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.
Friday, 27 November 2015
Wednesday, 25 November 2015
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.
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.
Wednesday, 18 November 2015
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 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.
Monday, 16 November 2015
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!
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!
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