The analogy of a house of cards to me is very appropriate in discussing the recent economic

growth circa 2003-2007 and pre-Kibaki growth in Kenya. Economic growth is an ideal every
country strives for and is usually the intrinsic mandate of all government efforts. Growth
leads to jobs, higher standards of living, higher life expectancies, higher education and even
less suffering and misery. However in our case, we have to be very careful as to what factors
drive this growth. Here I would like to present a very simple growth model, first posited by
an eminent MIT economist called Robert Solow. His model was simple:

Y = f(At Kt Lt)

In this simplified model, he stated that growth in output Y was dependent on At which is a
measure of productivity at a given time, Kt a measure of the amount of capital (Buildings,
machines, cars, trains) at a given time and Labour at a given time.

From the model, it is the (At) that we should be interested in. In economic terms, it is
referred to as Total Factor Productivity (TFP) and basically shows how much we are getting
per worker or machine. If TFP is low in relation to other countries, then our workers and our
stock of capital produce less than the same workers and the same stock of capital in other
countries. The IMF in a recent study show that Kenya’s growth and that of other Sub-
Saharan countries has been due to an accumulation of factors rather than an increase in TFP.
To better discuss this, I feel an analogy is appropriate. Imagine the economy as a lush field of
grass and growth is reflected in how much grass we can cut and harvest off the field. We
harvest grass by hiring people armed with sickles to cut the grass. Our growth then in this
regard has been as a result of hiring more and more people armed with more and more
sickles to cut the grass. The worrying fact is that according to the law of diminishing returns
this method of growth is not sustainable.

The law of diminishing returns states that as more and more variable factors of production
are added to a fixed factor, production will at first increase at high rate then increase at a
decreasing rate before eventually dropping. In the grass case, then production of grass will
first increase because of more workers then as workers start jostling for space and arguing
over whom gets which sickle, the production will start increasing at a decreasing rate before
eventually dropping. TFP in our case would be solved by maybe fertilising the grass so that it
grows longer thus justifying the number of workers, buying lawnmowers so as to increase the
speed of collection and other such measures.

Clearly then TFP is an important and I would dare say the most important factor in creating
economic growth. According to the World Development Report of 2005, between 1960-2000
45-90% of cross country differences in GDP growth were attributable to TFP growth. Added
to this, TFP growth in Kenya according to the World Bank grew at an average rate of -1.0
between 1990-2000. Slowing TFP in Kenya has then been the main cause of the massive
difference between Kenya’s growth and the growth of the East Asian economies. The diagram
below shows how Kenya’s GDP per capita measured up to those of the East Asian Economies
in 1964 and in 2006. The major difference has been increased productivity on their part.
Table showing the lacklustre growth of the Kenyan economy between 1964 and
2008

A study of the factors that affect TFP growth is therefore vital. The IMF in a study conducted
in June this year show that good governance, education, good health and inflation are
amongst the main causes of differences in TFP.

In terms of governance, it is no secret that the governance in Kenya for the last 40 years has
been miserable. Corruption, inefficiency and a lack of transparency have been some of the
main adjectives used to describe the successive regimes that have ruled the country. Good
governance is important as through working institutions and regulations, people can invest
in the country and technological and financial innovation can thrive. The poor governance
has lead to foreign direct investment flows to Kenya being much lower than those of other
countries. The graph below shows the level of FDI as a percentage of GDP for some selected
countries.

Graphs showing FDI as a percentage of GDP in selected countries

Bad governance has also affected Kenya’s exports as a lack of improvement in infrastructure
and the tax system has lead to domestic demand exceeding domestic production due to high
domestic production costs. This leads to Kenya being a net importer of goods and thus
creating a current account deficit. This flies in the face of the mid-term strategy of being a
net exporter by 2012. The World Bank usually grade a country’s government through six
measures namely; voice and accountability, government effectiveness, political stability,
regulatory quality, rule of law and control of corruption. The graph below shows how Kenya
performed between 2002 and 2006.

Graph showing performance of Kenyan government on a number of indicators

The graph shows that our governance was a general failure as they registered below 50% in
almost all measures the only outlier being regulatory quality in 2003. Added to this rule of
law has been an abysmal failure and definitely doesn’t come as a surprise to any Kenyan.
With the rule of law being the cornerstone of a capitalist economy, things are really dire for
this country.

However as a bright spot, I feel that the current Prime Minister Raila Odinga, has shown
commendable leadership taking a strong and often politically unpopular stand on many
issues such as the Mau evictions, environmental control and his commitment to improving
infrastructure.

In terms of education, it is no secret that our education system needs a lot of work and
prayers even. Sound educational policy has been lacking and is reflected in the enrolment
statistics and the cost of education in the country. Good education often leads to a higher
stock of human capital and thus improved labour productivity. Our education system in my
humble view is one that is still based on the colonial role of educating a native population the
basics of reading and writing so as to serve in clerical roles for the British. The lack of
technological innovation has been a big deterrent to improved TFP. The government has
clearly forgotten that early childhood education and technical education are an important
part of the educational infrastructure. My mother who has worked in education all her life
always stresses that early childhood education both at home and at school is a make or break
time for the child in terms of his/hers approach to learning and knowledge. The table below
shows just how much the government has disregarded these two in preference of primary
education.

Graph showing Education Expenditure by sub sector from 02/03 – 07/08

These factors augmented with the fact that of total expenditure on education, 92% is
recurrent shows the malaise in the system. Furthermore, unit costs of education in Kenya
don’t compare favourably with those of other countries meaning that it is more expensive to
educate a Kenyan as a percentage of GDP per capita than it takes to educate children from
other countries.

Table showing unit costs of education for selected countries

The last factor is inflation. Inflation in terms of TFP usually means that high inflation usually
leads to lower investments and savings which are major drivers in TFP growth due to lower
real earnings. Kenya has seen high inflation usually due to exogenous (external) shocks that
have rendered most wages and salaries useless. According to the Kenya Institute of Public
Policy Research and Analysis (KIPPRA), food and beverages contribute approximately 80%
of inflation and are subject to extreme shocks such as drought and gross mismanagement of
food reserves in the country. Sound policy needs to be enacted to deal with the food issue
and consequently inflation so as to improve TFP.

Clearly our economy has been a house of cards, growth has taken it higher and higher but
one day when the wind blows or someone bumps into the table, the house will come
crumbling down. Governance has to improve through a new proper constitution, improved
political good will and leadership and zero-tolerance to corruption. Our education system
needs to be ridden of the inefficiency and slack reflected in the high unit costs and high
recurrent expenditure on education. Furthermore, the bureaucrats in government need to
focus more attention to early childhood education and technical education. Finally the
government must realise that monetary policy alone will not fight inflation rather a focus on
removing the shocks that affect inflation. Through all these measures, Kenya’s growth will
finally be sound and stop looking like a house of cards.