Tuesday, 21 April 2020
A HERETIC’S VIEW OF KENYA’S ECONOMY POST-COVID-19
By Oduor Ong’wen
It is now five weeks since the announcement of the first positive case of a COVID-19 test. It was always a matter of “when” not “if” we were going to join the growing list of countries with cases of the vicious virus. In a rapid-fire manner, the cases began to rise.
Some Kenyans were alarmed. Others adopted a cavalier attitude. The government, earlier condemned for the inept or indifferent pose exhibited as the disease wrecked havoc in lands it considered far away – even passenger arrivals from epicentres like China and Italy – swung into action with a series of protocols and directives. As the Englishmen say, the jury is still out.
The low numbers so far posted give us some level of comfort and boost our confidence. But the COVID crisis has exposed the vulnerability of our health system.
When the coronavirus pandemic broke out, our country was totally unprepared for it. There were severe shortages of testing kits and healthcare facilities.
The first cases had to be tested in South Africa, taking almost a week to post results. Many Kenyans also lack universal entitlement to healthcare. We don’t have a robust social protection system despite that a policy was adopted ten years ago.
And please god. Not again.
Not after that sign language guy at Mandela funeral.
Back to real business.
Social safety nets including basic employment rights and unemployment insurance that could mitigate some of the worst effects of the pandemic’s economic impact have been considered anti-business and as such condemned.
All this points to the disarming reality that the pandemic would unleash mutually reinforcing health and economic crises.
COVID-19 pandemic is wracking and humbling every country, economy, society, and social class. In its socioeconomic and political impact alone, COVID-19 has already made history.
While I am not deriving any gratification from the fact that the invincible United States of America and mighty Europe are ravaged by the pandemic, COVID-19 has disabused the big powers of the oft peddled notion that Africa is a continent of poverty and disease.
The novel coronavirus has shown that pestilence is no respecter of riches and military might. Whether we already recognise or not, the pandemic has reorganised our society socially, culturally and economically. It has the potential for political reorganisation too.
As Paul Tiyambe Zeleza observes, “the neo-liberal crusade against ‘big government’ that had triumphed since the turn of the 1980s, suddenly looked threadbare. And so did the populist zealotry against experts and expertise.
The valorisation of the politics of gut feelings masquerading as gifted insight and knowledge, suddenly vanished into puffs of ignoble ignorance that endangered the lives of millions of people.”
Never before in our lifetime has the human race been so vulnerable. We only read in History books that one of the world’s deadliest pandemics was the Great Plague of 1346-1351, which ravaged larges parts of Eurasia and Africa and killed between75 to 200 million people, and wiped out 30 to 60 per cent of the European population.
The plague was caused by fleas carried by rats, underscoring humanity’s vulnerability to the lethal power of small and microorganisms, notwithstanding the conceit of its mastery over nature.
The current pandemic shows that this remains true despite all the technological advances humanity has made since then. Over a century ago, as World War I came to an end, an influenza epidemic, triggered by a virus transmitted from animals to humans, ravaged the globe.
One-third of the world’s population was infected, and it left 50 million people dead. It was the worst pandemic of the 20th century. Now COVID fatalities are more than 2 million and we are still counting.
The public health-induced mitigation measures imposed by the government, the responses of individuals (particularly, in terms of hygiene and self- isolation), downturn in economic activity from Kenya’s major trading and investment partners and the dislocation of global capital markets are some of the immediate economic impacts of coronavirus captured by the health shock.
But it’s not all gloom. It is from crises of this nature and great wars that countries discover and unleash their latent potential and change the course of history permanently.
How about the Sonko Solution. Try it. Macharia Gaitho explains it below.
And don’t forget the informal jua kali sector which is close or higher than the National Domestic Product (GDP)
We can come out of this crisis with a better-organized healthcare and social security system. We can re-engineer our economy in a manner that it better responds to the needs of the Kenyan people – and consequently that will redo the political architecture of our nation. We cannot afford to let this crisis go to waste.
Mitumba business is big in our country and it is good that the hasty ban on Mitumbas has now been reversed.
What I propose hereunder as a way of dealing with the post-COVID economy is considered a heresy in neo-liberal economics. Against the coronavirus pandemic, we are at war – nationally and globally.
And coming out of a war situation, we have to act in “strange ways” and dare to be us. The rulebook has to be suspended, if not revised altogether. We as a country need to have five interventions in the immediate aftermath of the pandemic.
First, we must address our public healthcare system holistically. Let every county be given a ring-fenced grant of Sh. 2 billion to upgrade the healthcare system including, but not limited to, building or physically upgrading hospitals, health centres and clinics, buying and repairing equipment, stocking the health facilities (some hospitals and dispensaries don’t have even bandages or paracetamol tablets), addressing health workers’ human resource issues (from salaries, work environment to health professional:patient ratio).
The pandemic has exposed the vulnerability of countries that had subordinated public healthcare to profit interests like our country and the United States, among others.
Let’s learn from the United Kingdom’s National Health Service (NHS) if the Cuban system can infect us with communism. Sh. 100 billion (Sh. 94 billion to counties and Sh. 6 billion to the national referral facilities) would revolutionise our healthcare system.
This must be in addition to – not in place of – the current budgetary allocations. The money to the counties should not be used for any other programmes unrelated to upgrading the healthcare system.
Second, we need to support domestic production. Not less than Sh. 80 billion should be infused in the food production systems.
Direct support to producers of staples like maize, wheat, rice, beans, milk etc. would ensure not only that these commodities are readily available but also the producers are backstopped.
Sugar production should be included here. The support should include subsidized inputs, extension services, production and marketing infrastructure and provision of the necessary storage and warehousing facilities, among other things.
Another Sh. 70 billion should be made available to those in the export crop production that includes, among others, tea, coffee, horticulture and floriculture and pyrethrum
The withdrawal of public services has not led to a florescence of the private sector in rural areas – but a yawning void.
Market liberalisation cannot contribute to poverty reduction unless better market linkages have been forged, linkages that not only bring smallholders to the market (and the private sector to smallholders), but that also embody enhanced market power among the poor.
The public sector has a critical role to play in this. Accelerating the process of rural reconstruction (including development of market access), expanding choices, improving access to information, creating conditions for equitable market relations for the poor – all these must be at the very apex of our development and poverty reduction agenda.
But the issue is not just markets; it is also assets – and the challenge of securing the rights of the poor to land and water that are at the hearts of their livelihoods.
Third, the State should ensure that the manufacturing sector is producing the goods we consume as a country. In the last thirty years, Kenya has been transformed from a regional industrial hub into a huge supermarket for imported stuff – largely of questionable quality.
From paper to furniture, we have turned to importing some products that can be produced here cheaper and in superior quality. The country has the capacity to produce most of what it needs in clothing and apparel, pharmaceutical products, industrial and auto spare parts.
Sh. 100 billion stimulus package in the post-corona recovery plan should be able to spur optimal industrial production. The construction sector should also be supported through this window.
It is the support for the agricultural, manufacturing and construction sectors that will put most of our people to work. The response to the pandemic – almost instant production of alcohol-based hand sanitisers, face masks, personal protective gear (PPE) and even a prototype of cheap ventilators – have shown that given a conducive environment, Kenyans can produce quality manufactures for both local and regional markets.
In the short to medium-term, the agricultural products aimed at ensuring our food security and manufactured products would need to be cushioned against import surges of similar products.
Over the last three decades, protectionism has become a dirty word. Trade liberalisation under the World Trade Organisation (WTO) has elimination of protectionism as its main aim.
But contrary to the widely held belief that WTO prohibits protecting vulnerable industries and sectors, it allows restrictive measures in response to well-defined situations like addressing a balance of payment (BOP) challenge or what is known as Safeguard.
Countries facing BOP problems, i.e. problems regarding net inflow of foreign exchange or foreign cash reserves are permitted under Article XII of GATT 1994 (for both developed and developing countries) and Article XVIIIB of GATT 1994 (for developing countries only) to take measures such as tariffs beyond bound levels or quantitative restrictions.
Another situation that can provoke cushioning a range of products or sectors is called Safeguard. Safeguard measures are resorted to when a product sector of a domestic industry suffers injury or is at a threat of suffering injury from imports.
To induce value-addition, the State should impose export duties on primary products – unless it’s in our national interest not to do so.
Fourth, the State should make a total cash grant of Sh 40 billion grant as social assistance package to every vulnerable Kenyan. This amount is less than what the country lost in Arror and Kamwerer dam projects where Sh. 21 billion was gifted to a bankrupt Italian firm and a few dealers masquerading as leaders locally and the money the State lost to the Chinese firm CATIC when the JKIA Greenfield Airport Terminal project was cancelled, amounting to Sh. 20 billion.
CATIC has used that money to construct the Global Trade Centre (GTC) along Chiromo Road, Nairobi.
This proposal might appear populist. But that’s not the intent, even though it will be popular. COVID-19 is a supply shock and a demand shock.
With this money in the pockets needy Kenyans, the products and produce will get ready local market. They will buy food, construct houses, buy clothing, booze and marry many women, thus ensuring that the supply side (production) is sustained in the market.
This is pretty good for an economy emerging from war.
Unlike buying of emergency provisions for the poor, corrupt State officials can’t steal this money, if profiling is transparent.
It will also accord the low-income people the opportunity and dignity of having a choice as opposed to relief food that is bought remotely and presented to them in a “take-it-or-leave-it” situation.
Many Kenyans using this grant as a start-up capital will also start some micro and small enterprises and create employment.
There are sectors like tourism and hospitality as well as air transport that will take a long time to recover.
The State should assist them to recalibrate. For example, Kenya Airways shifting focus to cargo transportation while not losing the passenger routes it has secured in Europe, US and Asia; massive promotion of domestic tourism to return hotels and lodges to normalcy etc.
The foregoing interventions will require the injection of between Sh. 350 billion and Sh. 500 billion. Where do we source this money? Hold your breath! The Central Bank has to release new notes worth this amount.
Yes, print the money. Of course, this is heresy to neo-classical economists directing our fiscal and monetary policies. The IMF advisors that control our Treasury and State Department of Finance will vehemently oppose this.
Yet, they don’t object – indeed tacitly approve – when industrialised countries engage in the same. There are already strong indications that both the US Federal Reserve and European Central Bank are going to print money to enable them respond to the COVID challenge, if they haven’t done so already.
The IFIs discourage our countries from resorting to the same measures so that our economies absorb their excess liquidity through debt. Two authoritative European publications – the
Financial Times and The Economist – let the cat out of the bag almost at the same time a fortnight ago.
On April 6, 2020, the Financial Times opined as follows: In times of emergency, particularly war, central banks have often handed freshly printed banknotes to governments. The fight against resultant inflation was postponed until after any crisis … without limits, allowing a government to finance itself by creating money can lead to hyperinflation. But these risks can be manageable: the quantitative easing of the past decade, despite predictions, has not lifted inflation above the main central banks’ 2 per cent targets. The money pumped into the rich-world economies has been met by increased demand, perhaps permanently.
The same week, The Economist had this to say: this is no time to fret about government debt. While cases of COVID-19 soar and economic activity grinds to a halt, governments are right to throw all resources they can at efforts to limit the pandemic’s human and economic costs … Central banks, in an effort to provide relief to troubled economies, are already buying large quantities of government debt. The Fed is purchasing unlimited amounts of Treasuries; the European Central Bank recently announced a € 750bn ($809bn) bond-buying scheme. A weak recovery could push central banks to finance large fiscal deficits with freshly printed cash on an ongoing basis.
In the wake of the 2008 financial crisis, central banks led by the Federal Reserve created trillions of dollars of new money, and poured it into financial markets.
The QE was supposed to prevent deflation and restore economic growth. But the money didn’t go to ordinary people: it went to the rich, who didn’t need it. It went to big corporations and banks – the same banks whose reckless lending had caused the crisis.
This led to a decade of stagnation, not recovery. QE failed. QE can only succeed if the money goes directly to ordinary people and small businesses.
Instead of going for either external or domestic borrowing – both of which are expensive and punitive to the taxpayer, QE is a borrowing by the government from itself and in its own currency.
If the Central Bank (CBK) issues new Sh. 500 billion worth of new cash, the money supply (M1) would grow from the current Sh. 1.5 Trillion to Sh. 2 Trillion. The money supply (M2) in this case would rise to about Sh. 2.4 Trillion.
At a withdrawal rate of 2.5 per cent of M1 per month, CBK can mop out this excess liquidity in 12 months and return to the pre-COVID status. This is enough timeframe for the economy to find its own feet to stand on if the foregoing is implemented as a single package.
In its report, Africa’s Pulse,released last week on April 13, 2020, the World Bank acknowledges that many African countries still have room for countercyclical monetary policies but avers that space for fiscal policies is quite constricted.
If we don’t borrow from ourselves in increased money supply, the excess dollars and euros are sure coming our way through credit from industrialised countries and IMF’s Standby facility. This will be very expensive and enslaving.
Fifth, we have to address our taxation system in the medium to long term. In Kenya, like in virtually every capitalist country, the burden of taxes falls inordinately on lower and middle-income families. Income taxes, in absolute terms favour high earners at the expense of those on low pay.
Most consumer taxes – like the Value-Added Tax (VAT) – are also regressive, causing the poor and middle classes to pay much higher percentage of their income than a rich person who buys the same items.
A new progressive tax system should be introduced on production. In other words, taxes on goods should be levied at the point of production rather than at the point of purchase by the consumer, and taxes on service should be levied on the service provider for the services they provide.
A tax system based on production tax would provide the broadest possible tax base. All goods produced in the country would be taxed at the point at which they enter the economy, and the producer should pay the tax.
All imported goods should be taxed at the point of importation with the importer paying the tax. Similarly, taxes on services should be levied at the point at which the service is provided to the consumer and the tax paid by the service provider.
Thus, in such a system, the government would have the opportunity to collect the greatest amount of revenue.
A tax system based on a production tax would be the fairest possible tax system for both the consumer and the producer.
Under this tax regime, producers of essential, semi-essential and non essential commodities would be taxed at varying rates as would providers of essential, semi-essential and non-essential services.
Essential goods and services should be taxed at the lowest rate, semi-essential goods and services to be charged at a higher rate, and non-essential goods and services should attract the highest tax rate.
Each consumer would have the opportunity to choose which product or service they preferred, knowing that they would be paying more for luxury items.
Switching over to this tax system would, in very conservative estimates, move our tax to GDP ratio from the current 19 per cent to between 35 and 40 per cent.
This is another heresy to neoliberal economists.
Like all heretics, I am ready to be stoned to death or burned alive at a public ceremony at Uhuru Park. My only request is: remember to keep social distancing during the ceremony.
- Zahid Rajan22 April 2020 at 03:44Radical political Economics! It would be interesting to have a face to face on social media with a neo-liberal economist like Ndii for wider debate, input to create a national consensus.Reply
- Unknown22 April 2020 at 13:28Oduor,
That was a very powerful and timely piece. I like your ideas on how to reform the economy particularly in financing the economy and new taxation system. I will look at the piece very thoroughly over this weekend and give you some feed back.
Here in Toronto I put together a piece entitled :
“CIVID-19 Exposes The Often Despised And Most Needed People In Our Societies” Now what:
I was talking about how here in Canada and the US there would be no food without “Temporary Foreign Workers” who come from Mexico and the rest of Latin countries and the Caribbean to plant crops, pick crops handle livestock and work in food processing factories.
These workers are often despised and treated terribly by the majority white population.
Now those workers can’t make it because of this COVID-19 nightmare. There are millions of people in the US and Canada who are out of work and being paid to sit at home.
Trouble is they have no clue how to do farm work and won’t do it because they would earn slave wages. Now what do we eat.
Same thing in Nursing Homes. White folk dumb their parents and grand parents in Nursing Homes where mostly underpaid and mistreated immigrants take care of them.
Now the Nursing Homes are on fire with COVID-19 and the immigrants just don’t want to work there and nobody else wants to work there because of the terrible payrate and working conditions.
All of a sudden people are realizing that without these despised workers the entire society is in big trouble. Who would have thought that it would take a catastrophe like COVID-19 for people to see what has been in their face for centuries.Reply
- Unknown26 April 2020 at 02:18I am not an economist but I find the proposals contained in this piece very well thought out.
- I cannot agree more that blind reliance on foreigners who have – perfectly understandably – only their own interests at heart will never help us. It was wrong, it is wrong and will forever be wrong. Covid 19 might just be what the doctor ordered for in our case; if we see through its immediate devastation, it just might turn out that it came to free us. The time for African technocrats to work for Africans and not for Europeans, Americans and Chinese has arrived. Africa, arise!
Thanks, Oduor, for this thought provoking piece.