Sunday, April 25, 2010

Greece debt mess from unbalanced economy- can Kenya learn?

Greece's debt crisis which may lead to a complete economic collapse is as much about profligate spending as it is is about an unbalanced economy.

A balanced economy is made up of 3 key pillars whose relationship can be summed by this equation;

a - b + c = flourishing economy

a - is the private sector whose growth is a must as it effectively generates the required tax revenue that is taken by the
b - government/public sector and used to finance various types of infrastructure from judiciary to roads
c - is the external flows in form of investments; loans/grants and aid

From the above equation, its clear that if you have a huge or growing public sector then the either financing will come from either external flows or a faster growing private sector. In any case, whether the cash is coming from the private sector or external flows, in a recession, neither will be able to sustain the huge or growing public. Even in normally growing economy (neither too fast nor too slow), a huge or public sector will eventually stall the economy. A time will therefore come when massive cuts in the pubic sector spending have to be undertaken. But, typically, the public sector employee unions tend to be the most well organised and resistant to change. Public sector can be used as a patronage system rewarding supporters of current regimes with jobs.

Greece is a typical case of the above happening. The public sector accounts for 40% of its GDP! In effect this is almost non-productive resource being used without concurrent growth in the economy. In a recession, public spending would need to be reduced and this can be a problem where the unions are well organised.

While Kibaki's govt has made giant strides in reducing govt spending by for example privatising various parastatals, its also clear that since 2007, spending has gone awry with deficits recorded every year and the 42 heavy cabinet doesn't help in this respect.

Einstein said intelligent is measured by how well you learn from mistakes and it is hoped Kenyans can do so from the Greece debt crisis.

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