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Columnists

Where economists go wrong on growth

 

In his Daily Nation article on Saturday, September 13, Dr David Ndii argued that Kenya did not need some of the proposed mega projects.

A distinguished economist, Dr Ndii tends to think that economic growth will always be linear. And that economic growth trajectory can be used to predict other aspects of the economy because each aspect is either a constant or the product of a constant and a single variable.

For years in Kenya, we have used the rate of economic growth to build a predictor model for power demand. Yet Kenya’s power sector is plagued by inefficiency and is held back by monopolistic practices even though the services have been unbundled to facilitate competition.

The country has an estimated installed electricity generation capacity of about 700MW, and with a peak demand of approximately 1,500MW, to cater for the needs of a population of about 43 million. By comparison, South Africa, with a population of just 50 million, has an installed electricity generation capacity of over 52,000 MW.

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If we want to compete with South Africa and not Somalia, the argument that Kenya is not ready to absorb the supply of 5,000MW of energy is misplaced.

I would have thought that Dr Ndii would make a case for liberalisation in the energy sector and let the private sector take the risk. Many investors in the power sector have come but we funnel them into tendering processes that have no meaning if we need to build a competitive power sector.

It is only through a competitive market regime that you can deal with the inefficiencies in the energy sector. That is what will drive down costs, connect more Kenyans and create greater entrepreneurial opportunity.

With affordable power, we will create more employment and wealth. Fishermen will build cold storages, farmers will up supply through cold rooms and artisans will weld their way to international markets.

There are lessons we can learn from the building of the undersea fibre optic cables here in Kenya. Until 2009, we did not have access to a fibre optic cable that could lower telecommunication costs. Economists then argued that Kenya and Africa did not have the capacity to absorb high capacity broadband connectivity.

We demystified this self-demeaning thoughts by going it alone and linking the country to the rest of the world. Since then, telecommunications costs have plummeted from a high of $12 per minute for international calls to barely $.01 per minute.

We further took the risk of liberalising the telecommunications sector, turning the country from backwardness to a global innovation giant. Today Kenya has four undersea cables operating profitably and a fifth one is on the way.

No one would have predicted that Kenya would become a household name in tech innovation, but the presence of high capacity broadband has led to new opportunities that we now exploit.

As in Field of Dreams, “if you build it, they will come." By and large this has been the guiding principal for many countries.

Like most parts of the world, innovations cannot be done in silo formats that we are accustomed to. You need a community that is often referred to as an ecosystem where startups are helped to grow, leveraging on research and policy surrounding that is focused on employment and wealth creation.

You need a technology park that brings together researchers, industry and government. It was for the same reason why Facebook was moved from Harvard, Boston to Silicon Valley.

Mark Zukerberg had this to say when he was asked why he moved, “You get this feeling when you’re out here that you kind of have to be in Silicon Valley. There’s all these great engineers out here, there’s great universities, there’s a lot of great VCs, you can get people to help you set up a company well... you can rent data centre space—all this stuff.”

I know economists would argue that if for example you had $10 billion somewhere and you are thinking about how to invest the money, they would tell you to put the money where you will have the greatest number of people benefit from the investment.

If majority of Kenyans are in the rural areas, then they will advise that the resources be spent on rural roads than building the Thika Highway. This argument would make sense if rural areas were productive enough and contributed the most towards the gross domestic product (GDP).

As it is in Kenya, Nairobi contributes more than 60 per cent of Kenya’s GDP. Further, majority of the youth are moving to urban areas where mega projects will benefit the most.

Dr Ndemo is a senior lecturer, University of Nairobi, and a former permanent secretary, Ministry of Information and Communication.

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