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We must now go to basic economics which will unite us

By Otieno Odhiambo | Published Tue, March 20th 2018 at 00:00, Updated March 19th 2018 at 18:11 GMT +3
President Uhuru Kenyatta

Two weeks ago, the gods of politics spoke and President Uhuru Kenyatta and Opposition leader Raila Odinga realised that they needed to act to save the nation. This is good, but we will not achieve our national goals unless we accept that at the centre of the crisis is the state of the economy.

We must now go to basic economics which will unite us. We must revisit the key economic ideas that citizens are rational and respond to incentives more than political rhetoric.

Kenyans across the social divide must make choices to attain certain goals as a nation. We must only take decisions that add value to the quality of our lives; we must accept that resources are scarce.

We have limited resources that can produce limited goods and services. We must define and prioritise the goods and services to produce. The National Treasury, planners, the Central Bank and economists at top universities must liaise with development partners and invert economic models that propel the economy and recognise our resources are scarce.

In any case, economics is the study of choices we make to achieve goals given the scarcity of available resources. There are monopolies such as Kenya Power that charge whatever prices they like for the services they provide. We should move towards a market-driven economy.

Markets are better off in setting prices, supply and demand of goods and services. The government must accept that citizens are rational. In markets that are not controlled by governments, individuals weigh the benefits and cost of each good or service. They choose those whose benefits outweigh the cost.

The State must desist from deciding how economic resources are allocated.  That decision should be left to households and businesses. For this to be the agenda, we need to go back to the basics.

WASTAGE AND INEFFICIENCY

How will the goods and services be produced and who will receive the goods and services? I hope our economists can be as meticulous as lawyers when they defend their clients in court.

Leaders and economic planners must internalise the reality that we have limited economic resources. We face a trade-off because of scarcity. Producing more of one good or service means producing less of other goods and services.

We must be efficiently selective about our use of scarce resources. There is wastage and inefficiency in the public sector, which is unacceptable. There is a belief that governments that dominate individuals’ life perpetuate corruption. This explains why the State should allow individuals to make their economic choices.

Government intervention is welcomed if it protects citizens’ rights hence the need for mixed economic model. Here, economic choices are a product of the interaction between buyers and sellers but the State can oversee the allocation of the resources.

In a mixed economy, production of goods and services is driven by the market. The adverse effect on the economic process on the environment must be part of our development package.

When leaders meet economists, they should discuss economic efficiency and equity. To cater for local and foreign market, we must be efficient.

Goods and services must be provided at the lowest costs possible. In other words, efficiency is concerned with producing the goods and services at the lowest cost. 

The exchange between buyers and sellers must be voluntary. One economist argued that ‘allocative efficiency means what is produced reflects consumer preferences - every good or service is produced up to the point at which the last unit provides a marginal benefit to consumers - equal to the marginal cost of producing it’.

Some firms are winding up because they supplied goods and services to national and county governments but haven’t been paid.

Others do not remit their statutory payments such as NHIF and NSSF. Economic efficiency makes no sense if we fail to promote equity in the society.

There must also be a debate in our universities about the economic system we want. Kenya needs comprehensive economic reforms, including abolishment of harmful tariffs, privatisation of some State functions, tax cuts for individuals and firms, in addition to punishing corruption. Reducing or leaving VAT at the current level will propel economic growth.

 


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