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.