The Mt. Kenya region will play a major role in next year’s presidential election thanks to its seven million votes. And for the first time in three decades, the region does not have very strong presidential candidates, adding to the streak for all candidates as they wrestle for the hearts and minds of Kenya’s most populous region. As the debate stands now, it’s all about the economy.
In advocating Raila Odinga last Wednesday, part of the region’s leadership tried to reiterate the position that the people of Mt. Kenya care more about the economy than politics and that the economic problems the republic is facing , are complex and should not be reduced to slogans.
What are some of these problems? At the national level, real monthly wages in the private sector rose from 8,700 Shillings. in 2002 to 33,100 Sh. in 2008. They then fell to 26,000 Sh. until 2012, before slowly increasing to 31,000 Sh. rose. In essence, there have been no significant improvements in labor productivity for 13 years, leading to an overall stagnation in real monthly wages.
Economists have been looking for explanations and three pop up. First, two key trends that had led to rapid increases in productivity between 2002 and 2008 – namely the connection of rural cities and market centers to electricity and mobile phone penetration.
Electricity enabled productive activities in rural centers that were previously not possible. Welding, for example. Mobile money and online banking have fundamentally changed the way we do business, removing the need for time-consuming systems such as bank queues.
Second, after a brief, if exhilarating period, we returned to a high yield regime. In 2004-05, the Narc government was the talk of the town in African financial markets. Everyone was amazed at how Kenya had succeeded in reversing an inverted yield curve on the bond market, extending the maturities of national debt and dramatically lowering interest rates.
In general, long-term bonds should have higher interest rates than shorter-term bonds to reflect the risk profile. But when the government has a big appetite for short-term money, the markets pull a premium. This leads to a shortage of long-term capital as financial markets generate higher returns on short-term instruments.
In addition, the government does not take out any short-term corporate loans other than as a market signal. Most importantly, the government should never drive the private sector out of credit markets. The Narc administration got all of these things right. But it shouldn’t last.
Soon the IMF and others argued that the low interest rate regime was unsustainable because it led to negative real interest rates, despite the fact that countries like Japan had been on the territory for years. Unfortunately, as we often do, the Treasury and Central Bank have listened and raised interest rates.
It is useful to distinguish areas within the economy – the real economy, such as factories and farmers that produce real goods, and the monetary economy, which mediates finance and thus facilitates the exchange of goods and services. High interest rates favor the financial or monetary economy over the real or production economy. Because of this, financial institutions continue to report high profits while factories and small businesses are closing.
The third reason for the stagnation in real wages is the failure of trade policy reform. This is partly because many of the political elite companies are based on imports. Two examples will suffice. On the one hand, the verification of conformity before dispatch (PVOC). The Kenya Bureau of Standards engages external verification agents at your expense to verify that the goods you are importing meet Kenyan standards and are safe for your use.
An excellent idea you could say. And that would be it, except the way in which this is done allows the government some product liability. For example, if the mobile phone you are using has been shown to have harmful side effects, you can sue for damages. And the liability would be in part with the government, who confirmed to you that the phone is safe because it meets the standards!
A better way to do this would be to ask the South Korean standards body to confirm that the Samsung phone meets Kenyan standards and is safe. And since it is their responsibility to enforce the standards in their country, they should assume product liability. If it’s so simple and sensible, why is it done differently? Because verification is big business, worth $ 8.7 billion annually. The fee for a single transaction is a barely noticeable 0.56 percent of the value of the goods. However, the value of our imported goods is over $ 15 billion! These imports include machinery and capital goods valued at $ 240 million each month.
Why do we import instead of manufacturing machines? Reselling is easier. In addition, we have passed laws that consciously give preference to imported machines. As I have already shown in this column, one such law is the EPZ law. To encourage EPZ operators, the law allows them to import machines tax-free. But the same incentive is not available for Kenyan machines! Why? Legislators either don’t believe we can make machines, or worse, they know we can, but prefer imports because they serve their commercial interests.
This brings us back to the presidential election and voting in Mt. Kenya and how to win them. Both top candidates have recognized that you can only win this vote if you address the economic issues. And there are deep-seated, weighty questions.
Why should the chopper used by a farmer in Muranga to chop napier grass for her cow be imported from China? Why should the pump and drip pump that a young man uses to water his tomatoes at the Wangwachi Dam in Laikipia be imported? And why should we prefer imported tuk-tuks when we make the same thing in Nyahururu?
It is clear that these questions cannot be answered with catchy slogans. They require committed, conscious action. This is where the machines are to be manufactured that our farmers need to increase their productivity.
We also need to help 7.4 million micro and small businesses with mechanization and automation. Not only will this create more jobs as small businesses move to mass production, but it will also increase labor productivity and therefore real wages! As? A combination of a return to a low interest rate system, the preference for locally manufactured machines, direct support for companies and the improvement of local and regional market access.
Ndiritu Muriithi is the governor of Laikipia