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Tuesday, December 02, 2008

Kenya - Voodoo Economics - Disaster

Kenya's economy is headed for a collapse unless the politicians get out of trying to run the economy!

Price Controls: These are always short-term and hardly work except under rare circumstances.

Food Prices: The farmers (producers) have little incentive to produce unless they get a fair price. Since the GoK restricts the purchase price of maize to KES 1,750 per bag, the farmers will stop producing.

Fuel Prices: In the case of remote locations, many firms will withdraw leaving the market open to black-market gouging. Since the GoK refuses to refund VAT among other duties/levies on time to the Oil Marketers, the costs will either be passed on to the consumers or the Oil Marketers will close up shop.

Subsidies: These are politically popular but ultimately hurt the consumers. How?

- Taxes will be raised (except for the MPs) to fund the extra spending
- Deficit will grow which means that GoK has to raise taxes or take on additional debt.
- Interest rates will rise to match the deficit (gov't borrowing) which crowds out the private sector.
- Corruption will increase as politically-connected firms/persons will "eat" the subsidies e.g. firm/person buys subsidized maize from NCPB & re-sells it back to NCPB at higher prices (a feedback loop).
- Subsidies create inefficiencies that are very difficult to root out.
- Kenya shilling will depreciate rapidly which will create imported inflation since Kenya is a net importer. Subsidies create an unfair playing field.
- Creating a larger gov't bureaucracy (bureaukrazy) will create additional avenues for corruption & inefficiencies.

Inflation: Folks will buy forex, gold and property (read: Why I don't invest in property in African countries) to hedge against inflation BUT this starves the REAL economy of investable funds e.g. investments in factories, farms, etc.

Remittances: The diasporan 'investing' cash will disappear as will any FDI if GoK can't guarantee a stable economic environment. There are always opportunities for a few rent-seekers but the economy as a whole will suffer.

Brain Drain: Kenya will experience a brain drain to other African countries, Middle East & of course... Europe & the USA even with the increasing level of unemployment there. Why? These economies still believe (for now) in keeping away from nationalization.

I have discussed in previous blog entries what measures need to be taken to right the economy. They may not be popular but need to be implemented. If Kenya loses its private sector, then Kenya is in huge trouble.
- When banks withdraw lending to businesses since its more profitable (& less risky) to invest in Treasury Bills & Bonds.
- When most Kenyan businesses become traders not manufacturers/producers.
- When Kenyan businesses compete against government subsidized businesses (e.g. Oil Marketers compete against a subsidized NOCK).
- When farmers decide its more lucrative NOT to farm since there are gov't handouts.
- Kenya has almost zero 'natural resources' that can produce income without much work e.g. oil. This means we need to work harder & smarter.

Kenya was unfortunate to have presidents like the jomo 'the land grabber' kenyatta (or as he is better known... crooked wa ngengi), dan 'steal all I see' moi and myriad other politicians whose sole interest was their own enrichment. Singapore had a brilliant benevolent dictator (Lee Kuan Yew) who transformed Singapore into a bastion of prosperity & stability in S.E. Asia.

Most of the current political class needs to be PURGED. They are thieves, idiots & greedy bastards. Most have been implicated in scams or have stolen fortunes. How do we expect them to lead us in these trying times?

Kenyans are also to blame. They vote for tribes NOT character. They have the world's highest population growth rate. They sway to the winds created as the politicians blow hot air. They want freebies without considering the after-effects.

15 comments:

PKW said...

CT; in what markets do you invest in property? If as you say, Kenya's population growth rate is the highest in the world (??), the most basic thing all these people will need are houses to live in. Me thinks this is the place to invest at least in real estate.

coldtusker said...

High pop growth without corresponding economic growth leads to poor property rights.

Kenya has had 2008 RV, 1997 Kilifi, etc.

Others are 1972 Uganda, 2007 Darfur, pre-GOSS S.Sudan, Somalia, 1960s Tanzania (nationalization), 1994 Rwanda, etc.

Invest in Africa BUT be wary of property in MOST African countries.

coldtusker said...

Property Investments: Make them where you live for the best returns BUT for 'safety' I think the 1st world (with strong property rights) is the best.

I am NOT talking of Real Estate pricing... or Returns... but of SAFETY from expropriation.

PKW said...

Gotcha-on expropriation.
Most people agree that where the the risk is high the corresponding returns are high.I guess it must be why even the first worlders are putting their money here e.g. Knight Frank. Expropriation just one risk to factor in. For instance, I wouldn't put my money where Mr. MP might wake up one day and tell his constituents not to pay residential and/or commercial property rent.

What sources back your 'Kenya has the highest population growth rate in the world'? I thought that was back in '90, or thereabouts, at 4.1%?

MainaT said...

This is latest idea is a bandage that won't help us. Government needs to get its act together or get out of the following industries:
-Agriculture. NCB needs compe urgently as does
-Electricity distribution and generation: KPLC has issues. We need to urgently encourage utilisation of biggest natural resource the sun so we can use the little HEP for manufacturing purposes.

coldtusker said...

PKW: Would one of the highest suffice?

No census for over 10 years... thus no accurate numbers but the over-crowding in the cities is an indicator.

MainaT: It's silly but what to do?

coldtusker said...

http://en.wikipedia.org/wiki/List_of_countries_by_population_growth_rate

How do you post a link in comments?

Natural said...

Fertility rate for Kenya is at http://www.prb.org/pdf08/08WPDS_Eng.pdf with WW comparisons.

Impact on the country is in an Economist article titlesd "Opportunity Knocks".

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