Towards Realising Affordable Housing in Kenya

Guest Writer
30 October ,2018

by Mukami Githagui

Housing is a fundamental human need. With the rising cost of inflation and other economic drivers making life very expensive, President Uhuru’s focus in affordable housing is a much welcome reprieve. In 2017 the President launched “The Big Four” agenda for economic development in Kenya, focusing onfood and nutrition security, manufacturing, affordable healthcare and affordable housing as his blueprint not only to deliver a legacy government, but also to bring long-term meaningful change to Kenyans.

The government plans to deliver 1 million housing units over the next five years. The president’s ambitious housing plan aims for at least half a million more Kenyans to own homes by the end of his second term. In Nairobi for instance among the areas to be covered include Park Road, Shauri Moyo, Bachelors’ Quarters, Suna Road/Toi Market, Pangani and Mukuru Kwa Njenga. It has also been reported that at least 36 governors have signed agreements with the national government to extend the project to their regions. Can this dream become a reality or is it going to become yet another white elephant?

According to the National Affordable Housing Summit Group of Australia, affordable housing is housing that is reasonably adequate in standard and location for lower or middle-income households and does not cost so much that a household is unlikely to meet other basic needs on a sustainable basis.

The National Housing Corporation, puts the housing deficit at 2 million units cumulatively and it’s growing by 200,000 units per year. With a rapid population growth of 2.6% per annum and the rate of urbanization standing at 4.4% it presents a dire situation. For context, the global average is 1.2% for population growth and 2.1% for urbanization respectively. The supply of housing in Kenya is constrained and the Ministry of Transport, Infrastructure, Housing and Urban Development estimates the total annual supply to be at 50,000 units.

To further underscore the need for affordable housing, the ministry indicates that 83% of the existing housing supply is for the high income and upper-middle-income segments, with only 15% for the lower-middle and 2% for the low-income population. In summary, while 74.4% of Kenya’s working population requires affordable housing, only 17% of housing supply goes into serving this low to lower-middle income segment.

Long story short, it’s not good. But what’s going wrong?

According to a Cytonn Investments report there is an inadequate supply of serviced land at affordable prices due to soaring land prices in urban areas. In Nairobi, for example, land prices have been growing at a 6-year compound annual growth rate of 17.4%. This has led to increased development costs as land costs account for 25% – 40% of development costs in urban areas, which consequently impacts on end-user prices. Even in most of the areas earmarked for this housing land prices are steep, which again begs question.

The report also cites costs of construction. Mid-level construction costs in Kenya range from Ksh44,000 – Ksh64,000 per square metre depending on the level of finishes, height and other related factors, and account for 50% – 70% of development costs.

According to Hass Consult Ltd, in Q3 of 2017 the prices of housing dropped by 5.1% due to the political instability we faced last year. However, the average value of a residential property in the country surged to KES 29.8M in September last year. The same report cites that property purchases in Kenya are purchased cash, mainly because the mortgage industry remains underdeveloped.

What solutions are available?

The government, the Capital Markets Authority, NSSF, Retirement Benefits Authority, Kenya Revenue Authority, private sector finance and development, all have a role to play and the specific solutions need to be wider.

Given the need for funding businesses in a growing economy where SMEs create majority of jobs, private markets such as structured products offer a compelling alternative for developers to seek financing.

Strong government support and strict housing policies are also necessary in order to boost home-ownership. It is necessary to set up and adhere to strict rules and eligibility measures for house-purchase such as minimum occupancy periods and housing to income ceilings, so as to restrict to prospective home-owners only as opposed to speculative buyers.

There’s need for efficient planning to allow the best use of land in a sustainable manner to cater for the growing population with key considerations on the provision of services such as water, power, garbage and sewage disposal. Hand in hand with this is exploring cheaper building technology to lower construction costs. Training of labour on the use of alternative building technology is essential so as to boost its application.

An article in Nairobi Business Monthly, argues that the construction industry needs to embrace technological changes that will result in a mind-shift on the use of innovative products and services whose aggregate effect would be to lower the average cost of building. Despite the emergence of innovative construction materials, building a house in Kenya is still costly.

In Nairobi where land prices have sky-rocketed significantly, we need to make use of land in the neighbouring areas outside the metro region such as; Kitengela, Ruiru, Ngong, Kiserian, among others to put up low-cost houses.

An efficient mass transport system linking the above areas to the city’s central business district will incentivise private sector investments in the greater metro region. Ethiopia is a perfect example where they have built a light rail system that connects Addis Ababa to the neighbouring towns where low-cost houses have been built. Due to the efficient mass transport system, Ethiopians are able to work in cities and towns but put-up kilometers away.

Given the rising cost of land, the cost of construction materials, taxation on these materials and of course corruption which sees title deeds irregularly issued, buildings constructed on riparian land and other irregularities, becoming a property owner is not a walk in the park. Only time will tell whether the government’s ambitious project is feasible or not.

Mukami Githagui is a freelance writer based in Nairobi. Mukami has covered business and written features for two of Kenya’s leading media companies, the Standard Group and Nation Media Group.

Kenya At 52

Brenda Wambui
15 December ,2015

On Saturday, 12th December 2015, Kenya celebrated 52 years of being a republic. We had our usual annual celebration where Uhuru Kenyatta addressed the nation and expressed a sense of optimism that is becoming more and more scarce as we continue to awaken to just how badly we are doing as a nation – socially, politically and economically.

He cited many triumphs, remembering the forefathers who build our nation, and the youth who have since inherited said nation. Except that most of the people who fought for our freedom (that are still alive) live in poverty, and the Kenyan youth aged 15 – 34, who make up 35% of the population, have an unemployment rate of 67%. The troops he celebrates for their bravery and integrity, and their work in the “liberation” of Somalia from terrorism are often accused of profiting from the same illegal trade deals that also financially support Al Shabaab. These are the same troops that were accused of looting Westgate Mall in the aftermath of a terrorist attack.

He named our athletes and innovators as shining examples of our excellence, forgetting that these athletes are robbed of their potential glory by sports officials in acts that his government conveniently ignores, and that we are becoming mired with failed doping tests which his government is just beginning to take seriously. The innovators he hails for developing new technologies and business models are still crippled by poor financial policy such as the VAT Act 2013 and lofty assumptions in the 2015/16 budget that may not become a reality.

National income per head is said to have grown to more than 13 times what it was fifty years ago, yet inflation has outpaced it at 7.32% by November 2015, yet 50 years ago it was – 0.10%. Hardly comparable. He hailed us as one of Africa’s most attractive investment destinations, something some scholars have disputed with good reason. In 50 years, our life expectancy has only increased by 12 years, compared to countries like India and Ethiopia, whose life expectancies have increased by almost double that figure (23 years).

He went on to speak about how we have made strides in education. Quantitatively, this is true: almost 10 million children are enrolled in primary school, we have more than 7,000 secondary schools now as compared to 151 in 1963, and we have more than 60 universities now as compared to zero in 1964, according to his speech. However, what is the quality of this education? We have written about this before on this site.

While Uhuru Kenyatta did apologize for the wrongs committed against each other on behalf of the Kenyan government in his State of The Nation address earlier in the year, to dismiss the pain and anger that many Kenyans feel and urge us to look forward is to be asleep to how much we have suffered, and what we are feeling. Indeed, one only needed to watch the TJRC proceedings to witness this pain, and realize that there is a case for reparations in Kenya, and that they are more urgent than we think. He apologized so that we could “accept and move on.” If only it were that simple.

He claimed that his administration was implementing the constitution quickly and decisively, yet he and his government have severally flouted the same constitution. The one thing we cannot argue with is the rate at which electricity connections have increased, from 28% to more than 50% in three years, with primary schools being the main target. We have also added 280 MW of geothermal power to the national grid. He spoke of the contentious Standard Gauge Railway being 60% complete as an achievement for Kenya, despite there being good arguments for the inefficiency and marginal utility of this railway.

Uhuru mentioned the benefits of devolution, such as the 24 hour economy in Kisii after the installation of 300 solar lights, the feeding programme for children up to Standard Three in Mombasa, the first C-section in Mandera, and the opening of the first medical training college by a county government in Kapenguria, West Pokot. I found this interesting, because his government has been accused of undermining devolution often.

In his spirit of “accepting and moving on” he mentioned that Garissa University would be reopened soon, never mind that not enough has been done by the President and his government to help the nation move on from the pain caused by that attack. He made promises to do all that is within his power to protect us and defeat the enemy, but given that he is one to always have the right response but not act in the right way, I am not quick to feel safe.

Perhaps the saddest yet most laughable part of the speech was when he spoke of corruption, a monster we seem unable to defeat in Kenya. He was right in saying that corruption is corrosive; that it brings with it destructive ethnic politics that associate public office with accumulation of wealth; that corruption kills. However, that is where we part ways. He declared a national campaign against corruption, and the whole time I asked myself, “how sir, when the culprits play right under your nose? Do you mean to tell us you cannot see them?” I feel we are being taken for yet another ride.

To attempt to list all the corruption scandals that have occurred since he took office in 2013 is to seek exhaustion – the poor state of our nation is known by heart by almost every Kenyans except those who are cushioned by their wealth – many of whom have acquired it illegally. He claimed that KES 2.24 billion of corruptly acquired money and property had been frozen or recovered. This sounds encouraging until you realize that Kenya cannot account for KES 450 billion (a quarter) of its 2014/15 budget. He stated that 337 corruption related cases were in court, and that 68 of those involved powerful people, but which powerful Kenyan has ever gone to jail for corruption, even within his term so far?

He claimed to believe in media freedom, yet as we remember, he is the same one who said that newspapers are good for wrapping meat. He attempted to play victim to the media, claiming that lies and sensation for the sake of sales hurt our economy, our cohesion, and our nation’s name. No sir, bad governance is killing our country. Lack of leadership is killing our country. Corruption is killing our country. Tribalism is killing our country. Most of all, poverty is killing our country. Work on fixing them as opposed to embellishing the state of Kenya.

Sharing The Spoils: The Division Of Revenue Bill 2014

Brenda Wambui
22 April ,2014

The Division of Revenue Bill (DoRB), 2014 is at the top of the agenda for parliament in their next couple of sittings, and as such, it is in form to explore its implications.

This bill is the first step in our annual budgeting cycle, and is particularly important as it should work to ensure the success of devolution through adequate allocations to county governments. The revenue is based on the government’s 2011/12 audited revenue, which comes to KES 682.1 billion.

This debate, as with many others, has become overtaken by debates fuelled by supremacy battles between national and county governments. Since the last election, there have been unending infighting, with each level of government wanting to show the other as less relevant, and with county officials claiming that the national governments wants to kill devolution.

What this debate should be about, really, is what Kenyans want. It should be about our needs and wants as a country, then, because our constitution gives both levels of government different mandates, we should allocate the revenue to each level based on our priorities and each level’s respective mandate when it comes to these priorities. It’s not about whether we love county government and hate national government, or vice versa, it’s about what we are trying to accomplish as a country to get us to middle-income status and beyond.

Three bodies have proposed allocations of revenue – the National Treasury (Treasury), the Commission on Revenue Allocation (CRA) and the Intergovernmental Budget and Economic Council (IBEC).

The IBEC recommends that county governments receive KES 238 billion. The CRA recommends KES 279.2 billion and the Treasury KES 221.2 billion, and this is worrying. Both the CRA and Treasury are affiliated to government, yet they give widely varying estimates, signalling that their basis for the figure is different. Treasury based its figure on the cost of devolution as approved in the DoRB 2013, which is KES 190 billion, while the CRA based its figure on the 2014/15 estimates for ministries (from the Estimate of Recurrent and Development Expenditure, 2012/13), which is 230.8 billion. The difference in bases causes the huge variance, and while the Treasury tries to explain itself, it is imperative that they agree on the best approach for the costing of devolved functions so as to avoid confusion, as well as to ensure that counties receive enough funds to perform their functions.

The fact that the 2012/13 budget greatly informs the DoRB 2014 also raises important questions. Should a budget drawn before devolution was implemented be used in the estimation of a budget supposed to support devolution? The allocations to county functions such as health, water, agriculture and housing are based on the 2012/13 budget, only adjusted for inflation and additional costs of staffing county governments. This makes it feel like not much thought has been put into devolution since it was conceptualized and implemented.

Not much is offered in the way of data when it comes to the cost of running counties, making it difficult for parliament and the general public to contribute in terms of oversight. The cost of remuneration and administration of counties has increased from KES 13.6 billion in the 2013 budget to KES 30.2 billion in the DoRB 2014, and an extra KES 4.2 billion has been transferred from national to county governments in lieu of pensions. Given the high wage bill (which is 13% of GDP, higher than the Treasury target of 8%) one can only wonder whether there is a duplication of effort and talent at both government levels. Are the new structures too bulky? Are they overstaffed?

As for the KES 7.1 billion that is to be transferred from national to county governments transferred from the national government to county governments as an adjustment due to the expected reduction in administration expenses for national government and the corresponding increase in administration expenses at county level due to transfer of devolved functions, it would be useful to include the progress of this transfer so as to justify it.

Treasury provides a conditional allocation of KES 13.9 billion (made up mainly of loans and grants), down from KES 16.6 billion in 2013/14. However, this amount cannot be transferred to the county government due to a number of reasons, such as legal and cost implications and existing finance and implementation structures, hence will be budgeted and managed by the National government in 2014/15. This is perfectly in order, however Treasury needs to clarify on the exact areas where these projects will be carried out, as well as their individual costs to avoid shady expenditure masquerading under development.

Treasury also allocates Ksh 7.3 billion for rural electrification to county governments. However, the transfer of this function to county governments is pending hence the function will remain with the national government for the time being. It would be useful to make public the manner in which all projects under the conditional allocation are to be implemented to aid in keeping the government accountable.

Article 203 (1) of the constitution provides criteria for revenue allocation, such as national interest, public debt and other national obligations, emergencies, equalization fund and county government allocations, with the remainder available to national government.

Under national interest, there is an increase of KES 17.2 billion on KES 91 billion, allocated to national strategic interventions. These come to almost a quarter of the budget dedicated to national interests (KES 108 billion out of KES 478 billion) yet not much is offered in way of explanation. What are these national strategic interventions, and what is their purpose?

Public debt, as expected, is on the rise. It has increased by KES 32.9 billion to KES 414.4 billion. The bulk of this (85.3%) is taken up by public debt, which has increased 6.7% from KES 331.2 billion. Debt repayment plus pensions, constitutional salaries and others, are also known as Consolidated Fund Services (CFS), whose primary dedication is debt repayment. It is a compulsory expense, and it has to be paid before other expenses, meaning that as CFS increases, less is left for our other needs. We need to manage our debt to ensure that enough revenue is left for devolution.

Treasury asserts that it is too early to measure the fiscal capacity and efficiency of county governments – that is, potential revenues that can be generated from the tax bases assigned to the counties when a standard average level of effort is applied to those tax bases. Thus, no official data on this is provided and the criterion is not taken into consideration. While this is true – a year may be too early – already, there is reportedly wastage at county level, and I feel that this is an area to watch when it comes to parliamentary and public debate.

The Equalization Fund, with a proposed allocation of KES 3.4 billion in 2014/15, is to be used to finance development programmes that aim to reduce regional disparities among counties. This is another key area to watch as no particular formula is given to guide how these funds will be split, and the programmes to be pursued are not defined.

Other than these issues raised, the DoRB seems reasonable. However, it raises a few questions.

In line with our priorities as a nation, one of which is achieving middle-income status, are we investing enough in areas that will expand our economy, such as trade and industrialization? Are we spending enough on factors that are important to living a dignified life, such as health, water and sanitation, housing and agriculture relative to security and education, which comprise about 30% of the proposed revenue allocation? Are we spending enough on the services the national and county government should provide, relative to the cost of provision of these services (recurrent versus development expenditure)?

We should aim to answer these questions in upcoming days as we debate, and possibly amend this bill.

References

The Division of Revenue Bill, 2014, by The National Treasury, Retrieved from http://www.treasury.go.ke/index.php/resource-center/doc_download/690-the-division-of-revenue-bill-2014

The County Allocation of Revenue Bill, 2014, by The National Treasury, Retrieved from http://www.treasury.go.ke/index.php/resource-center/doc_download/689-the-county-allocation-of-revenue-bill-2014

The EAC Conundrum

Brenda Wambui
24 December ,2013

The East African Community (EAC), a regional intergovernmental organization, was re-formed in 1999 by the Republic of Kenya, the United Republic of Tanzania and the Republic of Uganda after the collapse of the original EAC in 1977. The Republic of Rwanda and the Republic of Burundi became member states in 2007, and South Sudan has expressed interest in joining the community.

Its vision is a prosperous, competitive, secure, stable and politically united East Africa, and its aim is to widen and deepen integration and co-operation among partner states politically, economically, socially and culturally for their mutual benefit. So far, it has established a customs union (in 2005) and a common market (in 2010). The next phase involves the formation of a monetary union, and ultimately, a political union of the member states to form the East African Federation, a sovereign state.

So far, there has been significant progress towards meeting the full requirements of the customs union. Member states have also begun to amend their laws towards the achievement of a common market, which should come in full force in 2014. In November 2013, the five heads of state of the member states signed a protocol for a monetary union within the next 10 years to converge their currencies and expand regional trade.

To evaluate the potential for success of such a union, I feel it is important to look at the progress made in the customs union and common market, as well as compare the proposed monetary union with other long standing ones such as the United States of America, whose currency is the American Dollar, and the Eurozone, whose currency is the Euro. The Euro has experienced several crises in the last decade, and caused the wisdom behind monetary unions to be questioned. One must therefore ask: What makes the EAC monetary union different? Is it a smart move?

The EAC Customs Union

In economic theory, a Customs Union (CU) is the third stage towards economic integration after a Preferential Trade Area (PTA) and a Free Trade Area (FTA). The EAC, however, provides it as the first.

The CU, though launched in 2005, was fully ushered in towards the end of 2009, its main purpose being to ease and increase trade between member states. Formation of a CU requires member states to dismantle all barriers to trade between each other (both tariff and non tariff), implement a harmonized customs administration (including the classification of commodities, valuation of custom goods/services, procedures, documentation and rules of origin) and agree on how to share common external tariff (CET) revenue (what is charged to states outside the EAC).

Trade is at the heart of a CU, and its main objective is thus the formation of a single customs territory through which all the requirements in the paragraph above can be met. The aim of creating a single customs territory is to enable member states to enjoy economies of scale, which in turn lead to faster economic development. A CU, however, cannot lead to development without additional measures like development of infrastructure and ease to market for goods/services.

CUs come with numerous benefits. The EAC bloc has a combined population of 130 million people (as at 2010), a combined GDP of $74.5 billion (as per 2009) and currently spans 1.82 million square kilometres. Comparative figures for the USA are a population of 303.95 million people, GDP of $14.54 trillion and an area of 9.83 million square kilometres. It becomes apparent that as individual countries, we cannot hope to compete with nations such as the USA, but as a single bloc, it starts to seem possible.

A CU also levels the playing field for producers within member states by imposing standard laws and policies, customs procedures and external tariffs on goods imported from non-member states, assisting the region in the advancement of its economic development and poverty reduction agenda. It promotes intra-union FDI as well as external FDI to member states and attracts investment to the region due to minimal customs clearance bureaucracy. This is more attractive to investors than dealing with small national markets. The economic environment becomes more predictable for investors and traders in the CU, since regionally administered CET and trade policies tend to be more stable. This reduces their risk and increases their propensity to trade and invest.

Perhaps the most important benefit is the negotiating power gained at a global level, where countries are entering into negotiations as groupings as opposed to individual nations (for example, the BRICs and the EU).

CUs do have some drawbacks, though. Great competition is created among domestic firms. With this in mind, the principle of asymmetry was adopted when the phasing out of internal tariffs so as to provide firms located in Uganda, Tanzania and other seemingly disadvantaged states with an adjustment period of five years so as to lead to fairer competition when it came to forming strategic alliances with competitors, quality of human resources, production technologies and creation of competitive advantage.

Implementation of a CET has been challenging to the member countries. Customs valuation procedures vary, leading different bases for taxation. Moreover, Tanzania, a member of both the EAC and the Southern African Development Community (SADC), has taken integration commitments in both regional blocs, so it will have to implement two CETs. The four other members of the EAC are also members of the Common Market for Eastern and Southern Africa (COMESA), facing a similar challenge in terms of multiple integration commitments.

A single customs territory was put in place in 2013, but only three of the member states, Kenya, Uganda and Rwanda, are party to it. Tanzania and Burundi were left out. This territory also includes the implementation of one stop border posts, a single tourist visa as well as the use of identity cards (IDs) as travel documents within the three states. This is expected to start in January 2014, with operational requirements being finalized by June 2014. While this is commendable, leaving out two member states eventually slows full economic integration and does little to boost their spirits.

By and large, however, significant progress has been made by the EAC towards CU status. Success in this area may be said to be imminent.

The EAC Common Market

Despite the challenges encountered in implementing the CU, the EAC created a Common Market (CM) in 2010. The plan is to implement the Protocol progressively until 31 December 2015. The CM Protocol calls for liberalization of the labour market, capital market and services market, since the goods market has already been liberalized by the CU Protocol.

The CM seeks to integrate member states’ markets into a single market in which there is free mobility of factors of production – persons, labour, goods, services and capital – and the right of establishment and residence in any part of the region. This is in addition to the achievements of the CU, which it integrates and supplements. This requires a great number of institutional and legislative reforms, as well as harmonization across the region. Implementation of the CM is guided by four key principles: non-discrimination of nationals of other member states on grounds of nationality, equal treatment of nationals of other member states, transparency in matters concerning the other member states and sharing information for the smooth implementation of the protocol.

A CM provides several benefits to member states. There is increased productivity due to the free movement of factors of production across borders. This leads to increased competition in the market, which in turn leads to cheaper consumer goods and an increased choice of products. Goods and services acquire a larger market size (130+ million people), giving manufacturers and service providers economies of scale in production, which leads to cheaper goods. This single, large market is also more attractive to investors than a smaller national market.

Cross-border trade becomes easier as a result of harmonized trade policies across member states, and cross-border travel becomes cheaper and easier due to removal of visa requirements. Individuals have freedom to work anywhere within the territory, in accordance with the labour laws of individual member states, and both firms and individuals have freedom to provide services (such as legal and medical services) across the territory. Individuals also have the freedom to stay and move freely within the territory of other member states for a period of six months, as well as the freedom to pursue economic activities as self-employed persons across the region.

However, this is not without drawbacks. At the moment, implementation of a CM within the EAC has not gone beyond the signing and ratification of the Protocol. Several national laws (such as labour, employment, immigration and competition laws) have to be amended so as to be compatible with the CM. Some member states have amended a few relevant laws (such as Rwanda’s immigration and labour laws, and Kenya’s immigration laws) but few, if any, have implemented them. The need for domestic policy harmonization at this level is much greater than at CU level, as the full benefits of a CM can only be achieved if the Protocol is fully implemented by all member states.

Kenya and Uganda closely border Horn of Africa, which experiences severe droughts and famine, high poverty levels, terrorism, internal conflicts and political instability. Kenya is also a destination and transit point for human trafficking. The number of refugees from neighbouring countries (Somalia, South Sudan and Ethiopia) further worsens the situation. This is a major hindrance to the free movement of persons and labour in the EAC region as it makes other member states more exposed to trafficking, smuggling and other types of human rights abuses.

Language barriers may also be a problem, especially in Francophone countries like Burundi and Rwanda, and in Tanzania where Kiswahili is predominant. Some member states may be reluctant to open up their labour markets to other member states. Fears of job loss are present, especially in the other four countries excluding Kenya. Locals losing jobs to foreigners may lead to a lack of support for the CM. Kenyans are feared to cross the border and take jobs currently belonging to locals as they are more competitive in the labour market.

When it comes to CM status, the EAC is lagging behind. This may very well be the biggest hurdle in the path towards monetary union, as it involves factors of production whose mobility is currently hindered by barriers, especially non tariff barriers like bureaucracy at borders. Perhaps it would have been wiser to focus more time and effort towards this, as it will smooth the path towards a monetary union.

The EAC Monetary Union (EAMU)

In November 2013, the EAC heads of states signed the Monetary Union Protocol whose aim is to strengthen economic cooperation through a single currency for all EAC members. Other than that, it also aims to attract foreign investment to the region and reduce reliance on aid. The proposed currency is the East African Shilling and the aim is to have the EAMU ratified by 2014, and up and running by 2023.

Before establishing a monetary union, it must be established that it is an optimal currency area (OCA). An OCA is a geographical area that can maximize economic efficiency by sharing a single currency if four main criteria, among others, are met: a high degree of flexibility in wages and prices, high mobility of labour, a high degree of intra-regional trade and a system in place to adjust the region during asymmetric shocks (changes in economic conditions that differently affect different countries in the region, making it difficult to make fiscal policy beneficial to all member states.)

The USA is an example of a successful monetary union. Labour is highly mobile, and wages adjust to changes in demand and supply. The USA sets fiscal policies at both national and state levels, allowing it to better respond to asymmetric shocks. The more apt comparison for the EAC would be the European Monetary Union (EMU), whose conditions are more similar to those of the EAC. The EMU does not have an EMU-wide fiscal policy. Labour is also not as mobile in the as in the USA due to language and cultural barriers, and wages are not flexible. Many economists have argued, based on these factors, that the EMU does not meet the criteria for forming a monetary union (MU).

Even with the recent Euro crisis, African states are keen to move towards monetary unions – The EAC with its shilling and the West African Economic and Monetary Union (UEMOA) with a proposed currency called the Eco, to be adopted by the year 2020. This points to the fact that currency unions, if they work out, are extremely beneficial.

Transaction costs are reduced, as there is no longer any need for currency exchange in the MU. Firms no longer need to incur foreign exchange transaction costs, and this leads to a GDP boost in the region. This in turn leads to less exchange rate uncertainty, which will likely boost intra-region trade and FDI, as exchange rate uncertainty is usually a deterrent to investors. The large market size provided by the MU is another incentive to investors.

A single currency makes the prices of goods across the region comparable, making it easier for consumers to buy in the cheapest markets. Firms have to reduce their prices to remain competitive. This then lowers the rate of inflation

A standard monetary policy run by the union’s central bank, as well as a statistics office to control the currency, lead to the possibility of government failure having a very low impact on interest rate decisions, thus reducing interest rates on bills, bonds and other investments across the region. This goes hand in hand with the reduction of inflation and putting policies in place to reduce inflation. Both low interest rates and low rates of inflation lead to a faster growing economy.

MUs come with huge drawbacks as well. One is the loss of independent monetary policy. Member states of the EAMU pass control of monetary policy to the East African Central Bank (EACB). The EACB has the mandate to set interest rates as well as other aspects of monetary policy for the whole region, rather than individual countries of the EAMU.

Individual governments will be unable to make the trade-off between inflation and unemployment in the short term. For example, to reduce the rate of unemployment in Kenya, the government could choose a low interest rate, which in turn lowers inflation and allows the unemployed to find jobs due to the reduced cost of doing business. Member states will no longer be able to make such decisions.

Asymmetric shocks, as defined above, are changes in economic conditions that differently affect different countries in the region, making it difficult to make fiscal policy beneficial to all member states. For example, the demand for a key product in Kenya, like sugar, may drop due to cheaper prices by competition. This would lead to sugar producers in Kenya reducing their members of staff (increasing unemployment) so as to reduce costs and the market price of sugar. Labour mobility within the EAC is still low, as compared to the USA and the EMU. The EACB would be unable to act unless all the countries in the EAMU are affected similarly (or symmetrically).

The economic structures and degree of development need to be close enough among the EAMU member states to be able to maintain a single currency. Without this, there may be extremely high levels of unemployment or decline in real income, similar to what is happening the Eurozone.

The EAC member states must first attain the set macroeconomic criteria and maintain them for at least three consecutive years before embarking on the actual implementation of the EAMU. Core inflation is capped at 5%. Fiscal deficits, excluding grants, should be no more than 6% of GDP and the tax-to-GDP ratio should be a minimum of 25%. Once these criteria are been met, member states must also meet macroeconomic convergence criteria, which entails maintaining a maximum headline inflation of 8%, a ceiling on fiscal deficits (including grants) of 3% of GDP, a ceiling on gross public debt of 50% of GDP on net present value terms as well as a reserve cover of four-and-a half months of imports. Only then can member states undertake the adoption of a single currency.

These criteria, as well as the ten years’ implementation period, are thought to be sufficient to address the aforementioned challenges. However, the EAMU may still be difficult to attain. It requires the convergence of the economies of the states involved. We are yet to achieve free trade through the common market, and the region is quite diverse economically, in terms of GDP, economic growth, business terms and conditions. Harmonization of exchange and interest rates across member states will probably have negative effects on their economic growth and stability.

The Eurozone/EMU, despite having a longer period of implementation and similar stringent monetary policy, has faced significant challenges. Its main flaws have been the lack of fiscal union and the flouting of limits set by the Stability and Growth Pact, which details limits on deficits, GDP and debt.

The current debt crisis is as a result of some member states in the EMU having too much debt, widely varying (and some uncompetitive) economies all sharing a single currency and lack of a single fiscal authority with a supervisory/enforcement role and full powers to the same. The countries with too much debt, such as Greece, Portugal, Spain and Italy, all risk being unable to pay it back, which would then lead to massive bank collapses. Worse still, there is a risk that some countries, possibly the stronger economies, may pull out of the Eurozone to avoid economic collapse. This would also lead to many banks collapsing in Europe, and possibly in the USA as well (as they hold a lot of European debt, especially in France and Italy). Europe would go into depression, while the rest of the world would go into recession.

The current state in the EMU is one of high rates of unemployment and hardship, high interest rates and increasing welfare. This only worsens the crisis. Austerity measures (taken in response to the crisis) make economic growth difficult to achieve. Governments are also forced to guarantee their banking sectors, making the states even more leveraged, and making the countries in question unsuitable investment destinations. It is a vicious cycle of debt and economic instability. The EMU, since 2011, has undertaken several measures to get out of its crisis, but it is still in the red.

While the EAC proposes to have tight fiscal policy control, the possible collapse of the Eurozone/EMU should make us wary of entry into the EAMU without total success at CU and CM level. In addition to this, we would need to maintain tight control over monetary and fiscal policies, but this would still not prevent individual countries from taking on too much debt and lying about it, putting the rest of the region at risk. Some have predicted that monetary unions will fail in most circumstances. While a crisis or the collapse of the EAMU may not have far reaching consequences like the USA and Eurozone debt crises, it would cripple member states’ economies were it to happen.

The EAC is also not yet at the level of global importance both the EU and the USA enjoy, therefore efforts to bail us out if such crises were to occur here would be few, if any. It is very possible that we would be left to stew in our own mess, perhaps with interventions only from COMESA, SADC and other African economic unions and countries.

Conclusion

At this point, the question is whether the benefits of the EAMU outweigh the drawbacks, as well as whether member states will be able to work together to converge their economies. This has been put in doubt by the emergence of the “Coalition of the Willing” and the side-lining of Tanzania, especially when it has genuine concerns about the speed at which integration is being pursued. The EAMU has a long way to go, and the ten year implementation period may not be realistic, given that there have been delays in implementing both the customs union and the common market.

References

“Is East Africa an Optimum Currency Area?”, By Mkenda B.K., Retrieved from https://gupea.ub.gu.se/bitstream/2077/2675/1/gunwpe0041.pdf

“Macroeconomic Shock Synchronization in the East African Community”, By Mafusire A. & Brixiova Z, African Development Bank Group, Retrieved from http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Working%20Papers%20Series%20156%20-%20Macroeconomic%20Shock%20Synchronization.pdf

“Protocol On The Establishment Of The East African Customs Union”, By the East African Community Secretariat, Retrieved from http://www.eac.int/legal/index.php?option=com_docman&task=doc_download&gid=183&Itemid=47

“Protocol On The Establishment Of The East African Community Common Market”, By the East African Community Secretariat, Retrieved from http://www.eac.int/index.php?option=com_docman&task=doc_view&gid=362&Itemid=163

“Regional Trade Integration in East Africa: Trade and Revenue Impacts of the Planned East African Community Customs Union”, By Castro L., Kraus C. & Rocha M., Retrieved from http://www.worldbank.org/afr/wps/wp72.pdf

“The East African Community After Ten Years – Deepening Integration”, Edited by Davoodi H.R., Retrieved from http://www.imf.org/external/np/afr/2012/121712.pdf

“Towards an Economic and Monetary Union Progress on the EAC Monetary Union”, By Bukuku E.S., East African Community Secretariat, Retrieved from http://www.eac.int/news/index.php?option=com_docman&task=doc_view&gid=271&Itemid=78

“Treaty For The Establishment Of the East African Community”, By the East African Community, Retrieved from http://www.eac.int/index.php?option=com_docman&task=doc_download&gid=158&Itemid=163

The Revolution Will Be Written In HTML

Brenda Wambui
22 October ,2013

After the Westgate attack, an American friend who works as a freelance journalist based in Kenya tweeted that he was tired of listening to a government that spouts lies and a nation that was unwilling to question it. To which I responded that several questions were being asked daily, minute by minute even, especially online – all he had to do was check on Twitter. He responded that we can’t change a government via Twitter – that it’s lazy – and we should get our media to ask real questions.

This got me thinking. Countries in Africa, Latin America and Asia have long lagged behind the West due to the type of institutions they have. In the book Why Nations Fail, the authors Daron Acemoglu and James Robinson argue that nations fail because of the following:

  1. – Extractive economic institutions (which are structured to extract resources from the many by the few, or elite, and that fail to protect property rights or provide incentives for economic activity)
  2. – Extractive political institutions (which concentrate power in the hands of the few and develop to support extractive economic institutions)
  3. – Lack of centralization of political institutions

Kenya and many countries in Africa, Latin America and Asia easily fall into the extractive institutions camp, and if the authors are to be believed and all factors are held constant, we are headed for failure, and that is if we have not already failed. It is easy to see why countries like Kenya are where they are today – extractive institutions, lack of proper centralization and most of all, the fear of the elite of creative destruction and innovation.

The book argues that, for any economic success, political institutions must be centralized enough to provide public services like justice, enforcement of contracts and education. When these functions are carried out, inclusive institutions enable innovation to emerge and lead to continued growth. The Industrial Revolution is a good example of what is possible under inclusive institutions. Extractive institutions are also able to deliver growth, but only when the economy is far from the technological frontier. They will always ultimately fail, however, when innovation and “creative destruction” are needed to push the frontier. Hence, even though success is possible for some time under extractive institutions, continuing success is only possible under inclusive institutions.

The authors also find that sustained economic growth requires innovation, which comes hand in hand with creative destruction, and replaces the old with the new in the economic realm also destabilizing established power relations in politics. Basically, inclusive institutions create an environment where citizens are empowered to innovate, invest in the market and work towards development.

Our institutions have been designed to stifle innovation and creative destruction – for example, when it comes to the ease of doing business worldwide, Kenya ranks at 121 out of 185 countries, and at 126 when it comes to the ease of starting a business. The gatekeepers at the institutions responsible do their best to make the process an absolute pain. This of course stifles innovation and creative destruction, and ensures that power in many industries remains in the hands of a few.

This method of stifling innovation and creative destruction worked well until the greatest invention of the 20th century arrived in Kenya: the internet. The internet has changed democracy as we know it, it has changed all forms of government as we knew them before. After all the things we have seen it do, it is extremely easy for a discussion on the effects of the internet to become anecdotal – to quote the Arab spring, to mention several Kickstarters, to casually mention fundraising causes like Kenyans for Kenya – it almost seems normal now, like nothing out of the ordinary.

Perhaps we overlook the ways in which the internet has changed how we are governed, especially in Kenya. It may not yet be within the reach of a majority of Kenyans, but even then, its effects have been felt all over the country.

The internet is the greatest democratizing force of our time.

By this, I refer to the literal meaning of the word democracy: majority rule, or the rule of the people. A democratizing force is one which increases the power of the people, and what has the internet done since it came around, if not increase the people’s power?

The internet gives political power to the people. It has become a tool to seek legitimacy (verified accounts on Twitter) and attention – resources which directly affect the power of politicians and therefore governments. On the internet, the people hold these resources, and as the saying goes, he who has greater need has less power. The centre of power shifts from the elite, who are so used to having it, to the citizens – as it should rightly be in any democracy.

Perhaps the greatest thing that happens online is the shaping of ideas. Before, one was limited to sharing ideas with people who were physically accessible, or via books, letters, telephone, telegraph and other slow means of communication. Now, all one has to do to share ideas with people in Venezuela is get online. The list of means is endless – be it Twitter, Reddit, Facebook or listserves – one can meet like minds, share one’s ideas and form opinions – decide what one likes and doesn’t like, and what one wishes to do about it.

Once ideas are constructed, interest groups emerge, and people are able to become aware of problems online, identify like-minded people and notify them of the problem as well. This creates a buzz, and this buzz can be used to create a particular outcome – it is what sites like Kickstarter thrive on.

Skills have been learned by many online, via sites like Coursera, YouTube and Udacity. One may not be able to afford school fees, but if one can get internet access, there is little that cannot be learnt online. This, of course leads to massive innovation and creative destruction – it puts the power over one’s knowledge and skill-set firmly in one’s hands. Resources are able to move across the world faster than they ever had before: a Kenyan in the USA can create a site to monitor injustices in Kenya without ever having to come back. The list of uses can continue ad infinitum.

The internet makes several gatekeepers irrelevant, and that is why people are constantly trying to control it – to “harness” it and “give it more order”, because of the immense power it has in its currently almost uncontrolled state. We have seen this locally, with the Media Council suggesting that bloggers be trained so that they are prosecutable (that is basically what the Council CEO said), and internationally with bills like SOPA and PIPA.

This increased awareness and power has boded well for Kenyans. When all of us come together and start asking our government questions online, even if it is on Twitter, it serves as one collective voice. Individually, we may not get heard, but as a collective, we can do great things. These interest groups, like Kenyans on Twitter for example (in a very loose sense, because most are interested in Kenya and its well-being), embody the sum total of the resources at the disposal of each individual. On Twitter, this would be the sum total of the followers of everyone asking questions about incidents like Westgate, for example. With this new found power, these groups are able to challenge other resource rich entities online.

The examples in Kenya are endless. In the past two months alone, Kenyans online took to task Governor Kidero for slapping Women’s Rep Shebesh, Senator Sonko for abusing Caroline Mutoko, the government for its poor response to the Westgate crisis, Sonko and Shebesh for their alleged affair and yet again the government for the unaccounted for Ksh. 338 billion.

We may feel like we are just making noise online, like it is all for nought, but it is not. Our cabinet secretaries, public officials and the president are not on Twitter because they think it is cool. It is because they have to be there, because a power shift has occurred and the elite love power. They would follow it into hell if it came to that. If they had it their way, they would probably not be online. When Kenyans have demanded for answers online, they got them. Granted, most of these answers have been lies, but they got them all the same. That is a start, and it can only get better.

In future, with the easy access to information online which can only get easier, it will become harder to take people for fools. When my American friend says that we should push the media to ask these questions, perhaps he does not see that the traditional media has also been caught flat footed. Mass communication was once at the beck and call of resource rich individuals, corporations and the government – he who paid the piper called the tunes. Along came the internet, and everyone started a blog and opened a Twitter account, basically making everyone a mini-publisher. User generated content became king.

There came an abundance of choice on where to get one’s information. Anyone can shape anyone else’s views, anywhere in the world. It is easy to see why traditional media would not be the people to look to for leadership in such cases – they are right there with politicians and government, unsure of how to react.

On the flipside, however, never has it been easier to make it into the news. Journalists are online, and will pick up leads for interesting stories from there. This not only applies to local journalists, but to international ones as well. A news cycle in these days may go like this: fire breaks out at JKIA. Man tweets about it. Lady twitpics it. Man and Lady get retweeted severally. Many people start asking questions. Al Jazeera picks it up. Next comes BBC. Next come our local news. Within two hours, the whole world knows that JKIA is burning down .

It may still feel illicit to many that you can change the world in your pyjamas, without leaving your house. Perhaps that is why a lot of the talk online is met with “Why don’t you go out into the ‘real world’ and do something about it?” Many find it difficult to translate activism online into ‘real world’ activism. The internet facilitates and accelerates on-the-ground activism, but it does not change the manner in which it is done. Usually, any anti-government activity is met with backlash, and in Kenya, this can be seen whenever blogger(s) are arrested for ‘being annoying’. What the internet has done is reduced the cost of organizing protests. Maybe we will see more people join physical protests in future after having participated in them online.

Others may argue that the internet has not changed anything major in Kenya, especially politics, which is still tribal and partisan. This is also true. However, the internet has changed how we understand politics, and the relationship between us and our government. We are questioning the status quo each day. It all begins with an idea and a recognition.

The internet in Kenya has, and will continue to, lead to more innovation, hence creative destruction. By shifting power from the elite, it will continue to lead to more inclusive political institutions, and later on, economic institutions. It will help us keep those in charge of political centralization in check, and maybe lead to better public service delivery. This may seem idealistic, it is; but it is not far-fetched.

Of course, the internet won’t change everything in a day. There are some things that cannot be changed online, or in a day. However, when it comes to the definition of democracy and power to the people, it is the closest we have come. So the next time someone tells you that you are “just” tweeting about it and that you are lazy, beg to differ. The revolution is happening in hearts and minds across the country, across the world – in bedrooms and living rooms and toilets – link by link, blog post by blog post, tweet by tweet.