Just Another Vocation for Ndemo

Bitange Ndemo's piece on inclusive growth indicates that GDP "has not been a good measure of inclusivity". I didn't know that GDP had such a role in the first place; even a first year economcs student can tell you it doesn't. But trust Bitange who, in his other vocation of pseudo economic punditry, is keen to sound profound. I take no risk in the bet that Bitange has not read Thomas Piketty's Capital in the Twenty-First Century (I'd be happy to lend a copy). Otherwise he could have been persuaded to take a different approach - underpinned by the sources and consequences of inequality. So here we are celebrating the dubious Forbes Magazine's ranking of Africa's richest and then we turn the corner and cry about lack of inclusivity in ther GDP numbers!

Financial Illiteracy: History Repeating Itself

They say that history often repeats itself. I didn't imagine it will be that soon at the Daily Nation business desk. It consistently gets one story wrong while her sister, the Business Daily, initially gets it right but subsequently gets recruited into the bad habit of being sensational. Recall a little while back when I pointed out that whenever a bank borrows - either locally (bond issuance) or internationally (line of credit from an international lender), it is an indication that it has adequate capital to leverage and expand its balance sheet.
On the other hand though, whenever a bank seeks to increase its capital - either through a rights issue or by listing at the stock mart, it is seeking to growth its balance sheet through increasing a liability called capital that will translate into an equivalent asset called credit (loan book); it could also be a move towards meeting some regulatory requirement.
These two actions on the liability side (one, borrowing, and the other, injecting capital) have the the same effect when it comes to the effect on the balance sheet - for they lead to growth. However, they mean different things when one is looking at what they mean with regards to the regulatory requirements. When one is able to borrow, it is an indication that one has met the requisite regulatory  requirement with regard to capital, and not the opposite as the Daily Nation and Business Daily will want you to believe - that one is borrowing to meet capital requirements! Nothing, at least to me, reflects financial  illiteracy than such lazy thought process.
So when the Daily Nation fronts such argument, as it does in today's edition, and the Business Daily gives the same story but taking a more 'reporting' line before they inject some "analysis" about how such move entails "injecting more resources" is linked to capital adequacy, you'd better go by the story of neither.
But I know where the Daily Nation and Business Daily are coming from: no story is juicier that pretending to analyse that a bank is in trouble and so is rushing for a rescue. As I have indicated before, it is akin to seeing a thief behind every bush!   

Correlation or Causation?

This is interesting. Agriculture is doing badly - low international prices for produce, low productivity, bad weather, etc; but listed stocks in this market segment are doing just fine. Why? Somebody is looking at the land potential - not for agriculture or agri-business; a speculator; a real estate speculator. This story in today's the Business Daily motivates the question: is this a case of correlation or causation? Well, seems to me that it is the the latter!

"What they Don't Teach You at harvard Business School"

There is a popular book titled 'What They Don't Teach you at Harvard Business School' by Mark H. McCormack. For those of us who didn't go to that prestigious school, this should be a compelling read. Nonetheless I haven't gotten around to read the book because that is not my kind of stuff - I would rather Thomas Piketty's 'Capital in the Twenty-First Century' or William Easterly's 'Tyranny of Experts: Economists, Dictators and the Forgotten Rights of the Poor '.
Now, Adan Mohammed, the Cabinet Secretary for Industrialization and Enterprise Development, went to Harvard Business School. I have no doubt that a prestigious school such as Harvard Business School teaches that strategic policy initiatives have a time lag before their positive effects can be seen; and that lag can stretch to a few years. In the modest schools that we went to (Oh. I have been to Economics Schools and not Business Schools), that is one of the issues we were repeatedly told.
Either Mr. Mohammed has forgotten (it has been a while since he was in that School) or he is being a good politician; for he imagines that all the good things in the Kenyan policy space happened over the last two years or as long as he has been in Government.
Just watch him say that! Here he is full or praises for the World Economic Forum and the World Bank's Ease of Doing Business ranking - which he links to the one and half year's that he has been in Cabinet. He nonetheless hints that some of these reforms could take some two to three years for their benefits to be seen, and this he does reluctantly on account of the prompting of the interviewer.
It is hard to believe that it is the same guy now sulking when the World Bank's latest Ease of Doing Business Raking simply tells us that we have been running around in circles. I do not want to call this intellectual dishonesty - there is nothing intellectual here. Oh, unless the concept of lagged effects of policy is part of  "What they Don't Teach You at Harvard Business School". 

The Righ To be Confused!

What is your objective reaction to this piece by Jaindi Kisero in the Daily Nation? Well, I can understand. Any way to bend an argument to fit a prejudiced view seems to be the order of the day here; and unfortunately it is often celebrated as great commentary. Look at this:
1. You make an irrelevant comparison that one intervention - under totally different circumstances - was less deserving than the one where your views are leaning towards without any logical basis.  I know why, project financing economics is not easy if you earn your living through mere pontificating in a subject where your expertise is only feigned.
2. You give examples that indicate government failure in running enterprises in a particular segment, even illustrating how the private sector is a master in running similar enterprises; yet you conclude that we need more government in the same enterprises.
My conclusion in one word is: confusion. In our constitutional dispensation, one has a right to be confused; right?

The Pretence Persists

Recently, I argued that there is a  lot of pretence when it comes to providing a good guide to housing prices. Seems like the pretenders are digging in: just have a look at the readers comments to the Business Daily piece and see how they have smoked out the persisting pretence!

Economics Nobel Prize 2014 Makes Lots of Sense!

I have a short version of the thinking of the Royal Swedish Academy in their 2014 economics Nobel Prize award. If you have no time for the technical citations that run up to 40-plus pages, my essay in today's Business Daily can give you a good idea why the prize was deserved.   

Argument Devoid of Context

I know a lazy argument when I see a lazy argument. This is especially in a subject where a keen professional interest and formal training, and where for more than a decade I have undertaken careful analysis; I am talking of the economics of the financial system.
Lazy arguments - often by people hiding their identity or with pedestrian viewpoints - are often coated with cherry-picked statistics that lack context. The trick here is to sound a "matter-of-fact" guy. And for people to take you seriously, you thrown in statements that make you sound profound. To non-suspecting members of the public, you may sound intelligent; until one looks at the argument being made carefully and asks the question: where is the context?
A case in point is a recent commentary by Bankelele(??) in the Daily Nation. His strategy is simple, take a list of bank ranking; don't bother to look at the comparison over time and against the size of the economy; observe that there is growth but it is not strong enough; rush into a conclusion that the banks that are "not big enough" are a let down. My take is that the conclusion is unmotivated; it could have been arrived at anyway without the pretence of grounding by anybody with a juandiced eye who sees everything as yellow.

Feigning Intellectualism

Last week my colleague and I presented a paper in a research conference. The paper was a Conceptual Framework on Housing Price Index for the Kenyan market. The framework undertakes a comprehensive evaluation of literature that highlights the various methodologies for computing a credible index for the property market. Our proposal is to base the index on the so-called hedonic function - which makes adjustments for qualitative aspects of houses.
I have no doubt that the proposed index will cause excitement to three types of stakeholder.
One, there are those who are really looking for a reliable tool for managing their assets - be they investment portfolio or security held for lending.
Two, there are those who pretend that such tool exists  while anybody who is slightly more than curious will tell you it doesn't.
Three, there are those - whom economist Paul Krugman would call Accidental Theorists - who will feign intellectualism and lazily (or sensationally) argue that banks are now fighting for control of the property market.
It is the latter two, whose views are represented in a recent lead story in the Smart Company pullout of the Daily Nation , that I find interesting.
There are several angles to the story that tells of the cheapness of sensational journalism, but I use one purely for illustration.
Assuming the Kenya National Bureau of Statistics publishes the consumer price index (CPI) and tells you that the price of the goods in the CPI basket has gone up by 20 percent, and therefore for your given income you may need to take a loan from  a bank at 15 percent interest rate to be able to afford the goods for your household, would you argue that the high interest rates have caused the CPI to increase?
Stretch the same argument to housing. Assume that an index for housing prices indicates that the house process have gone up by 20 percent; for you to acquire the house with your current income you need to get a mortgage from a bank at 15 percent interest rate, would you argue that it is the interest rate that has influenced the housing price index?
That is the argument that a tomato seller cannot make because it doesn't make sense; but that is the argument a self-declared leader in the mortgage market analysis tells a reporter, who readily peddles it as high street merchandise.

Doubling Down on Nonsense!

So the pretense to analysis by business reporting in the Daily Nation continues. My views on this are, I presume, known. As a financial institution, you simply cannot be borrowing so as to meet some regulatory capital requirement; you can only be able to borrow if your regulatory capital requirement so allows. But guess what, some reporters and/or editors at the Daily Nation will want you to think so.  Incredible!

It's Not About Love

In popular perception any overture from major external economic players is seen with the lens of how it will benefit us. There are instances when even external policy decisions are assessed in terms of how they will positively affect us. 

We obviously will be wrong if we swallow line hook and sinker all that those courting us tell us. in any case, as Adam Smith popularly quipped,  “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”.

That is the case I make in my essay published in today's Business Daily, where I argue that we are masters of our destiny therefore we need to build our institutions as a way of assuring our future growth. We simply can't outsource institutions.     

Seeing A Thief Behind Every Bush!

Are there "Chinese Walls" that separate the Daily Nation from the Business Daily? Do the reporters - especially business reporters - working for these publications have any discussions on what they are working on? Even at the cafeteria? Do such discussions entail deep perspectives?
I ask all these questions because in many instances where the two publications cover the same story and one (usually the Daily Nation) takes a mischievous, often erroneous, angle and the other (the Business Daily) takes sober and analytical angle.
Take today's example. The Daily Nation has a piece on how Cooperative Bank  "borrows" KES 6.4 million to meet Central Bank of Kenya (CBK) rule". To a non-suspecting member of the public, there is nothing wrong with the story. But even a casual reflection by anybody with basic understanding of finance, banks and how they are regulated, this story is misleading right from the caption.
The innuendo is that Cooperative Bank is in trouble as is close to violating some CBK rule that the reporter is either too busy or too lazy to specify. Then, the bank goes on an external borrowing to enable it meet the rules. The innuendo ends there. This is characteristic of sensational reporting, especially on finance; and the usual narrative is that if banks are not out to "rob" you with high interest rates (seeing a thief behind every bush!), then they are in trouble - or about to be - one way or the other.
The rule that that the reporter was too busy - or too lazy - to specify is that from from 2015 banks are meant to maintain a core capital to risk weighted asset ratio of 10.5 percent from the current requirement of 8.5 percent.
Where is the problem with the story? One, the reporter doesn't seem to understand - at least that is not evident - what a balance sheet is. Otherwise there could have been an appreciation that when Cooperative bank borrows KES 6.4 billion (a liability) it will create an asset (loans to its customers) of an equivalent amount.
In basic arithmetic, for you to increase Core Capital/Risk Weighted Asset Ratio, you do not increase the denominator (which the Daily Nation story erroneously indicates is the case with Cooperative Bank's move). Instead you increase the core capital at a faster rate than you increase the assets. That is the correct  story that the Business Daily is telling us.
Interesting; isn't it?          

So We Take A Break on Monetary Policy?

I pose the question chiefly to fellow economists because a piece by prominent economist, David Ndii  has made a proposition whose conclusion simply drops the question mark. David's commentaries usually persuade the conclusions they make.
This one, unfortunately doesn't. What could have helped lead to a somewhat different conclusion is left out for another day. That is why David readily accepts the Sargent-Wallace theory of 'rational expectations' and makes a blanked conclusion that "monetary policy may not be fit for purpose".
I disagree. Both demand-side and supply-side are important. If government borrowing goes towards sorting out supply, then the Central Bank should watch demand pressure on inflation. To argue otherwise is to imply that the so-called core-inflation - non-food-non-fuel - is not binding on Kenya, which is not the case.
Even Milton Friedman's critique of monetary policy, which provided an entry point for the Sargent-Wallace argument, wasn't unqualified. To Friedman, monetary policy is a "string" that you can pull to sort out demand challenges (together with fiscal policy, if we were to bring Keynes into the debate); but you "cannot push on the string", meaning it cannot be monetary policy alone. This is the argument in Friedman's 1968 American Economic Association Presidential address that I could have liked David to bring into the essay.         

An Imaginary Equity-Growth Trade-off.

I have had to read Prof. Joseph Kieyah's piece in today's Business Daily three times for me to figure out what its core message is. It is not because I wasn’t concentrating on my first attempt; it is because its approach easily endears itself to one tripping on once own intellectual shoe laces.

First, it espouses an argument that the President is not in control of policy. Yes, it does; I you do not believe me, let the Prof. speak for himself:

 "The president’s efforts to roll out his transformative economic agenda are being frustrated by policy makers and civil society, including the Judiciary, who seem clueless on the gravity of the economic problem facing the country"

 In other words there are people called economic policy makers who are not in the executive arm of government. This is new to me.

Second, it argues that there is a problem with the pursuit of equity. To put it differently, it assumes that there is a trade-off between economic growth and distribution. This can only be his illusion - the two are not a zero sum game.

I can only resist the temptation of loudly singing the great Fela Anikulapo-Kuti's master-piece 'Teacher Don't Teach Me Nonsense'; but I cannot resist the temptation of prescribing to the Prof. some reading. Let him try the latest rock buster on the world of economics, Capital in The 21st Century, by Prof. Thomas Piketty.

If he does, he will get an appreciation that inequality can frustrate growth sustenance. In case the book is too heavy (nearly 700 pages), then there is a shorter version in form of a recent compelling IMF Discussion Paper that bears the same message. 

"Trust-Me-I-know-what-I-am-Talking-About": The Carol Musyoka Edition

Facts and logical arguments are the arsenals on any discourse, especially if the subject entails matters of public concern. That was the basis of my recent article in the Business Daily where I was basically making my contribution to a debate on an issue where those who purpot to be experts only spew prejudiced views without substantiation; and they largely go unquestioned.
I thought that the Carol Musyoka piece that I was debating was a demonstration of a weak argument - so weak that one couldn't expect anything lower than that. But hey, trust Ms. Musyoka to beat her own record! For her latest piece, purpoting to respond to my arguments, is a dissaster to say the least. More than 99 percent of the essay is Ms. Musyoka's resume. I know why this is the approach: when the facts and logic do not support your case, you deploy a strategy called "trust-me-I-know-what-I-am-talking-about".
Oh, to be fair Ms. Musyoka spends 1 percent of her essay seeking to address the subject of the debate. And this is what she has to say:

 "Why have I quibbled so much about bank pricing, which I already hemmed and hawed about three weeks ago?  This is because my sentiments on the new Kenya Banks Reference Rate (KBRR), which come from actual practice rather than theoretical posturing about macroeconomic gobbledygook, have received some criticism as being the rambling justifications of an armchair analyst".

Now you get the drift. My argument is theoretical posturing; and hers is a manifestation of actual practice. On this I will delegate to John Maynard Keynes to respond, for he says in the concluding chapter of the 1936 seminal book, The General Theory, that:

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

I rest!

Attitudes in Search of Justfication

I have to admit that I do not enjoy being a debunker of bad ideas peddled by self-proclaimed experts. But it becomes necessary to do so as is the case in my latest piece in the Business Daily of  July 30, 2014.  
Like the football “experts” on television or radio who have never kicked a ball, Carol Musyoka’s article in the Business Daily of July 14, 2014 on the cost of credit is an exemplar of how armchair analysis can go wrong. So does the piece by Scott Bellows in the Business Daily of July 18, 2014 . 
When one front-loads emotions ahead of analysis, the result is a prejudiced view. But hey, I know how this stuff works; if you want to claim expertise in a subject where you are ill qualified, you need to sound profound in your pronouncements. But that will not take away the fact that to jaundiced eye everything looks yellow.  

Monetary Policy, "Prof". Julius Bitok, and Sam Cooke - A case of "Don't Know Much About History"!

Don't know much about "Prof". Julius Bitok. My first encounter of his thoughts is a commentary he published in the Standard on Saturday (April 26, 2014) on the Draft CBK Bill 2014. He may well be a Professor of Finance, but obviously not at a prominent address (from the by-line in the commentary, that address is Cooperative University/ JKUAT - wherever that is).
It is not that the address matters if the arguments are solid, but my reading of the commentary confirms the pedestrian nature of not just the address but the views. There is no sense of the history of successful monetary policy conduct; the basic grasp of monetary economics is not evident.
Oh, I understand: "monetary economics" - where monetary policy is thought in great depth  - and "finance" are grossly different.
My own views on the same subject are published by the Centre for Research on Financial Markets and Policy. You can be the judge as to who is more persuasive; but I fear for "Prof" Bitok's students, if they are unfortunate enough to have him teach monetary economics, or at the very least monetary policy conduct!

We Now Have a "Debate" - Or Do We?

I have a simple measure of knowing when one has been effective in passing a message that may be compelling but which needs to be delivered in a provocative manner so as to have the intended impact. That measure is seen in the manner of response what tells you that somebody has really gone under somebody's skin!
A case in point is the "debate" that economist David Ndii's essay on the so-called "wage bill crisis" has ignited. The response from the Ann Waiguru, Cabinet Secretary for Devolution and Planning, depicts  just that; its tone is almost one of desperation.
May be I expect more from a rebuttal. It cannot simply be a case of trying to prove that somebody didn't get the numbers right - even then that is  not the case here because I am more inclined to Ndii's intuition than Wauguru's ranting.
To me it is more of the context that you bring out on the numbers. While in Ndii's essay one could see an invitation to  engage on the subject of the economics of fairness, in Wauguru's "rebuttal" (I am still looking for the right word, for the response doesn't actually fit the rebuttal bill)  one could see an invitation to perpetuate the linear thinking underlying the "thrust-us-for-we mean-well" attitude.
Let me start with the latter, which has been evident from the "self-audit" that was displayed in the ineloquent account of the first year in office of the Jubilee government.
If you are the one to believe the everything that the government tells you, and therefore not in demand for accountability, then the performance of the Jubilee government, one year down the line was at best mixed - some things accomplished, and others - perhaps many - not. If I was to be extremely generous, that is how I will assess this year's State of the Nation Address.
Unfortunately, I am more sympathetic to the views of those who saw the address as a squandered opportunity, my generous comportment notwithstanding.
That is why it is almost laughable that we have a mixed performance at the very top and a stellar performance at the cabinet level.
Now to the former. I argue that those in denial that wage disparity in the civil service is an issue are simply turning a blind eye to the reality that our society has always been home to an entrenched crony capitalism where - in the words of Raghuram Rajan - the current Governor of the Reserve Bank of India “too many people have got too rich based on their proximity to the government”.
Unless we are willing to confront that reality, we will continue having a society where instead of the government pledging to perform and be ready to be accountable, it will seek the drive expectations in the direction of confusing accountability with trust.
That is why it is tempting to imagine that Wauguru is debating Ndii while that is far from the case!

Fuzzy Math - The Kenyan Version

In 2001 economics Nobel laureate Paul Krugman published an interesting book titled 'Fuzzy Math: The Essential Guide to the Bush Tax Plan'. This small book came to mind when I read David Ndii's compelling commentary on how the numbers used to back the excuse for a possible wage purge do not add up. My own view on the wage bill debate is that the "sudden realisation" that the wage bill burden is weighing heavily on the economy's growth potential is the epitome of policy hypocrisy.

The Sudden Realisation - The Wile E. Coyote Moment!

I call it the "suddenly" moment. This happens so often in the Road Runner Show when Wile Coyote finds himself running a few steps on thin air after the cliff upon Road Runner pulling a dummy on him by turning the corner; upon looking down Coyote finds no ground to run on, and then starts the process of steeply falling. Is Coyote a hypocrite? Probably not; naive is more like the character.
But not all Coyote moments are a manifestation of naivete more than they are a signal of hypocrisy. A case in point is the urgency to tackle the "wage bill problem" that the Kenyan leadership has suddenly discovered. One of my friends and high school classmate calls the move by President Kenyatta and Deputy President Ruto to "voluntarily" take a 20 percent pay cut and then demand of others in the civil service ranks to take a similar cut an  act “love for country” and all its starving children!         
I know people express their love differently, so the President and his Deputy are within their rights to express theirs by way of symbolism – for their proposal is simply that and nothing more. Is that a strong basis for policy? I say no, because a good starting point would have been to crack the whip on the ghost workers who cost tax payers KShs 1.8 billion annually.  When the president revealed that we have ghost workers in January this year, rational people imagined that there would have been a follow-through. Now that I have seen none on the ground, I could assume that the President wants the Ghost workers to take a pay-cut too. That will “save” us some money, you know!
How about rationalising the civil service such that we have what the government needs; no more, no less? Well, there was a team that was set up to rationalise state owned corporations (parastatals). It came up with a good report – not perfect, but one that provides a god starting point. It entailed merging a number of such entities whose roles are duplicating. What happened next? There was a sudden realisation that jobs of CEOs, board chairmen/women and board members – which are doled out as political favours – were to shrink.
I am sure many have forgotten the wave of appointments (some of which illegal - recall the appointment and disappointment of a guy by the name of Dida?) that happened in total disregard of the sound recommendation of the team’s report.  Oh, I get it. The logic is simple: appoint as many CEOs to these entities, some of whose survival depends on the continuous patronage of tax payers, and then force then to take a “voluntary” salary cut.
The question I will ask you now is: are we going to see the salary cuts go all the way down or the line will be drawn somewhere. I guess you know something called “inflation tax” where your real income is reduced by the factor of inflation as it erodes your spending ability. I also guess you know that if you reduce the so-called nominal income for the same person, then you are squeezing him from both ends; and his spending ability will be affected and this will affect the broader economy because expenditure is growth boosting – unless you imagine that John Maynard Keynes was an idiot.    
How about Parliament – both houses – which threatened to sack the chairperson of the salaries and remunerations commission which declared then state officers (for that is what they are; forget about this hon. nonsense) and proposed their pay-cut in a legal manner? Of this was no big deal to my high school friend and many others because those whose love for country they represent were quiet, lest they stir the hornets’ nest. Now they are busy trying to legislate against their being classified as “state officers”.
Ultimately, it all boils down to Edmund Burke’s apt observation that “to tax and to please, no more than to love and be wise, is not given to men”. As I said earlier, people have a right to choose how to express their love for country. But the love expressed in the manner of the recent proposal for salary cut comes with a small problem: it interfere with any logic that will indicate that the latest move is simply tokenism and does not amount to serious policy thought-through process nor does it indicate consistency in pronouncement.
Does this make my argument idiotic? Well, not if you share the view of those who consider the latest move as totally lacking  even in basic math, as David Ndii does. For if indeed there was seriousness about addressing the economy's fiscal challenges, then this is not the time to act populist and promise favours to every busy-body politicians such as Members of the Country Representatives with goodies as the president has done even after lecturing the country about the dire need for belt tightening.
Ultimately, we are now experiencing - or so are we made to believe - a Wile E. Coyote moment, but one underpinned by hypocrisy and not naivete!

A Drowning Argument: The Upton Sinclair Candidate

Just like a drowning man will clutch at a straw, a drowning argument will clutch at a  committee. That drowning argument is precisely what Jaindi Kisero is consistently flogging on the subject of interest rate. His latest on this is simply a tirade of desperation.
As I have already argued, consistency is clearly not one of Kisero's attributes while the demeanour of seeking to endear himself to those who can potentially look in his way with a favourable disposition seems to be his  core  competency,  at the very least on this subject.
Kisero's latest rant is a further demonstration,  for those who need one, that his grasp of even the basics on this subject is wanting. Let me give a just two examples.
One, Kisero insinuates that his beloved  committee must have been held hostage. His evidence: he doesn't know its members, and its deliberations are likely to be held in camera. He then posits that "clearly, this is not how to conduct public policy". 
If I understand him, he must  meaning that this committee should at the very least operate like the police vetting team - where deliberations get live television coverage! - but ideally be subjected to a national referendum. After all, in his words, "the issue at hand is so critical for the development of the economy".
I agree that this is a critical issue,  but there are so many other critical policies that are formulated and effected without playing to the gallery, e.g. tax policy, monetary policy among others. The public is simply informed of the basis of such formulation.
Secondly, Kisero asserts that the rules of supply and demand does not apply in a market that is segmented. I can only infer one thing from this assertion: basic economics is much more difficult than being a card-carrying columnist (ironically on economics) for the Nation Media Group. It  obviously does not speak of the Nation Media Group (alone); it speaks of economic punditry in general. This is a point I have made before.  
Then fact that a market is segmented or imperfect hardly means that the law of demand and supply has been overthrown. It simply means that the level of price that the market clears - in this case the interest rate - may not be be socially optimal. In this case, the price - which is merely a symptom - should not be the policy focus; instead all the efforts should be trained on the structural factors that speak to the segmentation or imperfections of the market. And you do not need a committee or a referendum to address these issues.
To non-suspecting members of the public, Kisero sounds very clever, even revolutionary, by observing that "you can not talk about supply and demand in such a segmented market, where liquidity cannot spread between all players".  We have known all along that there are efficiency challenges arising from the segmented inter-bank market. This we know from proper rigorous studies and not hearsay.
If Kisero was the reading type, he could have known this from a study  - Segmentation and Efficiency of the Interbank Market in Kenya - published in December 2012 by the Kenya Bankers Association Centre for Research on Financial Markets and Policy. This study makes very bold observations and conclusions.
It posits that the segmented nature of the inter-bank market has constrained banks' liquidity management strategies. According to the study, the efficiency of the inter-bank market can be enhanced through developing products with maturities of more than one day so as to have a term structure; increase the number of currencies traded; developing benchmark interbank rates; and enhancing linkages with other money market segments and monetary policy.To a lazy pseudo-analyst, the problem cannot be with any other party than banks.
Clearly if Kisero had read that piece of work, then his arguments could have manifested some depth. There can be two reasons why he evidently has not read this and any other analytical work that has been done in this area: One, he believes that any economist working for the banking industry (read yours truly) has a haughty attitude.
Two, he is most likely the type that Upton Sinclair was talking about when he quipped that "it is difficult to get a man to understand something, when his salary depends on his not understanding it", only that I will paraphrase it to read: "It is difficult to get a man to read something, when his salary depends on his not reading it."
If the mission of Kisero's latest commentary - cleverly captioned "What team must do on interest rates" - was to prescribe any solution, then it fails miserably. All it tells us is that the Nigerian Central Bank "took bold action, decreeing that all commercial banks must develop and implement a risk-based pricing model". If only he knew what risk-based pricing model is all about then he could have known that it is already happening in the Kenyan Market.
It gets more interesting when Kisero says that he "read somewhere that banks there have been made to compute  each cost element of their prices and to publish them". I will ask: read where? I will then proceed to prescribe for him some reading.
The document to be read is called the Central Bank of Kenya Prudential Guidelines. in line with this guidelines, banks have been disclosing the total cots of credit and giving loan repayment schedules since the beginning of 2013. Will I be asking for too much? Well, I thought so too. All hopes are now on the committee,and in any case Kisero has already "read somewhere"!

Speaking from Both Sides of One's Mouth

I recently published an essay in the Business Daily where I argued that the logic of Jaindi Kisero, a columnist and senior Editor with the Nation Media Group in whose stable is the Business Daily, on the subject of interest rates is at best flawed and at worst a representation of attention-seeking pretence.
As I suspected, there had to be a response. Predictably, the response is shallow, full of unsubstantiated assertions and can be debunked by my earlier essay, even without changing a word. Kisero talks of data that he does not give in his commentary. I suspect that he does not have the data, but he is trying to hoodwink his readership that his is fact-based.
Here is my take of the style that Kisero espouses: If one has a vested interest or is seeking to draw the attention of some politician(s), then one must seek to sound knowledgeable and authoritative. When the case being argued cannot be taken to bed purely on clear thinking argument, then the refugee will be some committee that is expected to swing a policy surprise - may be some price controlling legislation.
Why else should there be a reference to the much-discredited so-called Ndonde Bill that essentially was seeking to cap interest rates and you have pretended to be a believer in markets? Oh, I know. It is called perfecting the art of speaking from both sides of one's mouth!
 

Debunking the Pretence

I recently made an argument on how economic policy discourse is characterised by pretence. The one area where that pretence is glaring is on the subject of interest rate. The arguments on this subject by both punditry and pseudo-punditry often play to the emotions of people; sometimes the narrative is framed as if it is seeking political favour. I am not taking about straw-men here.
Look at Jaindi Kisero's two recent commentaries - one seeking to insinuate bad faith on the part of the Central Bank of Kenya on the whole issue of trying to come up with a "solution" on "problem" of interest rates spread and the other seeking to give a false impression that somebody somewhere has an immediate solution.
Both of Kisero's commentaries are at best peddlers of assertions. That is why somebody had to debunk the assertions. An that somebody was yours truly. I argue that not letting prejudice interrupt a good story amounts to intellectual dishonesty. I am waiting, and ready, for a push-back.  

Faking it Through and Through

We relish any opportunity to tell all who want to listen that we are a frontier economy. We are doing great when it comes to GDP growth, and this we are reminded by any "international partner" is in town to hobnob with leadership. Remember when Christine Lagarde was in town to tell us how well we are doing and how that is a strong basis for 'doing business?
To spice it up, we are now looking East - damn the consequences if by so doing we grow fast. And on this hypocritical stance, we are not alone; even the developed world is playing ball with the East while in the same breath pretending to be taking a high moral ground. But at least the developed world realises optimal job creation.
In our case, we fake it; at least that is what a recent study tells me. Firms in Africa are simply not creating enough jobs. Why? Wanting policy regimes; constrained financing; and we seem to assume that it is no big deal. Oh, and we are doing fine, or so our "partners" tell us!

Public Exchange on Economic Policy: The Right to Pretend

It is extremely difficult at the very best, otherwise impossible, to have logical discourse on economic policy matters in the Kenyan media. Why is that the case? Simply because expert opinion has been crowded out by the posturing that we see on display everyday (Oh, and nobody for instance tries to correct the fast-talking TV business newscasters who on a daily basis confuse the money market with the foreign exchange market! "And now the money market report. Today the Kenya shilling was trading at X shillings per US$, bla bla bla..". If you think I am joking, try to endure the business news tonight).
Admittedly, when it comes to strong opinions in the media, economics and economic policy prescriptions are ahead of views meant to help people loose weight or "projections" on which team is going to win an English Premiership football match and by how many goals.
Take the case of Mitiga Murithi's argument in a recent commentary. It's Murithi's considered view that for us to attain the "miracle" status that East Asian economies, our countries must be led by regimes that are close to dictatorship. That way, their benevolence will lead to fast growth.
And how was the "miracle" manifested? Of course in fast growth, arising more from heavy government investment - not household or firm. That is the trap that the World Bank fell into when in a report published in in 1993 - The East Asian Miracle: Economic Growth and Public Policy - it celebrated victory too soon. Only four years later, when the "miracle" culminated in the Asian financial crisis, did those who looked at the whole episode from the lessons of elementary economics and concluded that the growth was ordinary-garden-variety (if you invest more, then you grow more! But that may not be sustainable unless that growth is associated with productivity growth) almost chanted that: 'we told you so'! But that is retrospect.
It is no wonder that some people in positions of responsibility - legislators especially - feign a lack of appreciation of detail in the current controversy surrounding the standard gauge railway and its costing and retort that they only care about the end product regardless of how much it 'costs'. Such attitude can only make sense if one has never heard of the phrase Economic Rate of Return; for if we invest in the railway at any cost, it will result in high growth during the investment period, but because the viability is compromised it will compromise other areas of economic management - e.g. our debt sustainability, given that the investment is debt financed.
Do we expect our economic pundits and their pseudo-pundit cousins to  put a spotlight on the economics of such investments? Well, I almost give up on them. Such intellectual engagement competes for space and airtime with posturing - the right to pretend and be heard pretending.
The end result is that interesting and deep public exchange on economic policy is rare, if at all. And  in the recent past the best we have had, in my view, is the exchange between David Ndii and Nyaga Munyi.But such exchange often ignored or even misunderstood by those card carrying pretenders to expertise.  

Simple versus Simplistic: The Former Carries the Day

David Ndii has a brilliantly crafted essay in the Saturday Nation of January 18, 2013. But I suspect that those who have taken leave of objectivity, and choose to "see a thief behind every bush" - meaning reading mischief whenever somebody they do not like makes an argument, however persuasive - will go shrill that the case that he makes is simple and therefore unable to address serious economic challenges that we face.
I argue that if you find Ndii's essay, and in particular the 'model', to be simple then you should be relieved that it underpins serious discourse. Simple is different from simplistic, and it is those ideas in the latter category that are buttressed by the laughable believe that though issues of policy and discourse should be solemnly addressed with big words and elegant models and graphs.
In any case, trying to appear serious by making discussions complicated is an attempt to negate the logic behind the submission that "a map is not a territory".
If you have no idea how simple though experiments can make powerful arguments, then you need to read economist Paul Krugman's "The Accidental Theorist" commentary in Slate Magazine that was subsequently the flagship essay in an acclaimed book.

A "Balanced Argument" on Interest Rates

A superficial look at Robert Bunyi's commentary in the Business Daily gives the impression of a well-reasoned and balanced argument on the emotive subject of interest rates. It will take a trained eye to note that the commentary hides as much as it reveals on the general understanding on the determination and importance of the price of money in the broader dynamic of financial intermediation and the interplay between policy and market outcome.

Let me start with what it hides. One is the fact that there is no perfect correlation between the adjustment of the monetary policy signalling rate - the Central Bank Rate (CBR) - and the market interest rates. Even when such correlation exists, it comes with a time lag that depends on - among other factors - the level of depth of the financial system generally and the banking industry particularly. In our case, even the mechanism through which such policy is transmitted is not understood. As I recently argued in an essay in the Business Daily, even those seeking to support the Central Bank of Kenya (CBK) understand the monetary policy transmission mechanism are speaking from both sides of their mouths.

Two, is the fact that the effective demand for credit function is not a two-variable model with the sole determinant being interest rate. There is more at play here such that even if interest rates were to decline, credit demand will not necessarily respond. Real GDP growth numbers are interesting only on account of their outlook being continuously revised downwards. If the thinking is that credit expansion alone will spur sustained recovery then clearly there is need to give hard thinking a chance as a substitute for armchair economics practice.

For one, the slower than expected real GDP growth can only mean that the economy still has some substantial output gap - the difference between actual growth and potential growth. Under the circumstances therefore you can't expect a robust credit demand on the back of an economy whose performance is anything but robust.

Furthermore, it cannot be only the monetary policy to do the heavy lifting while the fiscal policy is actually seen as a drag to growth. As a recent World Bank report indicates, low government expenditure on account of absorption challenges is one of the key factors for the output growth not meeting the forecasted target.

Let me now turn to what it reveals. One, it reveals that there is little appreciation of the fact that the likely effect of the decision by the CBK's Monetary Policy Committee (MPC) in its January 14, 2014  will depend on the prevailing market liquidity conditions. If liquidity is tight - and this may be the case given that the inter-bank rate that has largely been below CBR when the CBK was pursuing an increasingly accommodative monetary policy are now showing signs of keeping ahead of the CBR (see Figure) - then any attempt to play activist through a reduction will not yield the anticipated results of increased credit.

Two, there is a misguided notion that the role of monetary policy is to support growth more than to promote stability. When I last checked, the CBK - unlike the Fed or the Reserve Bank of India - does not have a dual mandate; its forte is stability. That is not to say that sometimes it doesn't act as if it has a dual mandate.

So, Robert Bunyi's essay may well be balanced - on what it reveals being as much as what it hides, and on both accounts reflecting how sometimes even with good intentions analysts do not deeply reflect on issues they tackle.  

Pseudo-critique

So David Ndii is getting an economics "lecture" from one Robert Tinale, a self-described "social scientist"? Well, nothing wrong with it if the "lecture" was anything more than the pseudo-critique that it is - full of generalisation and cherry-picking of statistics and arguments to fit a preconceived narrative.
If Tinale's stated objective is to debunk arguments by Ndii's  in a recent essay, then he falls into the unintended trap of tripping on his own intellectual shoe laces.  I can easily illustrate this in four points:
One, it is a false start to contend that economists do not use opinion polls; oh, opinion polls are reported in hard statistics. Opinion polling is used in, for instance, gauging inflation expectations so as to guide the conduct of monetary policy. I can infer that Tinale imagines that the Central Bank of Kenya (CBK) conducts monetary policy in response inflation while in reality the monetary policy stance is based on inflation expectations. And how are those expectations gauged? Yes, you are right; through opinion polling - not necessarily those polls conducted by Ipsos, et. al.
Even when inflation is at single-digit level as it is in Kenya now, a significant portion of the population is  of the view that the cost of living is rising - and that is their number one challenge. This tells you that inflation expectations remain, in monetary policy speak, un-anchored. On the back of such stake of affairs, if you tell Kenyans that they are better off than  they were a few years back simply because some World Bank report has said so, they will tell you to try flying a kite for a hobby!
Two, I used to imagine that the concept of economic rate of return (ERR) should be fairly straight forward to whomsoever seeks to critique an economic argument - indeed whoever seeks to make a case around infrastructure investments that are funded by credit. Reading Tinale's write-up, I now know better! It doesnt matter to him that the costs and benefits streams that go into its determination take a long term view. That is why their benefits are expected to take time. But hey, Tinale is already seeing them on the Thika Superhighway project, even when he is condescendingly telling Ndii that "economic development is not achieved overnight". Did I hear somebody shout 'contradiction!'? Well, I thought so too.
Three, it is easy to forget the simple fact that all economic agents respond to incentives and for the private sector to align itself to productivity the policy regime has to do the intermediation.
Four, development dynamics do not follow a linear pattern. So to argue, as Tinale does, that low borrowing necessarily means high taxes, is to epitomise linear thinking - in which case public finance gurus who argue that you can have an appropriate combination of the two so long as they are supported by a framework that ensures that they do not constrain investments and consumption would be speaking Greek - no pun intended to the long suffering Greece economy - to the linear thinker.

Starting A Blog: A Forum to Debate "Policy Entrepreneurship"

As a trained economist, it is natural for me to regularly publish short essays on economic policy. Such essays often reflect current events, mainly in the macro-international economics sphere, that have implications on economic performance and business decisions. Many of my essays are motivated by debates amongst commentators - usually characterised more by conventional thinking as the driver of varied positions than by analytical rigour that is mad to persuade conclusions.


Admittedly, a good debate is one where it is not necessary the loudest that carry the day but the most logical. But that is the ideal world. In the real world, the loud voices often carry the day. In the economics arena, such voices  arena sometimes fit the definition of what Nobel Laureate Paul Krugman calls "policy entrepreneurs" - "intellectually dishonest self-proclaimed experts who tell politicians what they want to hear".


The type of "policy entrepreneurship" that we commonly see thrives on emotions. A case in point is the excitement that has characterised the recent signing of the East African Community Monetary Union Protocol. Such excitement is usually whipped by a one dimensional look at the issue. My essay on this subject  that calls for careful consideration of the move has been seen in some quarters not to be representing a call for caution but to be epitomising timidity. While not necessarily looking to be vindicated, I seem to be in good company on this subject.


Another case is the emotional argument that China's becoming systemically important is necessarily at the expense of the US - and consequently the possibility of the US dollar being replaced by the renminbi as the dominant global reserve currency. As I have argued before, we may be conditioned by the political class to "look East"; but let's not take leave of the fact that a multi-polar global reserve currency regime is the most likely outcome in the long-run and the East - China in this case - needs to work harder on financial reform if they have to join that league any time soon.


All in all, it is clear that there is abundant room for an engaging debate on some of these issues beyond what we have now. That is my motivation for starting a blog. I consider my views as fairly mainstream - informed by recent research and aligned to the progressive agenda of logic based inferences.

But I also know that what is mainstream and what is not may be unclear even amongst my fellow economists. But I intend to have a debate that is accessible beyond colleagues of my persuasion. Let the discussion commence, initially on a weekly basis, and subsequently on an increasing frequency as we go along.