, and so not much was said when we learnt that a college-mate had been sexually assaulted, or even possibly gang-raped, at a college frat party in an elite university in Boston. I remember one instance vividly. My dorm mate, who happened to be a devout Catholic, asked me to wait in the reception for her while she went upstairs with a male student she had just met. I didn’t think much of the dangers that she might be exposing herself to at the time. (In US college campuses in those pre-HIV/AIDS days, it was quite normal for students to engage in casual sex.) When she didn’t return hours later, I decided to go back to my dorm, thinking that perhaps she had decided to spend the night with her new friend.

The next day, she returned to the dorm, visibly bruised and traumatised. It was obvious that she had been raped. She did not say what happened to her, but her demeanor suggested that she had been through something physically and emotionally painful. Her mental condition deteriorated to the point where her parents had to be called to pick her up and take her home. She never returned to college.

And no one in the college administration tried to identify the boys who had done this to her or to charge them with sexual assault. It was just not the done thing in those days. She probably blamed herself for the “sin” she had allowed to be committed against her, and being a Catholic, she probably even forgave her attacker/s. This is the thing that people don’t get about sexual assault – the victims always feel a sense of shame and guilt, and this is what often prevents them from coming forward. Worse, they are made to feel that the assault was just a figment of their imagination. Yet, as data shows, almost every woman in the world will experience or has experienced some form of sexual assault or harassment in her lifetime. So why is it so hard for people, especially men, to believe that this is happening?

A year or so before, I had almost been raped by a man who was driving me home from a party.

But was the reality TV-type US Senate hearing of Ford’s claims really necessary? I don’t think so. In my opinion, Ford should not have agreed to present her case in public on camera in front of the whole world, especially considering that she had previously requested to remain anonymous, and also because women who come forward publicly with such charges are often ridiculed, and made to feel bad all over again.

And indeed that is exactly what happened. A few days after the hearing, Ford was mocked and made fun of by none other than the President of the United States who suggested that she had made up the whole story at the behest of his political opponents. The laughter that echoed at the Mississippi rally where Donald Trump derided Ford probably brought back memories of the “uproarious laughter” that she says she remembers most about the sexual assault incident in 1982. For those who watched the rally on television, the most shocking scenes were those of women in the crowd laughing and jeering.

Until the #MeToo movement gained momentum, most victims of sexual assault or harassment believed that they were to blame for what happened to them. What the #MeToo movement has done is shift the blame to the perpetrators, thereby liberating women (and men) to speak openly about the trauma they suffered. It is likely that the recent barrage of revelations about Catholic priests in the United States and Australia molesting or raping boys may have remained a secret if these boys (who are now middle-aged men) had not been emboldened by the #Me Too movement. For the first time in a long time, it has become okay for women and men to say they were raped or sexually harassed without feeling that they will be put on the dock and not be believed.

But, as the Senate hearing has shown, despite the #MeToo movement, it is still difficult for sexual assault victims to be believed. And when they do come out, all kinds of questions are raised about their mental health, rather than the mental health of the perpetrators even though during most of the hearing, it was Ford who appeared coherent (though visibly flustered) while the man she was accusing appeared hysterical and overly defensive. Kavanaugh even managed to paint himself as a victim of a left-wing conspiracy. And despite his repeated declarations about how much he liked beer, none of the members of the male-dominated Senate accused him of having a drinking problem.

Until the #MeToo movement gained momentum, most victims of sexual assault or harassment believed that they were to blame for what happened to them.

In 1991, Anita Hill, a bright young black lawyer, accused Clarence Thomas (another US Supreme Court nominee) of sexual harassment, and she was not believed. She was vilified and accused of being a “man-eating professional” who was just seeking attention. To see this happen now, once again, 27 years later, is discouraging.

Some feminists like Germaine Greer have even stated that women who claim to have been sexually harassed or assaulted by powerful men might have willingly agreed to have sex with these men. Of the Hollywood actresses who have accused movie moguls of sexual assault or harassment, she had this to say: “If you spread your legs because he said ‘be nice to me or and I’ll give you a job in a movie’ then I’m afraid that’s tantamount to consent, and it’s too late now to start whingeing about that.” It is disheartening to hear these sentiments expressed by someone who has spent a lifetime examining male-female relations and how they impact sexuality.

Greer, of all people, should know that rape and other types of sexual assault or harassment are political issues – because they are the result of skewed power relations between men and women. When the man raping or sexually harassing a woman has the power to make or break her career, the issue of consent becomes murky and blurred. What does consent mean in this context?

And it really doesn’t matter if the assault was a rape or a groping of groins while fully clothed; the impact on women and girls is the same. (I still remember to this day when a big burly man came up behind me, fondled my buttocks and let out a great big guffaw as I was walking to school from my home in Nairobi. Like Ford, it is the laughter I remember most about that incident. That happened more than 40 years ago, when I was around 10-years-old, but I am still wary of walking alone on lonely lanes.)

Recently the Bollywood actress Tanushree Dutta stated that the “casting couch” is alive and well in Bollywood and that leading male actors routinely ask their female co-stars to have sex with them before they approve them for a role. (Apparently, the casting of leading ladies in Bollywood happens in actors’ trailers and hotel rooms, not in the offices of casting directors). Dutta has not had a leading role in a Bollywood movie since she accused a much-respected male co-star of sexually harassing her. This shows that when a woman comes out and accuses her boss or colleague of sexual harassment, she is likely to be committing career suicide. She will be ridiculed, not believed, and most likely fired. Which woman would risk facing all this?

It really doesn’t matter if the assault was a rape or a groping of groins while fully clothed; the impact on women and girls is the same.

So when a woman does come forward, chances are that she has either calculated the risks in her mind and has decided to do what is right no matter what. Some argue that women who come out years after being sexually assaulted – when both they and the accused have got married, had children and moved on with their lives – are not doing anyone a favour as many lives and reputations are destroyed. The problem with this argument is that it assumes that the perpetrator has stopped attacking women now that he is happily married with children. As the Harvey Weinstein and Donald Trump cases have shown, men do not stop grabbing p….. just because they have a beautiful wife and children home. Men who commit such crimes or misdemeanors – and constantly get away with them – are likely to continue committing them unless they are made to account for their actions.

All the men and women who support abusive men should know that sexual crimes have no expiry date and that if this culture of misogyny and male entitlement continues, it is their daughters who will one day pay the price.

The Women for Trump brigade and all the men and women who support abusive men should know that sexual crimes have no expiry date and that if this culture of misogyny and male entitlement continues, it is their daughters who will one day pay the price, if they are not paying it already.

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