Painful economic realities Kenyans don’t want to face

By XN Iraki | Tuesday, Aug 28th 2018 at 09:18
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Economists regard themselves as the high priests of humanities.

Not so surprising because their esoteric equations and graphs mystify the lesser humanists.

And like religion, they still can’t explain many things.

Lately, the high priests have left the neatness of equations and graphs to the muddles of our behaviour.

That is why behavioural economics is in ascendancy, winning Nobel prizes.

Can we use the new approach to explain the paradox of Kenyan public on economic matters?

Are Kenyans really rational?

Kenyans are up in arms against introduction of VAT on petroleum products, including oil which we are supposed to start exporting (yet another paradox). The reasoning is that VAT on petroleum products will raise inflation levels. That is a fact.

Petroleum is one of the key inputs into production systems, particularly in logistics and transport. If you talk to anyone building a house or any other big structure you will by surprised by the cost of transport.

One man told me he saved 30 per cent in building a house by buying an old truck.

Workers or labour in “economicspeak” must also be transported to the work place. Alternatively, work places, a fancy term for telecommuting or working from home is still far from becoming commonplace.

Worse for the ordinary Kenyans is that they have few alternative means to the workplace like cycling or walking. Paradoxically, these alternatives are available in developed countries.

The new VAT could also have some unintended consequences.

The rise in prices could depress the economy, leading to less consumption and investment as well as less tax revenues. Any car left at home is tax revenue forgone.

The only consolation to the Government is that petroleum is almost a necessity and not very elastic. Rise in price of necessities does lead to a drastic fall in consumption.

Now you know why medical services are expensive. The Government also knows we are addicted to cars and workers must go to work, materials and others inputs must be transported to keep the economy humming. That is why owning a car is not far from economic slavery.

Car owners can’t say that loudly lest they lose prestige. Those without cars dream of owning one sooner than later.

Less talked about is the political cost of raising prices particularly of food. Hungry voters can be angry voters. Large-scale farmers say one of their biggest costs is energy.  My hunch is that the State could start charging the new VAT and blame external influence like the International Monetary Fund (IMF).

KANU found itself in a similar situation in liberalising the economy and the subsequent rise in prices. Some observers think bad economic times planted the seeds of KANU’s end. But the cockerel party mutated and is still in power. The alternative to raising revenue through VAT on petroleum products is to borrow from the public, banks or from abroad through sovereign bonds or concessionary loans or hope for grants or aid.  Kenyans do not want new VAT or more debt.

We are already accusing our leaders of mortgaging the country to external debtors which is often cheaper than local debt.

Let’s get into the Kenyan mind: if we don’t want the Government to raise funds through taxes and borrowing, where should it get its money from?

We suggest four alternatives equally hard to implement. One is to reduce the public workforce which takes a huge chunk of money raised thorough taxes.

No Kenyan wants to hear of retrenchment when unemployment is this high. Yet, the money saved through this would fund governments and increase national productivity and hopefully create more jobs in future.

Unfortunately, politicians unlike economists think of today; tomorrow will take care of itself. Two, is to tame corruption into total submission and use the money saved to fund State operations. This is the best option. but it requires lots of political will and sacrificing of friends and allies.

The beauty about this approach is guaranteed public support and politicians like to hear that. Three, we can reduce our dependency on oil by embracing electric cars and alternative energy sources like wind, geothermal and solar.

Paradoxically, huge investments in these renewable sources have not reduced the prices of energy. One reason is legacy technologies, some which use oil. It is not easy to retire old power generating technologies because of job losses and political repercussions. Four, we can become more efficient in the use of technology like in our financial sector.

 Why else did banks post profits despite the controversial interest rate cap? This would reduce waste and appetite for more public money.

How many public services can be automated? How many can be offered more efficiently by the private sector? Don’t we have private jails in the US?

Washington visit

Needless to say, the State could postpone the decision and renegotiate with the IMF or whoever is behind the new VAT.

That could be on the cards during President Kenyatta’s visit to Washington. Whichever alternative, the State takes, either singly or in combination, is not easy and must consider the Kenyan mind.  Kenya’s economy is facing its moment of truth.

Luckily, moments like these test and shake our leaders into reality and hopefully spawn new leaders. After all, every leader is paid so well to make tough decisions and live with the consequences.

Such decisions should be about the maximum good for the maximum number of citizens.

The previous sentence is easier to write than actualise. 

 

-The writer teaches at the University of Nairobi

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