Cockroach Ideas: A Sequel Starring Bitange Ndemo

Early this year, I gave an illustration of our context of cockroach ideas as defined by economics Nobel Laureate Paul Krugman. These are basically bad ideas that are like cockroaches which "no matter how many times you flush them down the toilet, they keep coming back".
We now have a sequel as espoused by Bitange Ndemo, who happens to be core faculty at the University of Nairobi Business School. In the Wednesday 25th November edition of the Business Daily, Ndemo insisted that Mega projects have role in long-term growth. Unfortunately, he does no prosecute his case.
I have a bad feeling that Ndemo is making emotional assertions. While he prefer to consider himself an economist, he teaches at the business school. This is not a matter of nuance, for he has in the recent past argued that he has a problem with economists (see Where economists go wrong on growth). In other words, her has "seen the light" and retreated to the business school to pontificate about - you have guessed right! - matters economics.
If the assumption made by Ndemo is that we have short memories, then he needs to review its plausibility. The last time he tried to make such a case for grandiose projects in a debate with David Ndii, this is what he got: a clear and compelling rebuttal from Ndii.
That Ndemo is back, with the same story but without any different argument can only remind me of a cockroach. It also confirms the fear that I expressed in December 2014 that much of his commentary is not founded on careful considerations of the basics of economic logic, making it just another vocation.

Who Murdered Context?

When I saw today's Business Daily screaming that "Kenyan banks rank poorly among peers in region, says IMF", one thought came to mind: context has been murdered in cold blood!
You see, the piece by Geoffrey Irungu is factually correct in the observation that Kenya ranks lower than, for instance, Mauritius in the Banks Assets/GDP measure; the former is at about 64 percent while the latter is at nearly 350 percent.
The question that one needs to ask is: does this amount to a poor ranking? The answer requires somebody to work much harder than the Business Daily requires of its reporters. The only reasons why this piece is  giving a comparison of Kenya and other "peer countries" in Africa is because the economies under consideration have the "privileged" status of being "middle income".
Mauritius' per capita income according to IMF data is presently estimated at US$9,186 compared to Kenya's US$1,432. South Africa, which according to the Business Daily ranking in terms of Banks Assets/GDP is third, with the ratio being slightly more than 100 percent - behind Mauritius and Cabo Verde - has a per capita income of  US$5,773.
To a non-trained eye, there is a pattern here: The high Bank Assets/the GDP and the per capita income must be linked; and that is the reason Mauritius leads and Kenya's ranking is poor. That quick conclusion can only arise out of mere coincidence. To a trained eye, however, if you bring in other parameters and more context, there will be reasons to be cautious (even to worry) about such pedestrian ranking. Lets introduce a few more numbers to set the scene for context.
South Africa, with a population of 54 million people, has a nominal GDP of US$317 billion. Kenya, with its 44 million people, has a nominal GDP of US$ 63 billion. Mauritius has a population of 1.3 million people and a nominal GDP of US$ 12 billion.
So when I look at the size of the Mauritian economy and the size of the assets of the banking industry in that economy relative to its output, one country comes to mind. That country is called Iceland.
Iceland is an advanced country with a per capital GDP of a colossal US$51,068. It has a population of about 330,000 people and a nominal GDP of about US$17 million (meaning the size of its economy is a fraction of Kenya's).
In 2000, Iceland's total banking sector assets to GDP were estimated at 96 percent. They rose astronomically to about 800% by 2006. In the thinking displayed by the Business Daily, this is something to be celebrated, and therefore any economies  - including other advanced economies such as the US  - with a much lower Banks Assets/GDP ratio are poorly ranked.
There is a problem with such thinking, if we use the Iceland example. Such high ratios are a reflection of the so-called internationalisation of the banking industry by a small-open-economy; much of those assets are foreign owned. This comes with the risk that financial vulnerabilities external of such economy can ruin the domestic economy. This is the script that led to the near-collapse of the Iceland economy on the back of the global financial crisis.
 So when I saw the Business Daily story, my mind raced back to a 2008 paper by economists Willem  Buiter and  Anne Sibert titled "The Icelandic banking crisis and what to do about it: The lender of last resort theory of optimal currency areas" published by the Centre for Economic Policy Research.
Did I expect the Business Daily to let such context interfere with a good story? Of course not! Context will ruin the flavour; so it must die.
This is precisely the same way I see quick judgement that an economy with low debt to GDP ratio is necessary debt  sustainable compared to one whose debt to GDP ration is rising. In other worlds, context is slayed by the same crude weapon of taking leave of critical analysis.
            

The Chickens Have Come Home to Roost

Eventually? Not really; it's more of: "that fast"! When I recently argued that the International Monetary Fund (IMF) has always been preaching hope and masquerading that it is forecasting, somebody at the Fund accused me of having a bad attitude.
The Fund projected a real growth rate of 6.5 - 7.0 percent for Kenya for 2015. The National Treasury swallowed that projection line, hook and sinker, and run to town with the same growth rate as a basis for budgeting both revenue and expenditure.
The National Treasury has now revised the growth projection downwards to 5.8 - 6.0 percent. It is normal for forecasts to be reviewed from time to time. That is because they are based on assumptions which are considered plausible at the point of projection but which may not remain so for the entire forecast period.
What is funny though are the excuses that the National Treasury is giving. One is high interest rates. The other is the effect of El Nino. Recall that the interest rates have come down as fast as they went up within a short two months; and the National Treasury is on record telling all that wanted to listen that the  borrowing binge that led to the spike was over and the rates will fall fast. Recall too that the Government has spent a hefty amount of money to obviate adverse effects of El Nino.
While there excuses are clearly laughable,  I didn't and actually shouldn't expected an admission that official corruption is weighing down growth, there is a sigh of relief that there is some climb down. I will add though that the rate still looks ambitious.

The Debate We Have Chosen Not to Have

In today's Business Daily, I make an argument that we are seeing a debate about the state of the economy based on the simplistic assumption of a binary state of "it is bad - it isn't".
The case I argue is that we cannot have fiscal discipline, without having fiscal rules. And fiscal rules are not the same thing as the ex post audit on how money has been spend - for that is simply accounting and not policy discourse.
And just for the record: I am not debating Mrs Beth Mugo, who seems to behaving  a monologue!

Can the East Save Africa? Hell No!

Africa is in India for, you have guessed it right, the African Summit - as if they can't have it in Africa. We see African heads of state and government jet to Asia - if it is not China, it is Japan, and now it is India that seems to be taking on China on matters Africa.
I couldn't help but revisit a 2008 paper by economist William Easterly titled "Can the West Save Africa?". The answer was an emphatic no. I bet that is the same answer when it comes to the East. 

Same data, same model, different results!

David Ndii and yours truly are looking at the same data, using similar models and coming to the same conclusion from different angles that the Kenyan economy is not doing great. 

That leads to the question: those who think that our growth is robust are looking at what dataset and using what model? The answer may surprise you; we have the same data and are using more or less the same model. 

The difference is that those whose verdict is that we have a healthy economy are peddlers of remedies  that will perpetual their relevance. And they are usually ultimately lenders to government whose financial resources are increasingly not needed in many emerging markets (remember the creation of the BRICS bank and how it caused jitters amongst the Breton Woods institutions?).

 A good businessperson must know that to survive one must have a core and local clientele. That is who we are to the IMF and World Bank, for when they tell us that we are ok even when we know we are not, it is business as usual for them.

Pleasing the Client.

I started on it in the Business Daily by debunking the IMF's pretence on Kenya. Bloomberg picked it. Now Mail & Guardian Africa have joined the party, albeit with an interesting humorous twist that I like. It seem that the IMF is not alone in this nonsense; it is in the good company of the African Development Bank (an institution that I have  had an indirect affiliation in the past), where its experts are reported to be celebrating a bourgeoning middle class in the continent. I guess it is a case of not seeking to upset the client.    

IMF: Preaching Hope and Clothing it as a Forecast.

For the time that Olivier Blanchard was Chief Economist - 2008 to October 2015 - I was a great fun of the Fund's research work. I still follow the IMF's research agenda with keen interest. As Blanchard was about to leave the Fund, the World Economic Outlook - the Fund's  twice-a-year flagship publication - was published. In there are two fantastic pieces of research in the technical chapters (i.e. besides the first Chapter that is dedicated to giving a view on the global economy).
How I wish I was as enthusiastic on IMF's policy prescription especially to the developing economies, in particular Kenya. That is why I blasted the IMF's in 2013 on their monetary policy ideas.
The IMF is at it again, giving as assessment of the Kenyan economy that in my view is misguided. This has forced me to do an opinion piece for the Business Daily to ask  a few questions as I indicate below:

"

Do the rules of good economics discourse by international agencies apply equally amongst countries? Or there is an excuse of taking leave of the call for rigour when it comes to economies that are considered to be systemically not-important – meaning that even if they were to go belly-up, the global economy wouldn’t hurt?

One asks these questions because it doesn’t take a hard look to see an economy’s performance being casually characterised as robust when all we can see is anything but robust.  Take the International Monetary Fund’s September 2015 review of the Kenyan economy Kenya under the twelve-month standby arrangement (SBA) and an arrangement under standby credit facility (SCF) approved early this year.
According to the IMF, despite the global headwinds and local shocks such as insecurity that have hurt key sectors like tourism, the economy is largely on the right track. I am straining to resist the temptation of imagining that the IMF is taking us for Candide, the character in Voltaire’s 1759 classic of the same title. You see, Candide was a student of Professor Pangloss who was a specialist in preaching optimism.  
Pangloss was able to prove, at least to Candide, that “that there cannot possibly be an effect without a cause and that in this best of all possible worlds the baron’s castle was the most beautiful of all castles and his wife the best of all possible baronesses.
“It is clear, said he, that things cannot be otherwise than they are, for since everything is made to serve an end, everything necessarily serves the best end. Observe: noses were made to support spectacles, hence we have spectacles. Legs, as anyone can plainly see, were made to be breeched, and so we have breeches. . . . Consequently, those who say everything is well are uttering mere stupidities; they should say everything is for the best”.
In short, Pangloss espoused the notion that we live in “the best of all possible worlds”. If he was right, then in our case a real output growth of 5.7 percent in 2013 declining to 5.3 percent in 2014 and all signs pointing to a further decline in 2015 is a signal of buoyant performance.
What then could be driving the IMF’s characterisation if not the Panglossian inspiration? I have a hypothesis inspired by the arguments in a 2009 essay titled “The State of Macro” by economist Oliver Blanchard – IMF’s chief economist from September 2008 to October 2015 – published in Annual Review of Economics.
In the essay, which drew as much praise as critique on account of the conclusion that the “state of macro is good” as the wold was imploding, Blanchard was modest in his approach, refusing to take the brief to write about “the future of macroeconomics”. Instead he took a short-term view, demonstrating the challenge of attempting to give a projection and taking the safe approach to “express hopes without disguising them as forecasts”.
My hypothesis here is that the IMF’s latest assessment of the Kenyan economy is the exact opposite of Blanchard’s approach; it is one of expressing hopes and disguising them as forecasts. Let me test this hypothesis starting with the latest forecast of the Kenya’s real growth by the IMF’s October 2015 World Economic Outlook (WEO).
The WEO projects that the economy will expand by 6.5 percent in 2015 before that rate rises to 6.8 percent in 2016 – the exact same projection presented in the Fund’s latest review of Kenya. It is clear, at least to me, that this outlook did not benefit from the latest data on the economy’s performance by the Kenya National Bureau of Statistics (KNBS) released before the IMF outlook.         
The KNBS tells us that the economy’s real output expanded by 5.5 percent during second quarter of 2015 the compared to 6.0 percent during the corresponding quarter in 2014. The first quarter of the year registered a 4.9 percent growth compared to the previous 4.7 percent during the first quarter of 2014.
Based on the first two quarters of this year, 2013 and 2014 look like great years even though the respective real growth rates of 5.7 percent and 5.3 percent are modest – if by no other comparison – when judged against the aspirational double digit growth rate necessary for the realisation of Vision 2030.
If therefore the IMF’s forecast for 2015 is to be realised, then the economy must spectacularly grow by nearly 8 percent in each of the last two quarters of the year. And the buoyant momentum has to be maintained if the 2016 is to be realised.   
But how realistic is such expectation? Very unrealistic, in my judgment. For one, the Central Bank of Kenya (CBK) has adopted a tight monetary policy stance to stem inflationary pressure and assure medium term stability. The inevitable consequence of the justifiable monetary policy stance is short-term cost in terms of real growth, but the focus remains anchoring medium term inflation expectations.
At the moment the fiscal front is the wrong side of the coin to look at if one is in search of some solace that growth would be policy-induced. That is because of what I see as some imagined self-fulfilling prophecy on real GDP growth by IMF and others that has been the basis of revenue and expenditure but which never crystallised.
This is how it is envisioned to work: project that the economy will grow at between 6.5 percent and 6.9 percent as the IMF did just last year. Let these rosy projection be the basis for government revenue and expenditure projections. Assume that the projected expenditure will support the realisation of the growth projection, especially expenditure on infrastructure.         
One can only agree to the IMF’s observation that the on-going upscaling of public infrastructure investment is critical in boosting the economy’s growth potential if there is a strong qualification: the economic viability of these investments against which financing is secured need not be in doubt. As it is, though, such viability could be either a wish or an assumption, or anything in between the two.
So when the IMF further observes that “maintaining fiscal sustainability requires significant efforts to mobilise additional revenue and contain current spending”, it is a covert admission that the self-fulfilling growth prophesy is not crystallising. Even then, the IMF review goes ahead and builds the same growth assumption into the economy’s latest debt sustainability analysis (DSA), with the verdict being a rendition of Jazz musician Bobby McFerrin’s “don’t worry be happy”.
So what is going on here? Beyond dodgy forecasts, the wisdom of Blanchard in a more recent short essay in the September 2014 issue of the IMF’s Finance and Development titled “Where Danger Lurks” is largely ignored. That wisdom is that it always important to pay attention to dark corners from where the economy can start malfunctioning.      
 I see one such dark corner in the situation where the large government deficit that the IMF acknowledges collide with the CBK’s stability efforts. Economists describe this as a collision between inflation targeting and fiscal dominance. This ought to be an issue to the IMF if the transition of the CBK to inflation targeting – a more accountable monetary policy regime – is to be smooth.
The key policy question here is: does the central bank have a responsibility for fiscal solvency on top of its price stability mandate? If choice is an inflation targeting regime, then the optimal monetary policy rule is that nominal interest rates should increase by more than inflation expectations to slow inflationary pressure, regardless of whether fiscal sustainability so dear to the IMF is at stake.
It is curious that such policy conundrum is not a point of potential concern to the IMF, in which case one could argue that in our instance the Fund is a post-policy, post-projection enterprise. That means its stance could be mirroring that of those economists who according to John Maynard Keynes “set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again”.
I suspect that if we were talking about a systemically important economy, any forecast will be scrutinised to the decimal point and policy assessment will receive thorough screening. In the words, the answer to a 2000 paper “Small States, Small Problems? Income, Growth, and Volatility in Small States” by economists William Easterly and Aart Kraay published by the journal World Development would simply entail dropping the question mark. In that case I see why there is temptation for the messages of hope to be disguised as forecasts. 
"

The Business Daily published the essay today, but the editor changes a bit of stuff on the introduction and chopped off a few paragraphs at the end. The message nonetheless passed across as the IMF resident rep in Nairobi has called me to indicate that he has noted my critique. I will have to keep pushing!
        

Corruption-Economic Growth Nexus: Limitations of the Waterboarding Strategy of Argument

In Enock Twinoburyo I have good company. When I blasted Andrew Mwenda for his arm-chair pseudo economics, some of the reactions were that I could have made the same point in a gentle manner.
On the matter of  civility and intellectual discourse, I resort to the strategy of good old John Maynard Keynes who once said that "words ought to be a little wild, for they are the assault of thoughts on the unthinking". That is the pillar of my blog.
Enock and I are squarely on the same side on the corruption-growth nexus story. I need to add one more thing: the so-called citations (so-called because they are not studies but countries) that Mr Mwenda makes in his wild assertions are cherry-picked.
The strategy that Mr Mwenda employs in his argument is taken from the script of typical policemen in a Banana Republic - pick any in Africa - who pick their victims, torture them until they confess to some preconceived position ( in the US they do waterboarding!).
In this strategy, one picks countries that are likely to fit a preconceived narrative, then go ahead and pick the numbers that will sit well with the narrative, and quickly conclude a "thesis". I call this an attitude in search of justification; and it is not science.
The ethical way of going about it is to gather as much evidence as possible - as Enock tries to do given space limitation in a newspaper Op-Ed - and carefully follow it in whichever direction it takes you.
That is what economist Paul Collier does in The Bottom Billion (if one is not patient to read the book, the New York Times published a good review of the same). Recall that one of the four traps that Collier discusses is one of governance; and in there is the corruption monster!
That is what Daron Acemoğlu and James A. Robinson do in "Why Nations Fail: The Origins of Power, Prosperity, and Poverty" ( if one is not patient to read the book, here  is a very comprehensive review of the same).
I can go on and on, but the bottom line is: bad ideas such as those that Mr Mwenda is peddling in his argument about corruption and growth need to be ruthlessly repudiated.  


      

Andrew Mwenda a Dunning-Kruger Effect Victim

Sometimes the media is careless. This is especially on account of being sympathetic to their own or somebody perceived to be their own. I don't know about you, but I do not consider Andrew Mwenda to be a journalist; and I know for a fact that he is not an economist.

I think Mr. Mwenda has careless opinions, especially on matters economics. Take for instance his latest outburst that there is no relationship between corruption and economic growth.

It is easy to see where the problem is. Because Mr. Mwenda is lazy, he doesn't appreciate the fact that an economy's growth function does not have a single variable. I guess his point is that if you run a regression of economic growth as the dependent variable (the one to be determined) and corruption - whichever way you measure it - as the independent variable (the one determining), you will find no relationship.

In reality, the growth of an economy has many determinants. Numerous studies that I have seen where corruption is one of the explanatory variables find that it (i.e corruption) is a major contributor in a negative sense to the economy's performance. See for instance here, and here purely for illustration. 

But trust Mr. Mwenda - neither a journalist nor an economist - to let facts and logic interfere with an opportunity to sound profound and draw attention to himself!

I think I know where the problem is. Mr. Mwenda suffers from the so-called Dunning-Kruger effect. This is basically a cognitive bias where a quack suffers from some self-perception of having a much higher intellectual ability. The converse of this is where highly skilled individuals underestimate their competencies and in the process assume that what is obvious to them is obvious to others.

 It is therefore bizarre that the Daily Monitor refers to Mr. Mwenda as a "veteran" journalist. As far as I can tell, journalists intermediate news and information; they are not a source of news. In this case Mr. Mwenda has company in the Daily Monitor when it comes to laziness. I see no journalist, leave alone veteran; instead I see a careless pseudo-pundit. 

The Shilling in a Crisis? What Crisis?

Punditry and pseudo punditry have been getting a lot of acreage in the print media, and lots of air time on TV and Radio (of course being hosted by DJs and not any serious economics correspondents) telling us how our currency is in a crisis.
In today's Business Daily, I argue that all that is nonsense. While I think my case is compelling, I am not sure whether people will let logic and evidence persuade them away from their preconceptions and misconception on this subject.

Greece, oh Greece

The East African thinks I have a valuable opinion on matters international economics (or is it politics?).  And I oblige!

The Pursuit of Sexy Postures through Taking Leave of the Basics

The Daily Nation (9th June 2015) - Smart Company - has a sexy story on how banks are cartel-like and how they are staring at trouble from the competition watchdog - thus the Competition Authority zeroes in. This comes a day after I published a commentary in its sister publication, the Business Daily, where I argued based on a study that the banking industry is characterised strong competitive attributes. Either the Daily Nation knows something about competition generally and in the banking industry specifically than I do,  or we define a cartel differently.
In economics, a cartel is an agreement between competing firms to control prices or exclude entry of a new competitor in a market. It is a formal organization of sellers or buyers that agree to fix selling prices, purchase prices, or reduce production using a variety of tactics. If you read my piece, you will see where I am coming from where the inference is the exact opposite of what the Daily Nation story seems to  imply. But that is economics. I do not know how a cartel is defined in journalism.
When the Central Bank of Kenya recently published the margin that each bank was charging above the common benchmark (so-called Kenya Banks Reference Rate), the story was about "which banks to avoid when seeking a loan". The Daily Nation's counsel this time around was based on the wide pricing differential amongst banks. Now that the leading daily is flogging the cartel story, the message is that in a short one week banks have swung from charging disparate prices for credit to fixing them.
I guess basics do not matter if the objective is for the story to be sexy and draw emotions. That is why this seems to be the Nation Media Group editorial policy - official or otherwise. Evidence to this effect is overwhelming, at least to me; and I have made illustrations before of the same.
To demonstrate that this is a common occurrence, I will pick another story in the today's Business Daily. First, some basics (I do not what to take anything for granted:

• In the credit market, the principal is the amount borrowed/lent;
• Interest is the price paid/earned from the principal;
• Therefore interest does not determine the principal; instead the need and ability (what in our tribe we call effective demand) determines the principal.

So when the Business Daily tells you that the average size of mortgages has increased to Sh7.5 million, making it difficult for a majority of Kenyans to own homes financed by commercial  banks, and this is arising from high interest rates (even among other factors), then know that somebody is being lazy. But hey, a daily newspaper has a lifespan of just a  few hours and you have forgotten about its contents until the following day!  Right? Right.           

I Thought so Too!

I thought that Prof. Njuguna Ndung'u was a successful governor of the Central Bank of Kenya - and here I haven't ventured into his capability as a people manager because I am not privy to how he did that. My assessment  is based on my assessment of policy. Some other guys agree.

The Thin Line Between Confusing and Being Confused

Sometime last year I wondered whether there are "Chinese Walls" that separate the editorial teams of the Daily Nation and the sister (or its brother) publication, the Business Daily. Whenever they are confronted with a business/economics information the two tend to see things differently, the latter often getting it right and the former completely missing the point.
Today was not any different. After the release of the Economic Survey 2014 by the Kenya National Bureau of Statistics (KNBS) that confirmed what we have known all along that the economy's performance has not been stellar (real growth a 5.3 percent for 2014 represented a decline from the previous year's 5.7 percent), the Daily Nation's headline screamed: Bad year for the economy but more jobs created. This is as confusing as it is confused.
Let me start with the confusing bit. The Daily Nation wants its readership to imagine that real growth is not important for job creation. Indeed it may be creating an impression that the causality runs the opposite way - declining growth leading to more jobs. That leads to the confusion that I see in there. May be somebody was trying to look for a positive angle where none exists.
Some of us believe that if something is black, simply call it black. But I know in journalism schools, they have what they call looking for balance. That is why if the Daily Nation was to conduct an interview about the shape of a chicken egg, and one egg-head says it is square and the rest of the respondents say it is oval, the headline will most like be: Opinion differ on the shape of a chicken egg. Nobody will say that some dunderhead thinks that it is square while it truly is oval.
The  Business Daily, using the same KNBS Economic Survey 2014 gets it right. It reports that  "Growth slowdown, generates formal sector jobs". In other words, the Business Daily cared to bring out the fact that it is not about numbers; it is about the quality of jobs.
If I were the Economics Editor for the Nation Media Group - they don't have one; perhaps they do not need one! - I could have steered the story towards analysing the extent to which the economy's growth is far from the potential (what in our tribe we call full employment). That way we are able to see the difference between cyclical things (temporary) and structural things (permanent), This will lead us to determining whether the jobs that Daily Nation seems to be celebrating are those that were lost during the downturn and are now being regained - in which case it is not job creation.
Oh, I unfairly expect too much out of the Daily Nation's economics reporting. I forget that they are busy trying to sell a newspaper!         

Cockroach Ideas: The Kenyan Version as Epitomised by Joe Keiyah

Economics Nobel Laureate Paul Krugman has an interesting characterisation of bad ideas. He says they are like cockroaches in the sense that "no matter how many times you flush them down the toilet, they keep coming back" . One such idea is the view that the Central Bank of Kenya (CBK) is better served by having a chairman who is  not the governor.
My views on this are clear: that is a recipe for confusion in policy signalling; and the role of the chairman - as envisaged - is not similar to that in other very few jurisdictions where the two offices are separate.
While I thought I have argued my case successfully, and even those who were thinking otherwise are on my side, the same crazy thinking seems to be getting back.
This time round, the peddler of this argument is Joe Kieyah of KIPPRA. In a commentary titled "Why the CBK needs board chair, governor", all that Joe does is everything but explain "why". Instead he goes ahead to tell the rest of the world how he doesn't understand the role of monetary policy.
To other non-suspecting Joes, this particular Joe argues that "unlike the CBK governor who enjoys security of tenure, the chair will be a presidential appointee, answerable to the citizens through the executive arm of government. Such accountability will ensure that monetary policy will take cognisance of social policy, which has been conspicuously missing". This is lazy thinking for two reasons:
First, when one reads my paper (third link in this post), one will see that the chairman of CBK as envisaged does not have accountability to the public; but the governor - to the extent that he/she chairs the monetary policy committee (one of the aspects where the chairman does not provide "oversight" - is answerable to a parliamentary committee (and if such committee so requires, the entire parliament); this is close to the practice in the US. This means that Joe is too busy to read carefully on the issue he is commenting about.
Second, the link between monetary policy and social policy is a clandestine way of seeking to politicise the CBK and formalise monetary policy activism. On this, Joe is consistent in peddling the wrong idea; this he did in a commentary in February 2015. The same day this commentary was published, Joe and I were panellists in a forum hosted by the CFA Society East Africa (See picture). In this forum he explicitly argued for the CBK to in some instances tolerate high inflation if that could lead to higher GDP growth. Of course that is a nonsensical argument given the knowledge we have on the link between stability and sustainable growth (see my essay reflecting on the legacy of Prof. Njuguna Ngungú as CBK Governor).

I certainly do not enjoy doing this, but it sometimes becomes compelling to ask of a Prof. to do some homework. So I will ask of Joe to:

• One, carefully study the governance of the Bank of England to be able to see that the role of the chairman of the court (yes not broad) of directors is not the same as what the chair of the CBK is meant to do.
• Two,carefully study the governance of the Federal Reserve System of the US to be able to appreciate that the chair of the Board of Governors is the head/CEO of the Fed just as the CBK governor is the CEO.

If Joe is not brave enough to do the homework, then he will have to carry the tag of being a peddler of cockroach ideas.

The Legacy Thing

I have a piece in this week's The East African that reflects on the legacy of Prof. Njuguna Ndung'u as governor of Central Bank of Kenya. When the invitation to do the piece came through I was categorical to the editor that I will steer clear of any intrigues at the Central Bank Kenya and focus on monetary policy.
I had to do this because I was mad at the pedestrian evaluation the former governor was getting from people that the media thinks are knowledgeable about economic policy generally and monetary policy specifically.
One such "expert" is Joe Donde - yes, you got me right; the "hero" who came up with a legislative proposal to regulate interest rates.
Hon. Donde, as his villagers would call him, summed Prof. Ndung'u's legacy as characterised by total failure. He argues that that when Prof. Ndung'u took over the corner office at the central bank, the Kenya shilling was exchanging at KES 67 per USD and when he left it was exchanging at KES 92 per USD.
Clearly Donde doesn't know that there is a difference between real exchange rate and  nominal exchange rate. Because if he did, he could noticed that over that period, the real effective exchangs rate appreciated by about 30 percent - meaning therefore that the economy lost competitiveness in the international markets. In such a case, the correction had to be the nominal depreciation.
And Donde applied to be Chairman of the Central Bank of Kenya's board of directors, and didn't make it to the short-list!

Celebrating Mediocrity

We live in a country where mediocrity is glorified. The gullible media is at the forefront in perpetuating this culture. That is why for all his many evident weaknesses, nobody saw through Mr. Tutus Naikuni's mediocre leadership and questioned his style and strategy for all the years he was the helm of Kenya Airways.
Instead, all we saw was media personalities - actually our pseudo-celebs who media owners have employed so as to attract "customers" - simply resorting to the "great-guy-tell-us-about-your-greatness" demeanour.
Even as he was one foot out, all we are told is that he successfully turned the airline around. Really?  If so, why is the airline broke? Poor Mbuvi Ngunze! I wonder whether they will cut him some slack or they will hang him for some other guy's incompetence.

Central Bank Independence and Johny-come-lately

In April 2014, I made a strong argument on why the Central Bank of Kenya's policy signalling should not be subject to confusion that could arise if you have some political appointee as board Chairman who is not the Governor. This was after I carefully scrutinised from an economist's viewpoint the provisions of the draft CBK Bill that was (is?) meant to overhaul and modernise the central bank.
The media at that time was only willing to listen to self-made "corporate governance experts" such as Carol Musyoka who certainly do not seem to be appreciating the unique nature of a central bank and therefore imagine that its structure - just like that if an ordinary corporate such as a bakery  - should have a chairman who is not the CEO.
All or a sudden the media has seen the light (see here). This is welcome, however late it comes!

Uchumi and How the Dog Ate My Homework: A Sequel

Recently, I wrote that the media - particularly the segment that pretends to have a business bias meant to imply specialisation - is so gullible to the extent of trying to link any problem (be it structural or dubious strategy of an enterprise) to high cost of credit.
Before my ink even dries, I see that Uchumi Supermarket Uganda's food segment has been closed because of poor hygienic conditions; yes, you got me right: poor hygienic standards. I am waiting for some "analyst" to argue that Uchumi's food segment is dirty because of high lending rates!

Oil Prices: The Inevitable Bounce Back?

My recent essay on oil prices relied largely on the economics, but insinuated - if only indirectly through the financial markets' trading of oil-linked instruments - on the role of geopolitics. The Financial Times has an interesting piece that solely argues the geopolitics case, highlighting the dominant role of Saudi Arabia in this 'saga'. We however converge on the fact the the oil prices could be on the rise. I am already seeing evidence to that effect (see Figure).

Pseudo Analysis Part 2: Banks, Idle Capital and the Game of Calvinball

This is my favourite, for it demonstrates the need for financial literacy for those seeking to do reporting that has a technical bearing. The Business Daily tells all that what to hear that banks are now drowning in capital that they don't know how and where to deploy.
This is a good one coming from a publication that devotes lots of staff resources giving an impression that banks have struggled to meet the regulator's capital requirements.
Typically, a sucessful resort to capital markets either to issue a note or seek additional equity is a mark of financial health given the fact that both forms of resource mobilisation are unsecured; therefore the capital markets regulator must be assured of the financial soundness of the issuer.
But as I have pointed out before, the Business Daily reporting has no time for such niceties - any resort to the market is a signal of desperation, they often implicitly argue. The story now suddenly switches to one where bans are portrayed stranded with idle capital.
This is a pefect example of playing a game called Calvinball - the imaginative game where the rules are not known upfront, so they keep changing as the game goes on.
I am really having fun on this subject! Not because somebody is making sense, but because the Business Daily is falling into the typical media temptation of choosing what to see in any situation.

Pseudo Analysis Part 1: Uchumi and How the Dog Ate My Homework!

I expect the Business Daily to be a bit more curious than to take what it is told. Am I expecting too much? Well, may be yes.
Take the case of a recent story in its pages regarding Uchumi, the struggling supermarket chain. In that story, all of Uchumi's problems are occaioned by expensive bank borrowing. That will be okay of it were true.
I suspect that even the Business Daily knows that that is not true; but I guess the argument will be that the "ingenuous" boss said so - after-all with a honorary doctorate in "turn-around strategy", he must be knowing stuff!
Some sense of history may help here. When Uchumi was literally run down by some individuals - some of whom the gullible media celebrates as serious entrepreneurs - the government and banks were forced to take painful decisions to ensure that the company does not go under.
A few years later, its CEO tells the media that Uchumi's main problem is that its rights issue was delayed 15 months. Over that time, it had to go for expensive working capital from banks.
One could expect the Business Daily to ask a simple question: why was the rights issue delayed? But again I expect too much! Why ask while the boss has already said that - like the kid whose account for not completing home assignment was the "the dog ate my home work - it is the banks.
The delay in the rights issue most likely had to do with financial status being in a bad state. But still Business Daily and the like wants banks to lend to this company at competitive terms.
The last I checked, Uchumi was still listed in the Nairobi Securities Exchange, meaning that it is legally obliged to publish its financial statements and have its Annual Report at the mart. One needs to have even a casual look at the financial statements to see that cost of finance is not the core problem and therefore could not have been the cause of its woes. I expect that one curious analyst to be the Business Daily! But, again I expect too much because in so doing the sexy caption - 'Uchumi loss reveals the price of  expensive bank loans' - could be ruined by any analysis.
Meanwhile, nobody is questioning Uchumi's strategy! Great stuff, isn't it?

A Plunge before A Spike

The global oil prices have been on a plunge. That has implications to both producers and consumers of the stuff. As consumers, we are behaving as if, the plummeting will be for ever. But then we have been in such a state before. As I argue in today's Business Daily, the prices may go up as fast as they came down. So let's enjoy the moment while it lasts!

Never Letting Facts Ruin a Good Story: Business Daily Edition

Whenever the Central Bank of Kenya (CBK) published the quarterly Credit Officer Survey, the expectations is that it is meant to inform in totality the dynamics around the banks core asset that credit is. Trust the business media largely, and those that appear to have a hypothesis to prove that the banking industry will do everything to make 'unjustifiably high profit' even if at the expense of dragging the economy to hell.
I can understand if it is a pedestrian publication printed on an A4 paper. But hey, these Mickey Mouse publications have competition from respectable quarters such as the Business Daily.
I know that there is a newspaper to sell, so the trick is: make it as sexy as possible. So the core message that the Business Daily gets from the latest Credit Officer Survey for the period January - December 2014 is that 'Banks defy new loan pricing tool to rake in Sh141 billion profit'.
The instructive words in this angle of pseudo analysis are: defy - meaning refuse to comply with the regulator's requirement; profit - which all other businesses but banks are supposed to make.
It doesn't matter that the same Business Daily indicates that the profit is as a result of fast growth in credit to the real economy, whose rate of growth for the period under discussion is the fastest in the past four years.
It doesn't matter either that the same edition Business Daily has a story to the effect that Kenyan banks have tough lending conditions, an attribute that speaks to the search for stability in the financial system.
Here is a couple of other facts in the Credit Officer Survey that the CBK prominently puts in the foreword, but with the Business Daily ignores:

• One, deposits grew by almost 18 percent from Shs1.98 trillion to Shs2.33 trillion. This means that banks are furthering the inter-mediation mandate effectively.
• Two, the total shareholders' funds grew by 22.5 percent from Shs431 billion to Shs530.09 billion. This, by the way is faster than the 13.47 percent growth in profit for the corresponding period. This means that investors in the banking industry are staking more resources and therefore the profit that is being portrayed as 'super' may end up being modest is one was to wear an objective hat.
• Three, the growth of interest expenses on deposits by 24.03 percent is faster than the growth in interest income that grew by 16.29 percent. This means that the portrayal of banks as profiteering from the misery of depositors is simply a figment of prejudiced imagination.

 But then, these are mere facts. Whom in the Business Daily will let facts ruin a good story? Well, nobody I presume.

The Guy Who Went to the Wrong School

David Ndii argues in an interesting essay in today's Saturday Nation that for a devolved gorvenance system to yield meaningful development, there has to be accountability; and I fully agree.
Jason Lakin argues in a lazily written essay in last weeks issue of The East African that what matters is auditing - in essence a purely mechanical exercise that audits usually are; and I fully disagree.
David's argument is the closest I have seen in independent replication of the thoughts of William Easterly in his 2014 book The Tirany of Experts: Economists, Dictators and the forgotten Rights of the Poor whose thesis I buy.
Jason must surely have gone to the wrong school!

Think Tank? Well, No; may be More Tank than Think!

Kwame Owino  argues in a recent Op-Ed in the Daily Nation that he doesn't think "issuing economic forecast is good and honest professional practice". By this measure, Mr. Owino fails his own test when he goes a head and issues a "forecast" to Business Daily, a sister publication of the Daily Nation.
Mr. Owino is the Chief Executive Officer of the Institute of Economic Affairs (IEA-Kenya), a Nairobi-based Public Policy Think Tank. That is more the reason why (a) his views on the essense economic forecasting and why he and his colleagues at the Think Tank are reluctant to be forthcoming with their projections (b) his eventual commiting to a forecast represent a careless thought process.
I agree with Mr. Owino that economic forecasting is not fortune-telling. But that is all I agree about insofar as his core thesis in the Daily Nation piece is concerned.Any forecast, e.g. the IMF's World Economic Outlook (WEO), is based on a model. The assumptions of such model are clearly specificed and such models are usually subjected to senstivity tests to ensure that they remain credible.
In the case of WEO, the projections are done twice a year - April and Actober; the reason for that is that the assumptions are reviewed and validated. Therefore these models are not an act of magic, and nobody presents them as such.
Closer home, any serious policy is based on the rigour of macro models. I am not sure whether Mr. Owino knows that the Central Bank of Kenya (CBK) deploys a macro model to enable a forecast. The so-called Taylor-rule, which is the basis for coming up with the policy rate (the Central Bank Rate), necessiates that the CBK projects both economic growth and inflation.
Indeed the Taylo-rule is based on the gap between actual GDP growth and potential growth, and actual inflation and the target. I actually wonder whether at IEA-Kenya, there is an understanding that monetary policy is not about actual inflation but inflation expectations - which means that policy is foreward looking and thus necessiates some forecasting.
Even fiscal policy is based on some projection - we may have a discussion as to whether we agree on the forecast, but there has to be one. If at all Mr. Owino knows that the KIPPRA-Treasury macro model is a useful tool is not known to me; I however have my doubts whether if he is aware of such model, he knows the underlying mechanics.
On this account alone, I would have my doubts on the ability to rigorously critique any outlook based on some well thought out model. If  such abililty was evident, then statements like "if an individual firm had a model or one professional capable of knowing about the performance of Kenya’s economy for three years in advance, that knowledge would be so valuable for profit generation that it would not be provided casually" will have no room in the argument.
Surely Mr. Owino should know that the further the period from the time of projection, the higher the likelihood of the outlook departing from the actual outcome. That is why, the IMF - while giving a five year outlook  in the WEO is reviewed twice a year.
Then there is the "small" matter of intellectual honesty. The true measure of such honesty is the consistency in the thought process. Mr. Owino makes one interesting assertion that :

"For instance, the IEA-Kenya has, in the last four days, received nearly a half-dozen requests for a formal declaration of interest rates, GDP growth rates and the exchange rate for Kenya and regional countries for 2015, from media houses and other professionals. Most of these very polite and diligent enquirers were surprised that while we think we are very capable and understand selected countries and Kenya very well, we do not think that issuing economic forecasts is good and honest professional practice."

I think that the capability that Mr. Owino is talking about is all in his mind. As an economist, I will simply ask him one question if he has to demonstrate such capacity: where is the model?

But then, Mr. Owino is not done. He asserts thus:

"What the gush of business and economic forecasts tells you is that professional economists and business advisors have forgotten the three golden words that are the mark of wisdom: I don't know."

So where does Mr. Owino get the number 4% - 5% outlook that he gives the Business Daily as his forecast for 2015 if his answer to any querry on economic forecast is: "I don't know"?

I think I know where; it is through guess work! And Mr. Owino signs off the Daily Nation  Op-Ed by the bold indication that he is the CEO of the IEA-Kenya, a Think Tank!
Such comedy makes me agree with Prof. Jagdish Bhagwati - one of my favourite economists - when he characterises such entities as being more about Tank than Think.