Replace foreign aid with economic migrant quotas

Remittances are now the largest foreign exchange earner in many developing countries. Fact.

So-called advanced economies are currently undergoing their most challenging economic times. Fact.

There is an ongoing, racial-tinged and tortured debate on how to tackle illegal immigration in the West.

Hopefully you can see the link I am drawing out.The west and other advanced economies are currently seeking to reduice their leverage by either government expenditure and or raising taxes where they can. To do so, they are seeking to cut back on ineffecient expenditures. As accurately described by Dambisa Moyo and others, there is none more inefficient than foreign aid to developing countries.

In almost all nations, immigrants to the West/advanced economies whether legal or illegal pay their way. That is they work, pay taxes and proportionately don't make use of public services more than the locals. Crucially, they send a significant portion of their income to their mother countries and so fulfil the trickle-down effect that most of the foreign aid is supposed to do. Simple really, the money they remit is reaches the hands of those is rural areas and even in slums.

The West can and should cut ineffective foreign aid/loans to developing countries and should replace it with smart programmes that allow graduates from developing nations to work for 2/3 years in developed countries. It is not an original idea. The UK has a discriminatory policy in place that gives 2 year working visa to all New Zealanders/Australians and South Africans (white) of under 30yrs of age.

Kenya's adoption of the "spend now, pay later" model

If you were to be offered the choice of shopping using your credit card or somebody else's credit card, your behaviours would be very different.

The spend now, pay later model is now a key characteristic of Western capitalism. The 00s boom and its aftermath have been funded by private sector leveraging itself to the hilt. And the public sector (govts) stepping in to continue the leveraging and in effect spread the same to everybody. In layman terms, many people and companies borrowed more than they could afford on their credit cards loans, mortgages et al to finance a feel-good lifestyle. When the whole facade crumbled, governments stepped in and borrowed money to in effect repay these debts. They also performed a socialist service by making sure that the paying was spread out to everybody.

GoK has been borrowing to finance both its blotted bureaucracy and also development projects. Lately, private sector lending to finance mortgages, credit cards et al has also increased. While financing development projects such as infrastructure will pay itself back in due to course, the rest of the spending is unlikely to bring any returns. As such, paying back the borrowing will become a problem in the medium to long-term.

Rather than waiting for the medium-term, Kenyans need to start taking pro-active steps to ensure they leave and grow economically. Within their means.

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

where:

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.

Kenya's population growth: time for the China solution?

We are poor nation in money terms.

• Kenya's population stands at around 40mn having doubled over the last 25 years.
• It’s growing at 2% per year which means it is on schedule to double in 2050.
• In real terms, our GDP has stood still since 1995 in real terms (that is 2002-2006 was merely to get us on even keel with 1997 and before and years since have been eroded by double-digit inflation). The economy as its structured currently can't double in that period.
• 65% of our population ekes a living from agriculture. Though this percentage will decrease in term, the total rural population will still account for around 50% by 2050
• Only 8% of Kenya's land is arable
• Without a sharp reversal, the current environmental degradation coupled with land issues, may well reduce this proportion of arable land to around 6%.

China was faced with similar circumstances in early 70s, its population having doubled within a period of 30years and with a static economy and agriculture growth. It worked what was its optimal carrying capacity based on its ability to feed its people (given arable land, land and economy growth potential) and instituted what is today known as the "one-child". It was actually more nuanced than that i.e. the one-child policy only applied to urban cities and didn't explicitly preclude having more than one child.

Is the population control needed for Kenya? Well, going above, a definitive yes. Is a China-type policy practical? Yes, GoK would offer to educate one child for free all the way to secondary school provided the parent/s only had the one. The parents would then have to pay for any additional ones.

Profetha, banks are not lending because...

A bank borrows from A and lends to B. The borrowing bit is called deposits and the lending bit is called loans. If it borrows from the raia, a bank rarely pays anything to borrow this cash, but will charge the same raia a considerable premium for lending to him/her. If it has borrow from other banks or other companies, it may have to pay something for the deposits. It can also borrow from the CBK, but its not called lender of the last resort for nothing. It'll sometimes demand explanations or a premium.

Simple maths will tell you that it makes a higher margin if it can borrow from the raia. Even more if it can lend back the same to that raia or his/er ilk.

Alas, we have times of plenty and times of scarcity. In times of scarcity, the bank can't borrow from the raia. It thus needs to pay to more to entice another raia or other entities to part with their cash. The other side of the equation is that the broke raia doesn't keep his/er loan repayments. The bank discovers things are thick. It decides that'll only lend to the select few who ordinarily don't to borrow anyway.

CBK wakes up and realises things are not well and its whole system is afire. Reducing the rates it charges as lender of last resort has no impact.

Professor that is where things are. Economy has no electricity to power businesses or consumers. Basic necessities are now luxuries such as flowing water and even food in some cases. It'd make more sense to have a word with the man up the hill...

Be part of "Enough is enough"

Wangari Maathai launches her "enough is enough" campaign this weekend. The campaign is aimed at reclaiming wetlands which are necessary for Kenyans to be able to continue getting spring water that flows into the some of the dams that water Nai.
So rather than whining about lack of water, this is a good opportunity to go and do something about helping ensure supply returns next year. Was reading an article about how Kagame pioneered such a scheme successfully in Rwanda and it has helped reclaim wetlands.

Capitalism- in the real world. Making it work for Kenya/Africa

Even without ever have met me, I'm sure you would not imagine that I'm the sort of fella who ever give Usain Bolt a run for his money. So just think of a situation where I was told that from now hence-forth I'd have to earn a living by competing against the likes of Usain!

That in a nutshell is what free market adherents and their neo-con friends believe economies around the world should use as their operating theory and model.

I like what capitalism can do for economies and society at large.

My worry is that many including the majority of its cheerleaders don't understand capitalism.

Capitalism = arbitrage. As long as an individual, a firm a country is able offer a distinctive

1. product
2. service
3. skill
4. experience

and do so at a mark up to cost with people willingly paying, a profit will be made.

The two key words are distinctive and able. Going back to the running example, the distinctive offering is a skill to able to outrun a cheetah. I don't have, so what happens to me. Secondly, I may have the distinctive advantage of being to run that fast , but how'd reach the pinnacle of my career if I am located in Mathira?

The obvious point is that capitalism can only work if it has strong institutions to backfill all the gaps that exist in terms of people who don't distinctive something or the ability have vis a vis others in the same society.

In Africa especially, its vitally important to recognise the role that private sector can play in transforming industries and therefore economies, but be prepared to mid-wife those industries and societies until they are in a position to be able to compete.

Budget Initial Thoughts

Here are some of the budget highlights and my take:

• UK has tried to make an interesting budget by making it targeted.
• CDF per constituency is now higher by 20% but also increased funding for health, teacher hiring, school construction et al. But what is needed is better governance. For every Gatanga there is 10 Sabotis; Nyeri Town etc.
• Reduced duties on cotton but also on mitumba i.e. zero net effect on cotton farmers
• Money for wholesale agriculture markets- it’d be cheaper to bring in legislation to allow local commodity futures market
• Reduced duty on maize imports-what about increasing research spend for KARI to develop drought-resistant maize? There was money towards irrigation projects...
• Ksh250mn for juduciary development work. Drop in the ocean...
• Some rural ICT initiatives. These I like...
• Reduced duty on mobile handsets. The industry doesn't need a helping hand. Money would have been better encouraging fibre optic coverage or even solar energy initiatives.
• Ksh1.3bn towards the light railway project, but note this needs Ksh20bn
• Reduced dutieson cosmetics-for who?
• Usual measures aimed at reducing ministry car use; expenditure on stuff like furniture, travel. Remember Kimunya's ideas? Not that this will entail new cars. How and when will the expensive ones be disposed?
• No MP taxation-UK has just escaped a mauling
• Wierd stuff like reduction of duty on spirits- a good finmin will always raise his cash via sin taxes.

Overall budgeted expenditure is growing at almost 20% per year which is in line with inflation. Total gross expenditure is Ksh864bn against KRA revenue target of Ksh570bn (up 14% on last year). Thus I make the deficit a shade short of Ksh300bn. Of this Ksh109bn has been flagged as being financed via bonds; there is some external aid (Ksh35bn). So still have a gap.

Bonds (cue higher interest rates) will finance some and of course some listings when NSE is buoyant enough. Do note that if there is competition between NSE and bonds, bonds will win for the time being so expect downward NSE movement if the bonds are flooded.

Bottomline: Its an aspirational budget, but the deficit remains key worry.

Thursday shorts

Investors hate uncertainty in the economy, the NSE (when Francis Thuo et al are not doing manipulations) is a good mirror of this. Right now the compe is between fundamentalist (long-term investors, buy-to-hold and appreciate economy) vs. analysts (speculators, focus on short performance). Analysts are winning on TPS Serena (its type of customers are not going to evaporate overnight) and losing out on other stocks (banking for example).

With our economy now starting to grow (as destructive as last week was to the economy, its not taken us back to the 2002 situation where we had so many holes in our economy, I am convinced the economy is strong enough to bounce), I am worried about the performance of two firms, KQ and Kenya Ports Authority. More about KQ later… but KPA seems to have a capacity problem which has been compounded by a more efficient KRA. Should it consider outsourcing some of its work?

The current political farrago has made politicians out of many a blogger. Many have subsequently engaged their hearts in an arena that requires a good dollop of brainpower. Many are also posting bar-talk in their blogs. The output is out there for all to see. There are exceptions however. Such as one by the name Silaha. Uniquely in blogworld, this guy is the only one who the got the election result correct (apart from Mutahi Ngunyi and some prophet Thomas Mason). His latest post on Kibaki’s move on Tuesday makes a lot of sense. Additionally, I think Kibaki is on his 2nd and last term and probably feels freer to exercise the sort of strong-man nonsense many Kenyans were crying out for in his first term.

Kenya has been dominated by two kinds of leaders (in the loosest sense of the word). Politicians and technocrats/businessmen. Kenyatta, Moi and Raila are all politicians the type who pull crowds talk nonsense mainly but have a sharp political brain. Mwai Kibaki, Michuki are all technocrats who are good at the doing, but are very poor communicators and rarely have sharp political brains. But is the old man about to show his political skills?

Obesity is a big issue in the UK. On public transport for example, seats that were designed to sit two adults comfortably can only sit one adult and a child. A very small child.

Americans invented opinion polls, but how bad were their predictions of how well Obama would do in New Hampshire?

From the do I say not as I do free-market school

Its take a lot, but today was eyebrow raising. That bastion of free-wheeler-dealing market capitalism (US) broke one of the golden rules of economics and finance. While most if not all central banks do occasionally intervene in money markets through OMO (open market operations), its rare to intervene through the weapon of interest rates as happened today with the Fed rate. And the the intervention is basically nonsensical.

Back in 1991, George Bush Snr was Prezzo and just about to go into election with the economy in doldrums. He lost to the charisma kid aka serial trouser dropper from Arkansas with his "its the economy stupid" slogan. Then came the era of low interest rates (read cheap credit), Internet driven and Chinese/Japanese/Korean-funded US growth. Times were good as house prices went up and money rolled in. Banks had so much money that (like Kenyan banks today), they had to start lending to the common US low income earners. Some got mortgages that they won't have had in a million years. To help the banks , hedge funds came along and bought the mortgages off the banks who then could go back and lend some more funny mortgages. On the corporate-side, we had private equity groups borrowing from (yes you guessed it), banks to do highly leveraged company buy outs. That why we are where we are today. Basically, irresponsible lending.

The Fed cut US interest rates despite worries about inflation-hence my nonsensical comment above.