THINK KENYA AS YOU NEGOTIATE TRADE DEAL WITH US

By Oduor Ong'wen

In the first week of February 2020, President Uhuru Kenyatta and Prime Minister Emeritus Raila Odinga attended a widely-publicized Prayer Breakfast in Washington, D.C. On the sidelines of this event, President Kenyatta held a bilateral meeting with his US counterpart President Donald Trump. The occasion was used to officially initiate a free trade agreement (FTA) negotiation between the two countries. On March 23, 2020, the Trump administration, through the Office of US Trade Representative, notified the Congress of negotiating objectives for the reciprocal bilateral trade arrangement. On June 22, 2020, the Kenyan Government, through the Negotiating Principles, Objectives and Scope released by the Ministry of Industrialization, Trade and Enterprise Development articulated what Kenya aspires to as the endgame of these negotiations. 

The negotiations proper are yet to commence, but there are already many red flags signaling pitfalls ahead. The overall concern is that whichever way we look at it, this agreement, when concluded, will undermine efforts at regional integration at driving seat of which Kenya has been. As a customs union, the East African Community of which we are the largest economy, has a Common External Tariff (CET) regime. This means whatever goods and services enter on a Most Favoured Nation (MFN) or other terms will be deemed to have entered the markets of the other five Partner States, yet these countries – all of them LDCs – are not involved in the negotiations. It also doesn’t sit well with the African Continental Free Trade Area (AfCFTA) to which we signed last year. There are other key concerns as below.

First, the motivation for Kenya in these negotiations seems to be solely based on securing market access to the United States of America beyond 2025 when the Africa Growth and Opportunity Act (AGOA) lapses. “We are trying to figure out which is going to be the path forward for our arrangement with the US post-AGOA while the Trump administration was seeking to “re-engineer its relationship with the continent,” said Macharia Kamau, the Principal Secretary for Foreign Affairs. Since AGOA was a duty free, quota free market access for qualifying goods, one is driven to ask how a reciprocal arrangement builds on this regime.

Second, while United States Trade Representative Robert Lighthizer hailed the “enormous potential” for the two sides to deepen their economic and commercial ties, the extent to which any eventual deal would benefit Kenya economically is under question. It is worth noting that while USTR has outlined the negotiating objective to its legislature, there is no indication that Kenya’s Parliament is seized of these negotiations. 

According to the US negotiating objectives, the FTA between the two countries will bring about enhanced harmonization of rules and policies between the two unequal countries. It is a widely accepted maxim that treating two unequal partners equally amounts to injustice. Yet, this is what the US seeks to do as shall shortly become manifest. Among the list of negotiating objectives set out by the US, the trade in goods will include objectives such as ensuring “fair, balanced, and reciprocal trade with Kenya”, and securing “comprehensive duty-free market access for US industrial goods.”

Third, the FTA will compel Kenya to harmonize its trade policies and trade-related laws with those of the US in several existing areas as well as new areas such as labour, environment, investments, competition policy, and government procurement. The latter three, as well as trade facilitation, are the “Singapore Issues” that Kenya led the rest of developing countries in rejecting at the Fifth World Trade Organization (WTO) Ministerial Conference in Cancun, Mexico, in September 2003. Disappointed and infuriated, the then USTR promised to achieve these objectives through bilateral deals. Is that promise coming to pass?

Fourth, the proposed FTA also calls for strengthening “disciplines to address non-tariff barriers that constrain US exports” as well as expanding “market access for re-manufactured goods exports by ensuring that they are not classified as used goods that are restricted or banned.” This is extremely dangerous for a country that has ambitions to industrialise. In the “Big Four” agenda, Kenya has focused on manufacturing, with a goal of raising the manufacturing sector’s share of GDP to 15 percent. Disciplining the importation of used goods and imposition of tariff and non-tariff barriers are some of the administrative and policy interventions that the country may resort to in order to incentivize its local manufactures. In its negotiating objectives, the US wants to close for good this policy space. I see nothing in Kenya’s negotiating principles and objectives that would address this potential pitfall.

Fifth, the Kenya-US FTA, according to the USTR Notice of Negotiating Objectives, also aims to secure “duty-free access for US textile and apparel products and seek to improve competitive opportunities for exports of US textile and apparel products while taking into account US import sensitivities.” Kenya’s textile and apparel sector has the potential to play a key role in anchoring the country’s deeper movement into middle income status and in serving as a source of gainful employment for its fast growing, young population. As a manufactured good, it offers opportunities for increased value capture and streamlined trade logistics, and for the building of skills and experience from the factory floor to management level. Based on these foundations, it therefore serves as a potential gateway to other manufactured goods, offering opportunities for Kenya to capture an increasing share of global trade and to advance economic diversification. With AGOA, Kenya’s apparel exports to the US increased from US$8.5 million (KSh 850 million) in 2000 to US$332 million (KSh 3.32 billion) in 2014. Almost 40,000 workers are employed in the Export Processing Zones (EPZ). While we do not advocate closing the doors on the US textile and apparel, duty free access would undermine the potential of this sub sector, which could be one of Kenya’s “quick win” areas as far our industrialisation drive is concerned.  

Further, the US wants to secure “comprehensive market access for US agricultural goods in Kenya by reducing or eliminating tariffs” and providing “reasonable adjustment periods for US import-sensitive agricultural products, engaging in close consultation with Congress on such products before initiating tariff reduction negotiations.” Kenya will have to eliminate “practices that unfairly decrease US market access opportunities or distort agricultural markets to the detriment of the United States, including: non-tariff barriers that discriminate against US agricultural goods, and restrictive rules in the administration of tariff rate quotas.” This is the clincher. In her interest, the US wants a comprehensive market access while at the same time protecting her import sensitive farm products, thus limiting market access for Kenya’s agricultural products. Kenya’s negotiating principles and objectives document is manifestly silent on both the matter of governance of imports of agricultural products and access to the US market.

According to the US negotiating objectives, in the area of sanitary and phytosanitary measures (SPS), Washington wants to build upon WTO rights and obligations, including with respect to science-based measures, good regulatory practices, import checks, equivalence, regionalization, certification, and risk analysis, making clear that each Party can set for itself the level of protection it believes to be appropriate to protect food safety and plant and animal health in a manner consistent with its international obligations.”Other SPS negotiating objectives for the US in the FTA include obtaining “commitment that Kenya will not foreclose export opportunities to the United States with respect to third-country export markets, including by requiring third countries to align with non-science based restrictions and requirements or to adopt SPS measures that are not based on ascertainable risk.” In the Kenya’s negotiating objectives, the SPS provisions will be negotiated on the basis of EAC-US Cooperation agreement. In the “Cooperation Agreement Among the Partner States of the East African Community and the United States of America on Trade Facilitation, Sanitary and Phytosanitary Measures, and Technical Barriers to Trade,” the obligation of the US is limited to capacity building, including training, information exchange and cooperation between respective authorities. There are no provisions about the US foreclosing export opportunities for EAC Partner States, including third countries (remember the US has NAFTA, for instance).

The US wants to ensure “high standards for implementation of WTO agreements involving trade facilitation and customs valuation” in the proposed FTA. Kenya is required to ensure that “all customs laws, regulations, and procedures are published on the Internet as well as designating points of contact for questions from traders”. The June 22 proposed principles and objectives, like with SPS measures, defers to the EAC-US cooperation agreement. Again here it applies to the SPS provisions mutatis mutandis. As already observed herein before, this is part of the Singapore Issues that Kenya and other developing countries fiercely resisted in the WTO. This concern similarly applies to Technical Barriers to Trade (TBT) negotiations where Kenya is to implement “decisions and recommendations adopted by the WTO TBT committee that apply to standards, conformity assessment, transparency and other areas.” If we are to negotiate on behalf of promoting our local productive capacity, safety and citizens’ wellbeing, Kenya needs to have a strong position on this. Further, the US intends to “obtain commitments that Kenya will not foreclose export opportunities to the United States with respect to third-country export markets, including by requiring third countries to withdraw or limit the use of any relevant standard, guide, or recommendation developed in accordance with the TBT Committee Decision.” Where is reciprocity in Kenya’s negotiating principles and objectives?

The USTR also listed several other negotiating objectives such as “ensuring that procedures facilitate e-commerce shipments and a simplified process for the return of domestic origin goods to meet the challenges disproportionately impacting small business e-commerce.” Moreover, Kenya will be required to “provide for automation of import, export, and transit processes, including through supply chain integration; reduced import, export, and transit forms, documents, and formalities; enhanced harmonization of customs data requirements; and advance rulings regarding the treatment that will be provided to a good at the time of importation.”

On trade in services, the US intends to “secure commitments from Kenya to provide fair and open conditions for services trade, including through: rules that apply to all services sectors, including rules that prohibit discrimination against foreign services suppliers; restrictions on the number of services suppliers in the market; and requirements that cross-border services suppliers establish a local presence.” Kenya’s position as expressed in the principles, objectives and scope is again fairly modest and likely to give the US a virtual free pass. Ordinarily requirement of the establishment of local presence in Mode 1 (cross-border services supply) is both a capacity building and employment creation issue. The principles and objectives developed by Kenya are silent on Mode 4 services supply (movement of natural persons). It reiterates that the negotiations shall take into consideration Special and Differential Treatment (SDT). Developing countries have had difficulties with SDT as they are normally based on “best endeavor” undertakings. Washington similarly wants to “retain flexibility for US non-conforming measures, including US non-conforming measures for maritime services,” while improving “the transparency and predictability of regulatory procedures in Kenya.”

The US also wants “competitive supply of telecommunications services by facilitating market entry.” In financial services, the US negotiating objectives include expanding “competitive market opportunities for the US financial service suppliers to obtain fairer and more open conditions of financial services trade.” As part of “digital trade in goods and services and cross-border data flows,” the US wants to secure “commitments not to impose customs duties on digital products (e.g., software, music, video, e-books)” and “establish state-of-the-art rules to ensure that Kenya does not impose measures that restrict cross-border data flows and does not require the use or installation of local computing facilities.” In her objects the US avers that Kenya must (my emphasis) agree to establish “rules to prevent governments from mandating the disclosure of computer source code or algorithms.” All these are areas where Kenya has the highest potential for being globally competitive or strategic interest and where state support or other forms of discriminative support may be called for. It is totally absent in Kenya’s negotiating principles and objectives.

While in her negotiating objectives, the US wants to seek “provisions governing intellectual property rights that reflect a standard of protection similar to that found in US law, including, but not limited to, protections related to trademarks, patents, copyright and related rights (including, as appropriate, exceptions and limitations), undisclosed test or other data, and trade secrets.” Kenya’s position is that “the text on intellectual property in the Kenya - USA FTA shall aim to reduce IP-related barriers to trade and investment by promoting economic integration and cooperation in the utilization, protection and enforcement of intellectual property rights. It shall cover other intellectual property areas covered by Convention on Biodiversity, including genetic resources, folklore, traditional knowledge, and benefit sharing.” What we, as a country, seek in covering these disciplines is unclear.

On April 22, 2020, the US Chamber of Commerce made its comprehensive response to the USTR’s March 22 Notice of Objectives. The broad areas addressed are as below:

§  Single Comprehensive Deal: Conclude a single, comprehensive agreement that reflects an outcome on all issues under negotiation, as agreed by the parties, rather than seeking agreement on a subset of issues or pursuing a phased approach. 


§  Trade in Industrial Goods: Eliminate all tariffs on industrial goods traded between the United States and Kenya, include a high-standard chapter on Technical Barriers to Trade (TBT) to address non-tariff barriers, and expand market access for remanufactured goods exports by ensuring that they are not classified as used goods that are restricted or banned. 


§  Trade in Services: Secure high standard rules and open market access commitments to ensure access to Kenya’s services market, including obligations for new services. 


§  Trade in Agricultural Products: Address market access through tariff elimination and by resolving concerns about non-science-based restrictions on agricultural trade with a high- standard chapter on Sanitary and Phytosanitary (SPS) measures. 


§  Protect Intellectual Property: Address intellectual property (IP) rights and enforcement as they relate to patents, copyrights, trademarks, and trade secrets to enhance U.S. and Kenyan leadership in innovative industries. 


§  Protect Investment: Eliminate forced technology transfers, reduce barriers to foreign direct investment by ensuring non-discriminatory treatment, ensure a high standard of 
protection for U.S. investors subject to a high standard investor-state dispute settlement mechanism. 

§  Good Regulatory Practices: Formalize a joint commitment to follow good regulatory 
practices, including sufficient advance notice and comment periods and in-depth 
consultations that include both domestic and foreign stakeholders. 


§  Emerging Technologies: Promote effective regulatory cooperation to address emerging 
technologies and prevent unnecessary regulatory divergence. 


§  Digital Trade: Facilitate a mutual right to transfer and store data across borders for all 
sectors, prohibit data localization requirements, ban customs duties and taxes on electronic transmissions, promote risk-based approaches to cybersecurity, foster cloud use across sectors, ensure non-discriminatory and interoperable frameworks for the protection of personal information, and align any plans to tax digital services with international tax regimes. 


§  Government Procurement: Establish open, fair, transparent, predictable, non- discriminatory, and value-based rules to govern government procurement. 


§  Procedural Fairness for Pharmaceuticals and Medical Devices: Seek standards to ensure that government regulatory reimbursement regimes are transparent, provide procedural fairness, are nondiscriminatory, and provide full market access for U.S. products. 


§  Section 232 Tariffs: Remove expeditiously the U.S. Section 232 tariffs on imports of steel and aluminum from Kenya. 


The US CC document went further to address sector-specific areas including, but not limited to: (i) agriculture and biotechnology (market access). This is a window for the penetration into Kenya of genetically modified foods; (ii) Automobile (compelling Kenya to access the US Federal Motor Vehicle Safety Standards); (iv) customs and trade facilitation; (v) digital trade; (vi) government procurement; (vii) intellectual property; and small and medium enterprises (SMEs).

So far, there is no similar document from the Kenya National Chamber of Commerce and Industry, Kenya Association of Manufacturers (KAM) or Kenya Private Sector Alliance (KEPSA). The members of these organisations as well as Kenyan farmers stand to lose substantially should the US realize its stated objectives, which are supported by their chamber of commerce, and which they are likely to realize.

In conclusion, the Kenya-USA FTA portends a bad deal as our country will have to negotiate in areas where she currently has policy flexibilities; have to undermine the regional integration in both letter and spirit; and reverse the little gains of multilateralism in trade relations. In the undesirable event that we must negotiate this FTA with Washington, our interests would be served best doing so as the EAC. No deal is better than a bad one. Rethink these negotiations.

Nairobi, June 24, 2020

A HERETIC’S VIEW OF KENYA’S ECONOMY POST-COVID-19

By Oduor Ong'wen

It is now five weeks since the announcement of the first positive case of a COVID-19 test. It was always a matter of “when” not “if” we were going to join the growing list of countries with cases of the vicious virus. In a rapid-fire manner, the cases began to rise. Some Kenyans were alarmed. Others adopted a cavalier attitude. The government, earlier condemned for the inept or indifferent pose exhibited as the disease wrecked havoc in lands it considered far away – even passenger arrivals from epicentres like China and Italy – swung into action with a series of protocols and directives. As the Englishmen say, the jury is still out. 

The low numbers so far posted give us some level of comfort and boost our confidence. But the COVID crisis has exposed the vulnerability of our health system.  When the coronavirus pandemic broke out, our country was totally unprepared for it. There were severe shortages of testing kits and healthcare facilities. The first cases had to be tested in South Africa, taking almost a week to post results. Many Kenyans also lack universal entitlement to healthcare. We don’t have a robust social protection system despite that a policy was adopted ten years ago. Social safety nets including basic employment rights and unemployment insurance that could mitigate some of the worst effects of the pandemic’s economic impact have been considered anti-business and as such condemned. All this points to the disarming reality that the pandemic would unleash mutually reinforcing health and economic crises.

COVID-19 pandemic is wracking and humbling every country, economy, society, and social class. In its socioeconomic and political impact alone, COVID-19 has already made history. While I am not deriving any gratification from the fact that the invincible United States of America and mighty Europe are ravaged by the pandemic, COVID-19 has disabused the big powers of the oft peddled notion that Africa is a continent of poverty and disease. The novel coronavirus has shown that pestilence is no respecter of riches and military might. Whether we already recognise or not, the pandemic has reorganised our society socially, culturally and economically. It has the potential for political reorganisation too. As Paul Tiyambe Zeleza observes, “the neo-liberal crusade against 'big government' that had triumphed since the turn of the 1980s, suddenly looked threadbare. And so did the populist zealotry against experts and expertise. The valorisation of the politics of gut feelings masquerading as gifted insight and knowledge, suddenly vanished into puffs of ignoble ignorance that endangered the lives of millions of people.”

Never before in our lifetime has the human race been so vulnerable. We only read in History books that one of the world’s deadliest pandemics was the Great Plague of 1346-1351, which ravaged larges parts of Eurasia and Africa and killed between75 to 200 million people, and wiped out 30 to 60 per cent of the European population. The plague was caused by fleas carried by rats, underscoring humanity’s vulnerability to the lethal power of small and microorganisms, notwithstanding the conceit of its mastery over nature. The current pandemic shows that this remains true despite all the technological advances humanity has made since then. Over a century ago, as World War I came to an end, an influenza epidemic, triggered by a virus transmitted from animals to humans, ravaged the globe. One-third of the world’s population was infected, and it left 50 million people dead. It was the worst pandemic of the 20th century. Now COVID fatalities are more than 2 million and we are still counting.

The public health-induced mitigation measures imposed by the government, the responses of individuals (particularly, in terms of hygiene and self- isolation), downturn in economic activity from Kenya’s major trading and investment partners and the dislocation of global capital markets are some of the immediate economic impacts of coronavirus captured by the health shock. 

But it’s not all gloom. It is from crises of this nature and great wars that countries discover and unleash their latent potential and change the course of history permanently. We can come out of this crisis with a better-organized healthcare and social security system. We can re-engineer our economy in a manner that it better responds to the needs of the Kenyan people – and consequently that will redo the political architecture of our nation. We cannot afford to let this crisis go to waste.

What I propose hereunder as a way of dealing with the post-COVID economy is considered a heresy in neo-liberal economics. Against the coronavirus pandemic, we are at war – nationally and globally. And coming out of a war situation, we have to act in “strange ways” and dare to be us. The rulebook has to be suspended, if not revised altogether. We as a country need to have five interventions in the immediate aftermath of the pandemic.

First, we must address our public healthcare system holistically. Let every county be given a ring-fenced grant of Sh. 2 billion to upgrade the healthcare system including, but not limited to, building or physically upgrading hospitals, health centres and clinics, buying and repairing equipment, stocking the health facilities (some hospitals and dispensaries don’t have even bandages or paracetamol tablets), addressing health workers’ human resource issues (from salaries, work environment to health professional:patient ratio). The pandemic has exposed the vulnerability of countries that had subordinated public healthcare to profit interests like our country and the United States, among others. Let’s learn from the United Kingdom’s National Health Service (NHS) if the Cuban system can infect us with communism.  Sh. 100 billion (Sh. 94 billion to counties and Sh. 6 billion to the national referral facilities) would revolutionise our healthcare system. This must be in addition to – not in place of – the current budgetary allocations. The money to the counties should not be used for any other programmes unrelated to upgrading the healthcare system.

Second, we need to support domestic production. Not less than Sh. 80 billion should be infused in the food production systems. Direct support to producers of staples like maize, wheat, rice, beans, milk etc. would ensure not only that these commodities are readily available but also the producers are backstopped. Sugar production should be included here. The support should include subsidized inputs, extension services, production and marketing infrastructure and provision of the necessary storage and warehousing facilities, among other things. Another Sh. 70 billion should be made available to those in the export crop production that includes, among others, tea, coffee, horticulture and floriculture and pyrethrum

The withdrawal of public services has not led to a florescence of the private sector in rural areas – but a yawning void. Market liberalisation cannot contribute to poverty reduction unless better market linkages have been forged, linkages that not only bring smallholders to the market (and the private sector to smallholders), but that also embody enhanced market power among the poor. The public sector has a critical role to play in this.  Accelerating the process of rural reconstruction (including development of market access), expanding choices, improving access to information, creating conditions for equitable market relations for the poor – all these must be at the very apex of our development and poverty reduction agenda. But the issue is not just markets; it is also assets – and the challenge of securing the rights of the poor to land and water that are at the hearts of their livelihoods.

Third, the State should ensure that the manufacturing sector is producing the goods we consume as a country. In the last thirty years, Kenya has been transformed from a regional industrial hub into a huge supermarket for imported stuff – largely of questionable quality. From paper to furniture, we have turned to importing some products that can be produced here cheaper and in superior quality. The country has the capacity to produce most of what it needs in clothing and apparel, pharmaceutical products, industrial and auto spare parts. Sh. 100 billion stimulus package in the post-corona recovery plan should be able to spur optimal industrial production. The construction sector should also be supported through this window. It is the support for the agricultural, manufacturing and construction sectors that will put most of our people to work. The response to the pandemic – almost instant production of alcohol-based hand sanitisers, face masks, personal protective gear (PPE) and even a prototype of cheap ventilators – have shown that given a conducive environment, Kenyans can produce quality manufactures for both local and regional markets.

In the short to medium-term, the agricultural products aimed at ensuring our food security and manufactured products would need to be cushioned against import surges of similar products. Over the last three decades, protectionism has become a dirty word. Trade liberalisation under the World Trade Organisation (WTO) has elimination of protectionism as its main aim. But contrary to the widely held belief that WTO prohibits protecting vulnerable industries and sectors, it allows restrictive measures in response to well-defined situations like addressing a balance of payment (BOP) challenge or what is known as Safeguard. Countries facing BOP problems, i.e. problems regarding net inflow of foreign exchange or foreign cash reserves are permitted under Article XII of GATT 1994 (for both developed and developing countries) and Article XVIIIB of GATT 1994 (for developing countries only) to take measures such as tariffs beyond bound levels or quantitative restrictions. Another situation that can provoke cushioning a range of products or sectors is called Safeguard. Safeguard measures are resorted to when a product sector of a domestic industry suffers injury or is at a threat of suffering injury from imports. To induce value-addition, the State should impose export duties on primary products – unless it’s in our national interest not to do so.

Fourth, the State should make a total cash grant of Sh 40 billion grant as social assistance package to every vulnerable Kenyan. This amount is less than what the country lost in Arror and Kamwerer dam projects where Sh. 21 billion was gifted to a bankrupt Italian firm and a few dealers masquerading as leaders locally and the money the State lost to the Chinese firm CATIC when the JKIA Greenfield Airport Terminal project was cancelled, amounting to Sh. 20 billion. CATIC has used that money to construct the Global Trade Centre (GTC) along Chiromo Road, Nairobi. This proposal might appear populist. But that’s not the intent, even though it will be popular. COVID-19 is a supply shock and a demand shock. With this money in the pockets needy Kenyans, the products and produce will get ready local market. They will buy food, construct houses, buy clothing, booze and marry many women, thus ensuring that the supply side (production) is sustained in the market. This is pretty good for an economy emerging from war.

Unlike buying of emergency provisions for the poor, corrupt State officials can’t steal this money, if profiling is transparent. It will also accord the low-income people the opportunity and dignity of having a choice as opposed to relief food that is bought remotely and presented to them in a “take-it-or-leave-it” situation. Many Kenyans using this grant as a start-up capital will also start some micro and small enterprises and create employment.

There are sectors like tourism and hospitality as well as air transport that will take a long time to recover. The State should assist them to recalibrate. For example, Kenya Airways shifting focus to cargo transportation while not losing the passenger routes it has secured in Europe, US and Asia; massive promotion of domestic tourism to return hotels and lodges to normalcy etc. 

The foregoing interventions will require the injection of between Sh. 350 billion and Sh. 500 billion. Where do we source this money? Hold your breath! The Central Bank has to release new notes worth this amount. Yes, print the money. Of course, this is heresy to neo-classical economists directing our fiscal and monetary policies. The IMF advisors that control our Treasury and State Department of Finance will vehemently oppose this. Yet, they don’t object – indeed tacitly approve – when industrialised countries engage in the same. There are already strong indications that both the US Federal Reserve and European Central Bank are going to print money to enable them respond to the COVID challenge, if they haven’t done so already. The IFIs discourage our countries from resorting to the same measures so that our economies absorb their excess liquidity through debt. Two authoritative European publications – the Financial Times and The Economist – let the cat out of the bag almost at the same time a fortnight ago.

On April 6, 2020, the Financial Times opined as follows: In times of emergency, particularly war, central banks have often handed freshly printed banknotes to governments. The fight against resultant inflation was postponed until after any crisis … without limits, allowing a government to finance itself by creating money can lead to hyperinflation. But these risks can be manageable: the quantitative easing of the past decade, despite predictions, has not lifted inflation above the main central banks’ 2 per cent targets. The money pumped into the rich-world economies has been met by increased demand, perhaps permanently.

The same week, The Economist had this to say: this is no time to fret about government debt. While cases of COVID-19 soar and economic activity grinds to a halt, governments are right to throw all resources they can at efforts to limit the pandemic’s human and economic costs … Central banks, in an effort to provide relief to troubled economies, are already buying large quantities of government debt. The Fed is purchasing unlimited amounts of Treasuries; the European Central Bank recently announced a € 750bn ($809bn) bond-buying scheme. A weak recovery could push central banks to finance large fiscal deficits with freshly printed cash on an ongoing basis.

In the wake of the 2008 financial crisis, central banks led by the Federal Reserve created trillions of dollars of new money, and poured it into financial markets. The QE was supposed to prevent deflation and restore economic growth. But the money didn’t go to ordinary people: it went to the rich, who didn’t need it. It went to big corporations and banks – the same banks whose reckless lending had caused the crisis. This led to a decade of stagnation, not recovery. QE failed. QE can only succeed if the money goes directly to ordinary people and small businesses.

Instead of going for either external or domestic borrowing – both of which are expensive and punitive to the taxpayer, QE is a borrowing by the government from itself and in its own currency. If the Central Bank (CBK) issues new Sh. 500 billion worth of new cash, the money supply (M1) would grow from the current Sh. 1.5 Trillion to Sh. 2 Trillion. The money supply (M2) in this case would rise to about Sh. 2.4 Trillion. At a withdrawal rate of 2.5 per cent of M1 per month, CBK can mop out this excess liquidity in 12 months and return to the pre-COVID status. This is enough timeframe for the economy to find its own feet to stand on if the foregoing is implemented as a single package. In its report, Africa’s Pulse,released last week on April 13, 2020, the World Bank acknowledges that many African countries still have room for countercyclical monetary policies but avers that space for fiscal policies is quite constricted.If we don't borrow from ourselves in increased money supply, the excess dollars and euros are sure coming our way through credit from industrialised countries and IMF's Standby facility. This will be very expensive and enslaving.

Fifth, we have to address our taxation system in the medium to long term. In Kenya, like in virtually every capitalist country, the burden of taxes falls inordinately on lower and middle-income families. Income taxes, in absolute terms favour high earners at the expense of those on low pay. Most consumer taxes – like the Value-Added Tax (VAT)  - are also regressive, causing the poor and middle classes to pay much higher percentage of their income than a rich person who buys the same items.

A new progressive tax system should be introduced on production. In other words, taxes on goods should be levied at the point of production rather than at the point of purchase by the consumer, and taxes on service should be levied on the service provider for the services they provide. A tax system based on production tax would provide the broadest possible tax base. All goods produced in the country would be taxed at the point at which they enter the economy, and the producer should pay the tax. All imported goods should be taxed at the point of importation with the importer paying the tax. Similarly, taxes on services should be levied at the point at which the service is provided to the consumer and the tax paid by the service provider. Thus, in such a system, the government would have the opportunity to collect the greatest amount of revenue.

A tax system based on a production tax would be the fairest possible tax system for both the consumer and the producer. Under this tax regime, producers of essential, semi-essential and non essential commodities would be taxed at varying rates as would providers of essential, semi-essential and non-essential services. Essential goods and services should be taxed at the lowest rate, semi-essential goods and services to be charged at a higher rate, and non-essential goods and services should attract the highest tax rate. Each consumer would have the opportunity to choose which product or service they preferred, knowing that they would be paying more for luxury items. Switching over to this tax system would, in very conservative estimates, move our tax to GDP ratio from the current 19 per cent to between 35 and 40 per cent. This is another heresy to neoliberal economists.

Like all heretics, I am ready to be stoned to death or burned alive at a public ceremony at Uhuru Park. My only request is: remember to keep social distancing during the ceremony.

Nairobi, April 21, 2020

WHY BBI MUST ADDRESS DISPARITIES IN KENYA

By Oduor Ong'wen

The Building Bridges Initiative, Kenya’s latest attempt at nationmaking is in the final stretch. While many Kenyans have welcomed it, a number of them led, by the Deputy President William Ruto, have dismissed it with contempt. The refrain for those contemptuous of the initiative is that it is about creating political positions for bigwigs on the backs of Mama Mboga. It could as well turn out to be if we just focus on political settlement but ignore three of the most important issues in the nine-issue initiative. The three are Shared Prosperity, Ethnic Competition; and Inclusivity. The remaining six issues including the lack of national ethos, runaway corruption, divisive elections, safety and security as well as responsibilities and rights depend on how we tackle these three.

Extreme inequality and skewed access to opportunities in both public and private sectors is out of control in Kenya. Despite impressive economic growth numbers we have been fed with annually since 2005, poverty still affects millions of people’s lives. It appears that a minority of wealthy individuals and investors are creaming off the yields of the country’s economic performance. While this minority of super-rich Kenyans is accumulating wealth and income, the fruits of economic growth are failing to trickle down to the poorest. The rich are capturing the lion’s share of the benefits, while millions of people at the bottom are being left behind. 

The gap between the richest and poorest has reached extreme levels in Kenya. Less than 0.1per cent of the population (8,300 people) own more wealth than the bottom 99.9 per cent (more than 46 million people). The richest 10 per cent of people in Kenya earned on average 23 times more than the poorest 10 per cent.

The poverty in Kenya has a face, gender and address.  The top 10 per cent richest households in Kenya control more than 40 per cent of the country's income. The poorest 10 per cent control less than one per cent. Currently, less than 10,000 people control 6 per cent of the Kenya’s national wealth. Poverty has the face of a young female Kenyan. For instance, in the 20-24 years age group, there are 274,000 unemployed women compared to 73,000 unemployed men. Nearly every child in the former Central province is enrolled in primary school. One out of three children in the North Eastern region go to school.

According to Kenya National Bureau of Statistics (KNBS), the northern part of the country has lowest income inequality. For instance, Turkana has 0.28 per cent, Wajir 0.321 per cent and Mandera 0.332 per cent. The coastal regions especially Tana River, Kilifi and Kwale have the highest income inequality in the country at 0.617 per cent, 0.597 per cent and 0.565 per cent respectively using the Gini coefficient. Income inequality in the coastal region is linked to historical injustices where large tracts of land were allocated to nonresidents, leaving the locals as squatters. This inequality has led to severe poverty in the region leading the squatters to live impoverished lifestyles with minimal access to basic amenities such as schools and healthcare facilities.  This has also led to increased levels of insecurity in those areas due to high unemployment rates especially in urban areas. In the former Nyanza province, twice as many children die before their first birthday than children living in the Rift Valley – that's 133 to 61 deaths per 1,000 live births, respectively.

Poverty levels in different regions vary greatly. The percentage of people living below the poverty line in Nairobi is 44 per cent. However, only eight per cent of the population living in Woodley, Kibera Subcounty, live under the poverty line while 87 per cent of the population in Laini Saba in the same sub-county live under the line.

In a country where employment in the public sector is key, the bias in hiring of those who work in the civil service and other state agencies is mirrored in poverty profiles. In its report published in 2012, the National Cohesion and Integration Commission, brought out the glaring disparities in access to government employment opportunities. More than half of Kenya’s ethnic groups are only marginally represented in the Civil Service – the country’s largest employer, where only 20 out of over 43 listed Kenyan communities are statistically visible. Some 23 communities have less than 1 per cent presence in the Civil Service 

The report shows that only seven communities – the Kikuyu, Kalenjin, Luhya, Kamba, Luo, Kisii and Meru – have a representation above 5 per cent in the Civil Service. All the other communities’ representation is below 5 per cent. Five of these communities – the Kikuyu, Kalenjin, Luhya, Kamba and Luo – occupy nearly 70 per cent of Civil Service employment. Although they are the most populous, their numbers in the Civil Service are at variance with their population size. 

But the above global figures still hide the disparities. A keener look reveals that there is a variance between a community’s share of population and share of civil service posts. Where some communities have a greater share of civil service jobs than their population, others have a lesser one. The Kikuyu and the Kalenjin have a disproportionate share of civil service posts compared to their population. Their proportion in the Civil Service exceeds the size of their share in the national population. The Kikuyu, who account for 17 per cent of Kenya’s population holds 22.3 per cent of civil service jobs – giving a variance +5 per cent. They are followed by the Kalenjin at 13 per cent but comprising 17 per cent of civil service (+4 per cent variance); the Meru at 4.4 per cent constituting 5.9 per cent of the civil service (+1.5 per cent); and the Embu, who are 0.9 per cent of the national population but hog 2 per cent of civil service jobs, giving a variance of +1.1 per cent. 

This contrasts with communities whose presence in the civil service is lower than their share of the population. These are the Luhyia, comprising 14.2 per cent but holding 11.3 per cent of civil service jobs, giving a variance of – 2.9 per cent; Luo, at 11 per cent but constituting 9 per cent of the government workforce (-2 per cent);  Somali, Kamba, Turkana and Maasai. 

There are many explanations for these variances, including disparities in access to education, proximity to the location of Government offices as well as willingness to seek employment in the public service. Be that as it may, it is remarkable that a service once dominated by Europeans and Asians has so dramatically changed in its composition over 40 years. The emerging patterns of staffing suggest that power and leadership influenced the ethnic composition of the public service. 

The Kikuyu constitute the largest single dominant ethnic group in all ministries and departments, except in the Prisons Department and the Kenya Police. The Kalenjin are the second largest group in the Civil Service. They are also the most dominant group in the Prisons Department, and the Police Force. These two groups alone make up close to 40 per cent of the entire Civil Service. Their numbers in the Civil Service suggest a direct relationship with the tenure of the presidency, in that they have both had a member as President for over 20 years. 

Lack of access to education has been cited as undermining equitable hiring for the Civil Service across communities. Yet, the skewed recruitment into the Civil Service cuts across all job groups, including those that do not require high educational qualifications. In the lowest job groups – ABCD – the same seven major communities account for over 80 per cent of Civil Service jobs. Again, the number of those hired from each community is at variance with their population size. The communities that statistically insignificant remain outside this civil service group. 

The Constitution calls for ethnic diversity in the Civil Service. Article 232 (1) (h) requires ‘representation of Kenya’s diverse communities’ as one of the values and principles of the public service. 

Article 232 (1) (i)(ii) requires “affording adequate and equal opportunities for appointment, training, advancement, at all levels of the public service of the members of all ethnic groups.” 

A recruitment policy based purely on merit or competition may not give Kenyans a public service that represents the face of the country. Disparities in education infrastructure and imbalances in development generally mean that some communities are more likely to produce highly skilled people than others. It is these disparities in regional development and basic services that the country should have addressed in the past 50 years of independence. 

The disparities noted point to the country’s failure to identify ethnic inequalities as a challenge to national cohesion. There is a need to develop and implement policies that can reduce these inequalities. 

At the core of the BBI recommendations to enhance inclusivity are proposals that recognize that different regions of the country present different economic and cultural opportunities. It further proposes gender-sensitive budgeting as an essential component in eliminating obstacles that marginalise women in key spheres of development. While this is welcome, it merely scratches the surface of the problem, especially as far as skewed ethnic employment in the civil service is concerned. Countries that have experienced similar challenges of ethnic/racial exclusion like ours have resorted to constitutional instruments. This is what Singapore did. 

Singapore’s model of managing ethnic relations has been described as interactionist, rather than integrationist or assimilationist. This model acknowledges social heterogeneity and views the population to be composed of separate, distinct "races". In public policies, education, employment, housing, immigration, defence and national security policies are designed to ensure that each race retains and perpetuates its distinctiveness within a general framework of national interest.  The abortive OKOA Kenya constitutional amendment bill had proposed two amendments to cure ethnic exclusion: to ensure that each ethnic community does not exceed its share of national population in every cadre of the public service; and to ensure that at least 30 per cent of all civil service jobs are taken by ethnic minorities. In its referendum bill, the BBI steering Committee is advised to look at this proposal.

On shared prosperity, the report proposes a raft of measures that would promote entrepreneurship and put good cash in the pockets of young people, women and other groups surviving on the margins of the economy. The most outstanding include granting a 7-year tax holiday to start-up businesses by the youth. While this is welcome, there are hurdles faced by the young entrepreneurs that if not addressed will see many young people still unable to avail themselves of the incentives. One of these hurdles is lack of skills and mentorship. The other is pressure for loan repayment. For us to help our youth, the first intervention should be training and skills development; the second should be start-up grants to those who have acquired such skills as they are mentored in the world of business; and finally, those who have been successfully weaned from the foregoing interventions given credit facilities to expand their chosen lines of business. This would minimise the rate of failure of these enterprises and defaulting on loans even if the rates were concessional. 

Biashara Mashinani policies and incentives, which are aimed at promoting village-level businesses, are a welcome proposal. However, the challenges faced by the youth similarly apply and should be address through both policy and administrative interventions so that Mama Mboga, persons with disabilities and village artisans and urban hawkers may benefit.

Regarding lending to priority sectors, the government would provide legal and regulatory guidelines for banks to lend a part of their portfolio to priority sectors. These are micro, small and medium businesses, export credit, manufacturing, housing, education, health and renewable energy. It also includes sanitation and waste management, and agriculture including livestock and fishing.

In a very timid manner, the report proposes that the State be held accountable on opening markets for labour-intensive manufactured Kenyan goods in EAC countries. This would result to more business opportunities for women and youth, taking into account the government’s support of women and youth-led enterprises through Uwezo Fund and Women Enterprise Fund. This matter needs to be given prominence and call for the fast-tracking on East African regional integration, including exploring “federation of the willing” option.

The taskforce has also suggested a Kubadili Plan intended to lift marginalised wards out of underdevelopment. It would identify the wards and establish a framework of building the social and economic infrastructure to facilitate development. This should not wait for the anticipated referendum.

Finally, the BBI report proposed making Kenya a 100 per cent e-service nation by digitising government services, processes, payment systems, and record keeping. While this is welcome, the danger lacks in “communicative capitalism.” This refers to a phase of knowledge- and technology-based commodity production in which information on a massive scale is produced, gathered, and sold for profit. What we now call the “information society” or “knowledge economy” sees the large-scale proletarianization of often highly-educated people in low-paying (often low-skilled) jobs, precariously scraping by to pay student loans, and living pay cheque to pay cheque.

Another more insidious feature of communicative capitalism is the role of technology companies in exploiting the participatory features of the knowledge economy (especially social media, digitized personal information archives, search engines, and online shopping) to harvest, store, organize, and sell consumer information to other companies. We all know something happens to the information we share on Facebook, input into Amazon or Google when we search, and are rarely surprised anymore when we see ads in our feeds and email for commodities that are similar to what we’ve searched for.

This aspect of the knowledge economy as free labor producing commoditized data for technological capital. Whenever we participate by watching the latest hit on Netflix, buy something from our favorite online store, or add information to our LinkedIn account, we are producing bits and pieces of our lives and interests that are transformed into products by technology companies. We do it for free and spend hours and hours on it. Technology companies are able to construct significant digital images and profiles of consumers, their needs and desires, their work and habits, their movements, alignments, and affiliations. I know it sounds like a scary science fiction movie, but it is true. 

The “knowledge economy” is most effective at using our desire for connection, for collectivity to promote the commodities that we help to build back onto us in ways that promise, but fail, to make up for the lack we experience under alienating capitalism. It successfully tweaks our desires and needs to negate our yearning for collectivity and convince us that our individuality is most important for a healthy life. It uses this false belief to divide us one from another and to absorb our dissent or criticisms or desire for political actions into its commodity-building software.

One dimension of this commodity-producing information behemoth is higher education. Once the domain of elites who transmitted the culture and civilization of the wealthy, higher education, by the mid-twentieth century had become a domain of working-class struggle and class mobility.

Nairobi, 18 March 2020