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Crony Capitalism and State Capture 3: Uhuru Kenyatta’s Manufacturing Agenda

8 min read. Uhuru Kenyatta’s manufacturing agenda argues DAVID NDII is a protectionism policy regime that puts tariff and other barriers on imports that compete with domestically produced goods. But as he illustrates, a protected competitive industry is a contradiction.

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Crony Capitalism and State Capture 3: Uhuru Kenyatta’s Manufacturing Agenda
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Ever since it was pronounced as one of his “Big Four” legacy initiatives, Uhuru Kenyatta’s manufacturing agenda has been blurry but an extensive television interview given two weeks ago was very revealing; in a nutshell, it is protectionism. “We want to ensure that we protect our industries, work with our industries to ensure that they are competitive but we also encourage them not to take advantage and extort Kenyans by overpricing their products.”

Protectionism is a policy regime that puts tariff and other barriers on imports that compete with domestically produced goods. A simple definition of competitiveness is a company, industry or country that is able to produce goods and services that are comparable in price and quality with those traded internationally. Competitiveness is benchmarked against internationally traded goods and services. But the purpose of protecting domestic industries is to shield them from competition. Once they are shielded from competition, they do not need to be competitive.

Ever since it was pronounced as one of his “Big Four” legacy initiatives, Uhuru Kenyatta’s manufacturing agenda has been blurry but an extensive television interview given two weeks ago was very revealing; in a nutshell, it is protectionism.

We have a problem. A protected competitive industry is a contradiction in terms. Tea and sugar, two industries that have featured in this column on a number of occasions, provide a perfect case study.

As an export-oriented industry, the tea industry has to be globally competitive to survive. There is little the Kenyan government could do to help the industry if it was not able to produce quality tea at a price that its international customers are willing to pay. Consequently, there is no need to protect the local market from imported tea. Even though imported tea brands are available in supermarkets, they do not cause owners of domestic brands sleepless nights.

Sugar is a different kettle of fish altogether. It is the country’s most protected industry. Kenyan sugar costs $800 per tonne ex-factory, against a global price of $280. The only way Kenya’s sugar industry can stay in business is by being heavily protected. For the last twenty years or so, the country has sought and secured safeguards from the Common Market of Eastern and Southern Africa (COMESA) so that the country can restructure the industry, to no avail.

Why is Kenya’s tea globally competitive and sugar the complete opposite? Competitiveness is closely related to, and in fact, derives from productivity. Kenya has the highest tea farm productivity in the world, at about 4,507 kilograms of green leaf per acre, closely followed by Sri Lanka at 4,440. Unsurprisingly, Kenya and Sri Lanka are the leading tea exporters, each accounting for between 20 and 23 per cent of the world market. By contrast, of the COMESA trading partners, Kenya has the lowest sugar cane yields (see chart).

The only way Kenya’s sugar industry can stay in business is by being heavily protected. For the last twenty years or so, the country has sought and secured safeguards from the Common Market of Eastern and Southern Africa (COMESA) so that the country can restructure the industry, to no avail.

But the sugar cane yields are only part of the low productivity story. Kenya’s sugar cane also has less sugar content, and the state-owned factories are less efficient, i.e. they achieve lower extraction rates than those of the trading partners—low cane yields, poor quality cane, inefficient factories. To keep this industry alive, it is protected by a 100 per cent import tariff, or $460 per tonne, whichever is higher. At the price of $280 a tonne, the applicable tariff is $460, which is an import duty of 164 per cent.

Why are the sugar cane yields so low? We have the wrong model of sugar industry. Sugar cane is a capital intensive crop, that is suited to large-scale integrated farm and factory operations. Kwale International Sugar, which revived the failed Ramisi Sugar, reports obtaining 60 tonnes a hectare using a “state of the art subsurface irrigation system”. Smallholder farmers do not have the capital or knowhow to do this, and it probably would not make sense to invest in such systems on a small scale. Moreover, once the cane is planted, it requires very little labour until harvest time.

Tea, on the other hand, is a labour-intensive crop. It needs to be picked and tended meticulously by hand throughout the year. Smallholder tea farmers work in their fields every day. The economic law of comparative advantage predicts that a country’s competitiveness will reflect its factor endowments, that is, capital-rich countries will be competitive in capital intensive goods, and labour-rich countries in labour-intensive goods. Because we have relatively more labour than capital, the global competitiveness of our tea vis-à-vis the uncompetitiveness of our sugar reflects our comparative advantage.

Why are the sugar cane yields so low? We have the wrong model of sugar industry. Sugar cane is a capital intensive crop, that is suited to large-scale integrated farm and factory operations. Kwale International Sugar, which revived the failed Ramisi Sugar, reports obtaining 60 tonnes a hectare using a “state of the art subsurface irrigation system”.

It is instructive to compare sugar with coffee. Since the early 90s, Kenya has failed to reform the coffee industry to keep up with changes in the global market. Production and exports have plummeted from a peak 140,000 tonnes in the late 80s to just over 40,000 tonnes today. There is nothing that the Government can do to protect the coffee industry. It simply has to shape up or ship out. But the most important thing is that the resources that were producing coffee—land, capital and labour—have been redeployed to other products including macadamia nuts, avocado, dairy, bananas, real estate and so on.

The same would have happened in western Kenya if the sugar industry was not so heavily protected. The long-suffering smallholder sugar cane farmers would have long since switched to other products of which they would be competitive producers such as cereals, livestock, horticulture, oil crops and so on. Instead, protectionism misallocates 440,000 acres of some of Kenya’s best rain-fed agricultural land—a very scarce resource—to a crop that generates a mere $400 per acre, compared with tea, which generates $2,200 an acre.

Protectionists often bolster their case by observing, correctly, that the East Asian Tigers also protected their infant industries during the early stages. The best documented, and arguably also the most insightful case, is that of South Korea. South Korea’s industrialisation took place in two phases spanning two decades, 1955-65 and 1965-75. During the first phase, it pursued both import substitution and export promotion simultaneously, but with a heavy bias towards import substitution. By the early 60s it had run into the chronic balance of payments crises that have plagued all countries pursuing import substitution industrialisation through protectionism— including Ethiopia currently. The government realised that import substitution had hit a dead end, and changed course, as Larry Westphal and Kwan Suk Kim, of the World Bank and Korea Development Institute respectively, explain in their 1977 study, Industrial Policy and Development in Korea:

Policymakers came firmly to accept that rapid economic development depended upon an export-oriented industrialisation strategy. This view was predicated on the understanding that Korea’s natural resource base was very poor and on the realisation that further opportunities for import substitution were only to be found in intermediate and durable goods, where the limited domestic market could not justify establishing plants large enough to realize technological economies of scale.

The Koreans then embarked on trade liberalisation, devaluation and other policy reforms that the rest of the developing world was to adopt two decades later, and that we now call structural adjustment. These reforms were implemented between 1961 and 1964. Export-led manufacturing took off. By 1975, manufactured goods contributed a third of the GDP, and 75 per cent of exports.

As noted, Korea’s industrial policy pursued both import substitution and export promotion simultaneously from the outset. The policy regime, referred to as the “export-import link,” pegged incentives directly to export earnings. Like most other countries at the time, Korea had a controlled fixed exchange rate that maintained an overvalued currency, as well as a rigid import control regime. Exporting firms were allowed to retain a portion of their foreign exchange earnings, which they could sell at a premium, or to import restricted consumer goods for sale in the domestic market. Another element was generous ‘wastage allowances” on imported raw materials. To illustrate, if garment exporters were allowed 15 per cent wastage on fabrics imported to make clothes for export, and the actual wastage was 5 per cent, this was the same as allowing them to sell 10 per cent of their products in the domestic market.

The effect of these incentives was to substantially offset the protection of the domestic market and to keep domestic-oriented producers on their toes. Other incentives included subsidised credit and discounted tariffs on utilities and railway transport, also pegged to export performance. As export manufacturing grew, the case for protecting the domestic market diminished, since Korean goods could compete both abroad and at home. The protection regime was progressively rolled back such that by the late 70s, South Korea was, by and large, an open economy.

Embarking on a protectionist industrial policy today raises a number of vexing issues. I will highlight three.

First, what is it in aid of? The stated objective is to increase the manufacturing share of GDP. I have heard a figure of 15 per cent of GDP by 2022 mentioned. The manufacturing share of GDP has actually been trending downwards lately—7.7 per cent in 2018, down from 10 per cent five years ago. How much can protecting domestic industry contribute? In 2018 we imported Sh.218 billion worth of finished consumer goods—excluding motor vehicles—accounting for 12 per cent of total imports, and 9 per cent of the value of domestic manufactured goods. If all these goods were to be manufactured locally, it would increase the manufacturing share of GDP from 7.7 to 8.5 per cent. But of course, whatever protectionist policies are envisaged will not constitute anywhere near total substitution and will at best have a negligible impact.

Tea, on the other hand, is a labour intensive crop. It needs to be picked and tended meticulously by hand throughout the year. Smallholder tea farmers work in their fields every day. The economic law of comparative advantage predicts that a country’s competitiveness will reflect its factor endowments, that is, capital-rich countries will be competitive in capital intensive goods, and labour-rich countries in labour intensive goods.

The most critical imperative that any industrial policy ought to address is jobs. We need millions of jobs. Kenya’s industry is capital intensive and not job-creating. A World Bank study from a decade ago showed that Kenya’s manufacturing sector was 50 per cent more capital intensive than China’s, and almost five times as capital intensive as India’s (see chart below). Although the data is old, the structure of the industry has not changed that much. This is of itself a legacy of an import substitution industrial policy which promoted the capital intensive goods that the country imported, as opposed to an export-oriented policy which would promote the industries that could utilise developing countries’ abundant labour.

Second, Kenya is a member of the East African Community (EAC), COMESA, and the new African Free Trade Area (AFTA) trading blocs, which agreements we have signed and ratified. Under the EAC in particular, Kenya is bound by a common external tariff (CET). Kenyan manufacturers are the biggest beneficiaries of these trading blocs. In 2018 Kenya exported goods worth Sh.90 billion ($1.9 billion) to EAC and COMESA, accounting for 30 per cent of total exports. We made imports of Sh.123 billion ($1.23 billion), thus running a surplus of Sh.67 billion ($670 million). Virtually all of Kenya’s exports to the region are manufactured goods. The country can ill afford to begin a trade war with the regional partners, who would only be too delighted to find reasons to lock Kenyan goods out of their markets. How is the government going to protect local industries without jeopardising regional integration?

Third, the case for protectionist import substitution regimes was predicated on the infant industry argument—protecting nascent industries until they were strong enough to compete. The problem arose because, like our sugar industry, and Pan Paper for that matter, there was no incentive to grow up, and the state lacked the political will to roll back the protection until economic crises compelled them. The industries that are now to be protected are not babies. What is the case for protecting grown-up industries, some of which are already dominant oligopolies in their sector? Until when will they be protected, and what new policy instruments are there to ensure that this protection regime will not go the route of the old one? Protecting mature incumbents translates to not just protection from competing imports, but also giving them more muscle to fight potential entrants into their markets. Essentially, it amounts to entrenching cartels, and Kenyatta’s statement—which makes reference to taking advantage, extortion and overpricing—demonstrates that Kenyatta is actually alive to this fact. Why is he contradicting himself? State capture.

David Ndii
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David Ndii is a leading Kenyan economist and public intellectual.

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South Sudan: An African Tragedy where Looting is the Name of the Game

7 min read. A never-ending cycle of killing and looting has left South Sudan fragile and impoverished. Moreover, a kleptocratic class of politicians and generals at the top with deep ties to “international partners” has been benefitting from the conflict, which could explain why Africa’s youngest nation remains in a permanent state of political instability.

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South Sudan: An African Tragedy where Looting is the Name of the Game
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The signing of a peace agreement by the Government of South Sudan and opposition groups on November 20th 2019 has signaled to the international community that there is a real possibility of peace in Africa’s youngest country. But I am not hopeful, nor do I believe that the current leaders of this war-ravaged country, Salva Kiir and Riek Machar, are committed to a peace process, despite being humbled by Pope Francis (who kissed their feet last year—a gesture that spoke more about the Pope’s humility and generosity than it did about South Sudan leaders’ leadership).

I also believe that the two leaders should be held accountable for the violence and other atrocities they have inflicted on their people. As a new report has shown, not only are Kiir and Machar war criminals but they have been systematically looting their country for their own personal benefit for years. The report by The Sentry titled “The Taking of South Sudan: The Tycoons, Brokers and Multinational Corporations Complicit in Hijacking the World’s Newest State”, which was released in September last year, states:

“The men who liberated South Sudan proceeded to hijack the country’s fledgling governing institutions, loot its resources, and launched a war in 2013 that has cost hundreds of thousands of lives and displaced millions of people. They did not act alone. The South Sudanese politicians and military officials ravaging the world’s newest nation received essential support from individuals and corporations from across the world who have reaped profits from those dealings.”

The report documents what is often described as Africa’s “resource curse”—a never-ending cycle of killing and looting that leaves an African state impoverished and in a permanent state of political instability, and which creates a kleptocratic class of politicians and generals at the top with deep ties to international partners who benefit from the conflict and whose names and faces often remain hidden. These politicians and their partners in crime are wined and dined by these international “partners” who are keen to have their fingers in South Sudan’s resource pie—oil, in this case.

The report claims that local politicians and their “international partners”, which include Chinese-Malaysian oil giants, British tycoons, and networks of traders from Ethiopia, Eritrea, Kenya and Uganda, have plundered billions of dollars from the people of South Sudan, who remain mired in conflict, poverty and underdevelopment. It says that the largest multinational consortium in South Sudan, which is controlled by the China National Petroleum Corporation and Malaysia’s state-owned oil company, Petronas, provided material support to a pro-government militia that burnt entire villages and committed atrocities against civilians. South African and American arms dealers and mercenaries also seem to have benefitted from the conflict. It is believed that Kiir’s and Machar’s armies could be responsible for the deaths of up to 300,000 people.

Some of these “investors” formed companies with President Salva Kiir’s family members. (Former President Daniel arap Moi’s son, Gideon Moi, is mentioned in the report as one of the Kenyan individuals who formed a company with Salva Kiir’s daughter Adut.) In all, individuals and firms from 13 countries, including India and Canada, are implicated.

This African tragedy is being played out even as the international community tries to bring together warring factions in the hope that South Sudan will eventually become a functioning state with a thriving democracy. Why the two warlords, Kiir and Machar, have not been hauled before the International Criminal Court (ICC) for crimes against humanity is one of those enigmas whose answer lies in the geopolitical and financial motives of the international community, including South Sudan’s neighbours.

Both Kiir and Machar should be referred to the ICC, but neither the United Nations Security Council nor the African Union is likely to do this. The United States and other countries that financially supported South Sudan’s independence from the Arab-dominated north will also not admit that South Sudan has been unable to have the kind of leadership that can sustain peace and democracy.

But were we too quick to assume that South Sudan would one day become Botswana—a resource-rich country whose leadership did not go on a looting spree, and which managed its natural resources in a way that did not lead to conflict? I think so, because South Sudan was never intended to be a peaceful and stable democracy. And influential forces in neighbouring countries like Kenya were eager to take part in the looting.

Safe haven

In their latest report, The Sentry calls on the United States, the United Kingdom, the European Union, Uganda and Kenya to enforce and enact sanctions against individuals involved in the plunder of South Sudan and in human rights violations against civilians. These sanctions, it says, should include travel bans and the freezing of assets held abroad by these individuals.

This week the US finally imposed sanctions, including freezing of assets, on two senior South Sudanese officials, not because they looted South Sudan or inflicted violence on its people, but because they were perceived to be “disrupting efforts to end the conflict”. Kiir and Machar are not on the sanctions list. In essence, the sanctions are against “spoilers” of the peace deal between Kiir and Machar, which began in 2015, but which has been stalling mainly because both leaders have not agreed to all aspects of it. Machar, for instance, insists on his security being assured before he forms a transitional government. It is assumed that peace will return when Kiir and Machar form a government together. But past experience has proved this to be difficult.

The recommendations by Sentry are also not likely to be enforced for a variety of reasons.

One, Kenya’s capital Nairobi has for years been a safe haven for warlords from the region, and this has benefitted Kenyan politicians and businesses. Nairobi seems to be the preferred destination of criminals and warlords from neighbouring conflict-prone countries who want to quickly launder their money or make deals with corrupt Kenyan politicians or businessmen.

Kenya’s “bandit economy” has benefitted enormously from conflicts in the region, not just in terms of the illicit money that pours into the country, but also with regard to humanitarian agencies. The conflicts in Somalia and South Sudan generated enormous amounts of funds for Nairobi-based aid and humanitarian agencies, and private companies that transported or distributed aid to these countries.

We must also remember that the Mwai Kibaki administration’s support for a liberated South Sudan was predicated on the administration’s ambitions to link oil from South Sudan to a port in Lamu through the Lamu Port, South Sudan, Ethiopia Transport corridor (LAPSSET). So Kenya was already eyeing South Sudan’s oil long before the country seceded from Sudan and achieved independence in 2011.

Nairobi is also the preferred residence of many South Sudanese warlords. South Sudanese leaders are known to own houses in the poshest parts of Nairobi. Their children go to school here and their relatives come here for medical treatment.

According to an earlier investigative report by The Sentry titled “War Crimes Shouldn’t Pay” (foreword by George Clooney and John Prendergast), both President Salva Kiir and his former deputy Riek Machar, and top military officers in the Sudanese People’s Liberation Army and South Sudan’s armed forces, own or rent luxurious homes in Nairobi and have accounts in Kenyan banks through which they have laundered millions of dollars. Kenya’s property market and banking sector thus appear to have been big beneficiaries of South Sudan’s conflict.

The report confirmed that the rivalry between Kiir and Machar was not so much about ethnic divisions as about competition over the country’s vast natural resources. South Sudan’s leaders are enjoying first-class lifestyles in Nairobi while at least half of South Sudan’s population faces starvation and more than 2 million people are internally displaced.

Another reason why South Sudan’s leaders are not likely to be brought to account is that for years South Sudan was the darling of the United States, which mistakenly believed that South Sudan’s war of secession with the north was about religion, not greed. Western countries have provided billions of dollars in aid to South Sudan in the belief that they were helping a budding Christian nation that wanted to be free of Muslim hegemony. After having financially and morally supported secessionist armies in South Sudan, the United States is unlikely to acknowledge that it has created a monster.

The recurrence of conflict in South Sudan has shown us what happens when the international community confuses clannism with nationalism and does not make the distinction between leadership and gluttony. The truth that is becoming increasingly apparent is that neither Kiir nor Machar should have ascended to leadership positions in South Sudan because both have blood on their hands. Both are incapable of seeing beyond their Dinka and Nuer clans, and both have shown no remorse for the thousands of men, women and children who have died, been displaced or been raped in their name. Independence in 2011 did not end the conflict in South Sudan; on the contrary, the conflict became more protracted.

And while Salva Kiir claims that he does not have the money to solve his country’s myriad problems, he seems to have a lot of money to improve his image. According to a report published by Vice News and the Center for Public Integrity, the Sudanese president spent more than $2 million on lobbying and public relations firms in Washington between 2014 and 2015. These firms were paid to boost his image, to keep US aid flowing and to prevent any criticism of the South Sudanese government’s atrocities against its own people that might have resulted in sanctions.

A large chunk of this money went to the Podesta lobby group, which included high-level officials who served in Bill Clinton’s and Barack Obama’s administrations. When a United Nations report accused the South Sudanese government of failing to end violence, protect civilians and punish perpetrators, Podesta issued press releases that discouraged sanctions against South Sudan, claiming that such sanctions could lead to the collapse of the fragile peace agreement.

South Sudan is not the only country that relies on PR firms to stave off criticism. Increasingly, rogue African states and leaders are turning to PR firms in the West to whitewash the atrocities they are inflicting on their people. Many countries, including Egypt, Nigeria, Equatorial Guinea, Iraq and Azerbaijan, have recruited lobbyists in the West to influence public policy and opinion. The spin-doctoring is so successful in some cases that human rights abusers turn into human rights defenders overnight.

South Sudan was bound to be a failed state straight from birth. In other countries, the “resource curse” strikes when stable countries discover oil or other resources and then descend into conflict over competition for those resources. In the case of South Sudan, the “resource curse” was brewing even before the country was liberated.

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No Country for Muslims? Modi Underestimated Indians’ Tolerance for Diversity

7 min read. What India’s Prime Minister forgets – and what the mass protests in Indian cities demonstrate – is that India’s secularist democracy has survived more than 70 years because Indians decided that religion was too personal and too precious to be left to the whims of the state.

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No Country for Muslims? Modi Underestimated Indians’ Tolerance for Diversity
Photo: Unsplash/Girish Dalvi
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Just before Christmas, when thousands of Indians – both Hindus and Muslims – were protesting against a controversial new law that discriminates against Muslims, a court in Pakistan handed down the death sentence to Junaid Hafeez, a 33-year-old university professor who was found guilty of blasphemy. Hafeez had been accused of posting derogatory comments about the Prophet Mohammed on social media. His case is one among many in Pakistan where harsh sentences have been handed out to those perceived to be insulting Islam.

That same week, a court in the Kingdom of Saudi Arabia – Islam’s holiest land – sentenced five men to death for the murder of the journalist Jamal Khashoggi. Critics believe that the trial was a farce and the real perpetrators of the crime, including Saudi Prince Mohamed bin Salman, have got away scot-free. Khashoggi’s brutal murder in a Saudi consulate in Istanbul in October 2018 shocked the world and led many to point fingers at the repressive Saudi monarchy, which is known to torture and detain those opposed to it – and which seems to suffer no consequences for its inhumane treatment of dissidents, not even from Western nations that advocate democratic ideals to the rest of the world

There were no mass protests or riots in either Pakistan or Saudi Arabia – or even outside these countries – against what are undoubtedly flawed and extremely unfair justice systems. On the contrary, the Trump administration congratulated Saudi Arabia for the verdict against Khashoggi’s alleged killers, thereby whitewashing what was clearly a miscarriage of justice.

So the fact that Indians of all religions have risen against the Citizenship Amendment Act (CAA) is perhaps on indication of how resilient India’s democracy and secularist traditions are. The CAA is being opposed because it allows Hindus, Sikhs, Christians, Jains and Parsees who are in India illegally to acquire Indian citizenship if they can prove that they are being persecuted in Bangladesh, Pakistan or Afghanistan, all of which are predominantly Muslim countries. This privilege, however, is not extended to Muslims from these countries. This is viewed by many as grossly discriminatory and contrary to India’s constitution, which was founded on the principle that religion should not determine citizenship.

At least 25 people have been killed by security forces since the protests began, but Prime Minister Narendra Modi has shown no signs of reconsidering the wisdom of the Act; on the contrary he has become more defiant. This could be because, like Donald Trump, he believes he has a strong base that will support him and his policies no matter what. But that base, it seems, is crumbling in Modi’s case. The protests have not stopped; on the contrary, they are getting louder.

Moral high ground

Since independence in 1947, India has prided itself for not being like its neighbour Pakistan, which insisted on forming an independent state for India’s Muslims rather than being part of a united India where both Hindus and Muslims could co-habit peacefully. India held the moral high ground with respect to its neighbour, often boasting that despite being a Hindu-majority country, it had no issue with its sizeable Muslim minority. (There are currently roughly 200 million Muslims in India – almost the same number as the total population of Pakistan.) In fact, until Narendra Modi’s right-wing Hindu nationalist party took over in 2014, successive Indian governments have made it a point to woo and accommodate the nation’s Muslims.

The fact that Hindus in India are fighting to preserve Muslims’ rights is itself a testament to Indians’ tolerance and maturity – even among those who have historical grievances against the Muslim community. Although Muslims have lived in India before the advent of the Mughal Empire, which ruled over India from the 16th century to the mid-18th century, the Islamicisation of India is often attributed to the Mughal invaders/conquerors and their proselytising mission.

There is no doubt that Mughal culture has contributed enormously to the arts, architecture, culture and cuisine of India. Architectural marvels like the Taj Mahal, biriyani, kebabs, and the Urdu language are a legacy of India’s Mughal/Muslim heritage. But the Mughal Empire (which lost power after the East India Company and later the British Empire controlled large swathes of India) is also associated with atrocities, including forced conversions, which India’s Sikhs are acutely aware of as their religion is founded partly on resistance to Mughal hegemony.

Although Sikhism is often viewed as a reaction against Hinduism’s stifling and oppressive caste system, and its first guru, Nanak Devji, is remembered for fusing Islam with Hinduism, thereby creating a monotheistic religion that shunned the worship of gods and goddesses and that bequeathed more rights to women, Sikhs’ resistance to Islam has come to define their religion.

Distrust of Muslims is an instinct that is inculcated in Sikhs and Hindus from childhood, much like the way Kikuyus are taught to distrust Luos. When I was a child, my grandmother reminded me that many Sikh gurus, such as Guru Tegh Bahadur, were tortured or put to death by Mughal emperors for resisting forced conversions to Islam. The sons of Sikhism’s last guru, Govind Singh, were buried alive by the sadistic Emperor Aurangzeb in the late 17th century. Govind Singh formed the “Khalsa” (a militant group of disciples) to wage war against the Muslim rulers.

Northern India’s Sikhs and Hindus thus have an instinctive fear of Muslims that is based on a history where they – not the Muslim/Mughal invading armies – were the persecuted ones, a fact that neither the left nor the right in India is comfortable addressing, but which Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP) have cynically tapped into.

What is happening in India is not your garden variety Islamophobia that emerged after 9/11 but a much deeper instinctive reaction that has its roots in Indian history. While the Mughal period in India is often seen as a golden age when beautiful buildings, poetry, dance forms such as kathak and other fine arts flourished, it is also viewed as a period of intense violence and cruelty. While Mughal emperors like Akbar the Great (who married a Hindu woman) are lauded for fostering harmony between the sub-continent’s largely Hindu population and the Muslim rulers, the atrocities committed by some Mughal emperors has also marred their reign. These atrocities shaped the formation of religions like Sikhism. Yet, the Sikh community’s religious leaders were among the first to oppose the CAA.

A “pure” India

The violence that characterised the Mughal Empire, especially in the 17th century, was reenacted again in 1947 when India attained independence and when millions died or were displaced when the new country Pakistan was born and the Indian subcontinent was partitioned. My ancestral family home in Lahore became part of Pakistan. This is a wound that my great grandparents and grandparents harboured for years.

And yet, India’s Muslims who did not cross the border to live in Pakistan in 1947 have rarely felt like they do not belong to India. Hindu temples sit comfortably next to mosques in most Indian cities as do cathedrals and synagogues. That was the beauty of India…until Modi came along, and told Hindus that India belongs to them and them only.

Modi and his BJP party exploited Hindus’ instinctive distrust of Muslims. The Rashtriya Swayamsevak Sangh (RSS), a militant Hindu organisation formed in 1925 and which Modi belongs to, has an agenda to “purify” India, much like Adolf Hitler sought to “cleanse” Germany. In the 1940s, as World War II was raging in Europe, the RSS leader MS Golwalker spoke of an exclusively Hindu nation: “Ever since that evil day, when Moslems first landed in Hindustan [India], right up to the present moment, the Hindu Nation has been gallantly fighting to take on these despoilers. In Hindustan, land of the Hindus lives and should live the Hindu Nation…”

He then went on to extol the virtues of Nazism: “To keep up the purity of its race and culture, Germany shocked the world by her purging the country of the Semitic races – the Jews. Race pride at its highest has been manifested here, a good lesson for us in Hindustan to learn and profit by.”

In January 1948, five months after India’s independence, Nathuram Godse, a member of the RSS, assassinated Mohandas (Mahatma) Gandhi, who the RSS viewed as being sympathetic towards Muslims.

In an article published in The Caravan and adapted from a lecture she gave in New York last year just before the protests in India began, the Indian activist and writer Arundhati Roy stated:

If Nazi Germany was a country seeking to impose its imagination onto a continent (and beyond), the impetus of an RSS-ruled India is, in a sense, the opposite. Here is a continent seeking to shrink itself into a country. Not even a country, but a province. A primitive, ethno-religious province…That it will self-destruct is not in doubt. The question is what else, who else and how much else will go down with it.”

To understand the depths of Modi’s fascist tendencies, we need not go very far in time. In the six years he has been Prime Minister, he has taken the country down a path that will not go down well in history.

A few recent examples: In November last year, Modi’s government revoked the overseas citizenship of journalist Aatish Taseer on the pretext that Taseer’s father was a Pakistani. Taseer, who grew up in India with his Sikh mother, but who is now a British citizen, had written a cover story in May 2019 for TIME magazine that described Modi as “India’s Divider In Chief”. The revocation of his overseas citizenship (which is extended to individuals who can prove that they have Indian ancestry or who once held Indian citizenship, and which allows one to travel visa-free to India) was clearly an act of retaliation by a leader who does not take criticism lightly.

In August 2019, Modi’s government annexed Jammu and Kashmir by repealing Section 35A of the Indian constitution, which gave the former princely state semi-autonomous status. This act was viewed by the state’s Muslim majority as a direct attack on them and their territory, akin to what Vladimir Putin did in Crimea. Jammu and Kashmir has been a front line state caught between the crossfire between Indian and Pakistani armies for years. The current and previous governments have often viewed it as harbouring terrorists sympathetic to Pakistan, even though the residents have argued that they have no desire to be part of either India or Pakistan.

Violence against Muslims has also risen under Modi’s regime. According to news reports, more than a hundred Muslims have been killed by Hindu mobs since 2015.

What Modi forgets – and what the mass protests in Indian cities demonstrate – is that India’s secularist democracy has survived more than 70 years because Indians decided that religion was too personal and too precious to be left to the whims of the state. Most Indians recognise that their country’s strength lies in its religious and cultural diversity. If India had gone the Pakistan way, there would be rivers of blood everywhere, like those that flooded the India-Pakistan border at independence when Muslims, Hindus and Sikhs crossing the border were slaughtered in the hundreds of thousands in revenge attacks. Few Indians want to go down that road again.

What Modi and his government have done may appeal to the anti-Muslim instincts of India’s non-Muslim majority, but it goes against the grain of how Indians (except members of the RSS and its offspring the BJP) perceive themselves and their country. With economic growth rates sharply dropping in India currently, it is only a matter of time before the protestors’ anger against the government’s anti-Muslim stance turns into widespread disaffection.

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Of Tigers, Debt Merchants and 2020 Vision

8 min read. The former president of the African Development Bank, Donald Kaberuka, has dismissed as “nonsensical” any suggestion that Africa may have over-borrowed, saying instead that with better debt management and higher domestic revenue mobilisation, the continent can take on more debt. But Kaberuka fails to make the link between the increased borrowing and the revenue problem.

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Of Tigers, Debt Merchants and 2020 Vision
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The public debt burden has dominated economic debate in 2019. Public debt is likely to be even more topical in 2020, both domestically and globally. As at end November 2019, 31 out of 70 countries in the IMF’s roster of low-income countries are listed as either in or at high risk of debt distress. Another 26 are listed as being at moderate risk, leaving only 13 that are still at low risk. Last week, the IMF approved a $2.9b bailout for Ethiopia, one of the high distress risk countries.

I first called out the Jubilee administration’s borrowing binge six years ago. Up until two years ago, the IMF and the World Bank were still giving it the thumbs up. (Very often we forget that these institutions are lenders and therefore conflicted on matters debt.) A few weeks ago Donald Kaberuka, the immediate former president of the African Development Bank (AfDB) and erstwhile Finance Minister of Rwanda, dismissed as “nonsensical” any suggestion that Africa may have over-borrowed:

“The idea that Africa is drowning in debt is nonsensical . . . If we can improve on our own domestic revenue mobilization, if we can improve on our public debt management and if we can improve on our debt management capabilities, the continent is able to take a bit more debt, especially at this time when the markets are looking for yield.”

This is an interesting argument. You may also have heard it from the Jubilee administration—the problem is not too much debt; it is the Kenya Revenue Authority (KRA) that is failing to meet revenue targets.

Kaberuka, who I gather is an economist, wittingly or otherwise, fails to make the connection between the borrowing binge and the revenue problem. Only a most incurious economist would look at revenue and debt trends such as ours (see chart) and conclude that they are completely unconnected. Although I have written about the connection on more than one occasion, it is worth recapping. There are two dimensions to the connection: an accounting one and an economic one.

Let’s start with the accounting. Let’s say we start with a GDP of Sh10 trillion which is 80 per cent private economy and 20 per cent government. Let’s then say the government is raising Sh2 trillion, which is 20 per cent of GDP, in tax revenue. Suppose the government goes to China and buys a railway worth Sh500 billion on credit. The GDP will now be Sh10.5 trillion. We will be told that the economy has grown by 5 per cent. But the railway has not added anything to the economy, and nor is it paying tax, so the government still collects Sh2 trillion, but which is now 19 per cent of the Sh10.5 trillion GDP. If this is repeated every year, by year five, the GDP will have expanded to Sh12.8 trillion and the tax revenue-to-GDP ratio will be down to 15.7 per cent.

This is a purely accounting view, which assumes that government investment is neutral, neither helping nor harming the economy. This is not as far-fetched as it might at first appear. For example, it could simply reflect government investments with long gestation periods. Indeed, we have been told that the new Standard Gauge Railway (SGR) is one such long-term visionary project whose benefits will be realised by our grandchildren. But for no harm to occur, two conditions need to obtain. First, all the borrowing needs to be foreign. Use of domestic resources means diverting these from the private economy, and that is harmful. We call this crowding out. Second, there are no repayments, because repayment of foreign debt amounts to sucking money out of the economy, also harmful. Neither obtains.

Let us start with repayments. This year, we have budgeted to pay Sh139 billion ($1.39 billion) in foreign interest, a tenfold-plus increase from Sh11b ($130m) in the 2012-2013 financial year, the last year of the Grand National Coalition government. And this does not include the hefty payments of the principal on the SGR loans that kicked in this year. The use of domestic resources is also a very significant factor. Half the debt that the Jubilee administration has accumulated is domestic. The crowding out extends beyond credit. With so much money to spend liberally, trading with the government becomes the most profitable business, diverting other economic services away from, and inflating the costs for the private sector. This could not be better demonstrated than by the case of Kenya’s banking industry.

Chart 2Last year, the industry made a consolidated profit of Sh110b, and Sh119b in interest from government securities. Considering that lending to government is virtually costless and risk-free, this implies that banks made all their profits from the government, and lost Sh9b on the business they did with the rest of the economy. The contribution of interest on government securities has increased steadily from 37 per cent in 2013 to 108 per cent in 2018 (see chart). But we also see that the banks’ profitability has declined. Profits declined by 40 per cent in 2017, following the capping of interest rates in late 2016. In 2018 profits were 14 per cent lower than in 2013. If banks are not making money from the private economy, it stands to reason that government revenue will also take a hit.

How much public debt is too much?

Debt experts have sophisticated models that are supposed to tell us. These models are built around “present value.” Present value is the sum of a forecast, such as a cash flow, and in this case annual debt repayments, discounted by a rate of interest or other relevant discount factor, used to give an estimate of current worth. If two similar countries borrow the same amount of money on similar terms, one invests wisely, and the other plunders it all, the net present value of the debt will be the same. It should not surprise then that the IMF’s models were giving the Jubilee borrowing binge the thumbs-up even as the Eurobond went walkabout and one Josephine Kabura was mocking us with tall tales of cash stuffed in gunny bags.

Chart 3For the financial health of a country, a simple rule of thumb is to ensure that debt service does not grow faster than government revenue for too long. If the debt is invested productively, the investments expand the economy, the government generates more tax revenue from the expanding economy, which it then uses to service the debt. How long is too long? That is a matter of exercising sound judgement. As John Maynard Keynes famously quipped, in the long run, we are all dead. But the question becomes moot when the trend looks like what we see in the chart—debt service heading north, revenue heading south. You do not need present value calculations to see that this trend cannot go on for much longer. Sooner or later, something will have to give.

Expect to hear a lot about fiscal consolidation in 2020.

Fiscal consolidation is defined as policy measures that aim to reduce the deficit and stop the accumulation of debt. The substance of it is what we used to call structural adjustment but, following the 2007 financial crisis, it became necessary to invent a new name—it just wouldn’t do to speak of Spain, or the UK for that matter, as implementing structural adjustment.

A fiscal consolidation strategy is predicated on the expectation that governments can find ways of bringing down deficits without hurting growth. Budget deficits are, in essence, the pumping of money into the economy, which ought to stimulate growth. Conversely, fiscal consolidation amounts to withdrawing money from the economy, which would dampen growth. The problem is that economic slowdown hurts revenue, meaning that the government has to constrain expenditure even further to meet its deficit reduction targets.

The first strategy entails counteracting the contractionary effect of fiscal consolidation with expansionary monetary policy. Simply put, what the government takes away, the Central Bank puts back in circulation. The Central Bank has a couple of tools to do this, principally by buying bonds and lowering the cash ratio and liquidity requirements for the banks (the percentages of assets that banks are required to have in cash and near-cash assets such as Treasury bills and bonds). Shovelling money out of the door is also expected to reduce interest rates, which besides making borrowing attractive for businesses and consumers, can substantially lower the interest cost of domestic debt. But unlike fiscal stimulus where the government is the spender, monetary stimulus depends on market response. The policy makers hope the money will stimulate production, but it could just as well suck in imports, or leave the country to seek higher returns elsewhere, thereby depleting foreign exchange reserves and putting pressure on the currency.

The second strategy is to find “off-balance sheet” financing of public investment. The default alternative these days is the so-called public-private partnerships (PPPs). Simply put, PPPs are the public equivalent of equity financing. Instead of the government borrowing to build a hospital for instance, a private investor builds, and the government leases it. But PPPs have their drawbacks. First, to make them attractive to private investors, PPP projects are usually structured in such a way as to ensure that the investors cannot lose money—“de-risked” in financial lingo.

Second, PPPs are seldom commercially viable so, more often than not, the Government usually has to part-finance the project in order to achieve an attractive rate of return for investors. Third, PPP financing cherry picks projects with commercialisation potential, which typically will be projects that benefit more developed areas or better-off people in society. In economics, we call such policies “regressive”, meaning they transfer resources from the poor to the rich. Fourth, PPPs have a very high corruption risk—we need look no further than the stink that is the medical equipment leasing scheme known as the Managed Equipment Services (MES) project.

Another scheme is to shift debt and deficit financing from the national government’s books to quasi-government agencies, such as has recently been done by amending the law to allow the Kenya Roads Board (KRB) to issue bonds leveraged on the fuel levy revenues that are earmarked for road construction. Assuming an interest rate of, say, 12 per cent, each shilling of fuel levy revenue can be leveraged to borrow 8 shillings. Already, the KRB has published an expression of interest for transaction advisors to raise Sh150 billion. Suffice it to say that Greece used financial gymnastics of this nature to first be admitted into the Eurozone and to subsequently fake compliance.

PPPs have a very high corruption risk—we need look no further than the stink that is the medical equipment leasing scheme known as the Managed Equipment Services (MES) project

How much public finance does development require? There is perhaps no better place to benchmark than with the Asian Tigers.

Chart 4In the 70s, Thailand and South Korea were raising 13 and 15 per cent of GDP in tax revenue, well below Kenya’s 18 per cent, while Malaysia and Singapore were doing better at just over 20 per cent (see chart). But where the East Asians stand apart is that each of them was able to put at least a third of their revenue into investment. The real miracle here is how they managed to keep their recurrent budget to a maximum of 10 per cent of GDP, out of which they were also heavily investing in education. As economists Mahbub ul Haq and Khadija Haq observed, beneath the East Asian economic miracle lay an education miracle.

Chart 5It is also a miracle of public finance, specifically, public thrift. We hear a lot about the high saving and investment rate part of the story. What we do not hear about is the role of government in that story. In the early seventies, East Asian and African countries had similar national savings rates, but even then East Asian governments were contributing more to national saving and investment, although African governments’ contribution was also significant (see chart). A decade later, East Asian governments were still contributing over a third of national investment, while for African and other LDC governments this contribution fell to 11 and 6 per cent respectively. Consequently, we turned to foreign resources. By the early 80s, Africa was investing 20 per cent of GDP more than half of which was foreign-financed, while the East Asians were investing 30 per cent, 90 per cent of which was domestically financed.

In the 70s, Thailand and South Korea were raising 13 and 15 per cent of GDP in tax revenue, well below Kenya’s 18 per cent, while Malaysia and Singapore were doing better at just over 20 per cent

The East Asian experience is telling us that when people were too poor to save much, it is the government, and not foreign resources, that closed the gap between private savings and investment requirements. In economics, we postulate that saving is determined primarily by income, and investment by rate of return. As these public investments paid off, they boosted private income and consequently private saving. When countries save more, they need less, not more foreign resources to finance investment. Donald Kaberuka is telling us that we need to raise more revenue to enable us to borrow more. Is he ignorant or dishonest?

During his tenure, the AfDB became the lightning rod for infrastructure-led growth, a fallacy that this column has discussed before. In fact, the nonsensical comments echo sentiments in the AfDB’s 2018 Africa Economic Review, to wit:

“For much of the past two decades, the global economy has been characterised by excess savings in many advanced countries. Those savings could be channeled into financing profitable infrastructure projects in developing regions, especially Africa, to achieve the G20’s industrialisation goal. That this mutually profitable global transaction is not taking place is one of the biggest paradoxes of current times.”

You may want to note that the objective is to “meet the G20’s industrialisation goal.” The irrepressibly prescient Franz Fanon read in the tea leaves:

“The national bourgeoisie will be quite content with the role of the Western bourgeoisie’s business agent, and it will play its part without any complexes in a most dignified manner.”

And therein lies the rub.

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