Putting cost of living in context


Customers shop for maize flour. FILE PHOTO | NMG

‘The Cost of Living’ has become an issue that appears almost every day in our newspapers. Prices of unga, cooking oil, fuel and electricity among other essential commodities continue to skyrocket, leaving many Kenyans surviving instead of living.

Part of the problem and contributors to this sad state of affairs are the politicians who mislead the citizens by campaigning on the platform of reducing the cost of commodities once elected.

And the clamour for reduced prices has not started today. When I was still young, we bought 2kg of bread at Sh5. This was during the Moi era.

On budget-reading days, citizens eagerly awaited the moment when the reduced prices of basic commodities would be announced.

It so happened that on one such occasion, the late Professor George Saitoti, who was the Finance minister then, could not increase the price of bread thanks to public outcry.

But he was shrewd: rather than reducing the price, he instead reduced the size of bread from the usual 2kg to 1.5kg but retained the price.

The bread I bought at Sh5 in those days now retails at about Sh220. Since the cost of production continues to go up, to expect the price of such commodities to come down is unrealistic and misguided, unless under subsidies, which is but a stopgap measure, as it is not sustainable.

So, is this clamour to reduce the cost of living by simply lowering the prices of commodities the right path economically?

In developed countries, things are comparatively expensive. In fact commodities and services tend to increase in price with the shift from a middle-income economy such as Kenya to a developed economy.

The first time I went to Europe, as I awaited the connecting flight from Amsterdam to Barcelona, I ordered a cup of tea. It cost 7 euros - which was equivalent to Sh850 - an amount enough for a whole kettle of tea and a few mandazis back in Kenya.

Before I could recover from that shock, a few days later I had to pay more than Sh1,000 in Geneva - also for a cup of tea. I was surprised that no one seemed surprised as I was.

Slowly I came to understand that I was in a developed country where goods and services were expensive if approached from my Kenyan developing country’s mindset.

The distance between Charles de Gaulle Airport and Paris is between 30km and 40 km depending on the route one takes.

Yet the cost of taxi trip between the two destinations is between 50 Euros (Sh7,250) and 60 Euros (Sh8,700), the fare which may be doubled during traffic jams.

These prices are even higher in New York. Clearly, therefore, by focusing on lowering the prices of goods and services rather than on increasing our income, our focus is misguided.

What Kenya needs to focus on is the growth of her income per capita, which currently is $2,082. In comparison, France’s Annual Household Income per Capita is $25,371.923, meaning that French citizens have 12.2 times higher purchasing power compared to Kenyans.

When Kenya’s income per capita will reach the level of developing countries, unga prices will never be headline news in Kenya.

The main challenge, however, is the strategy Kenya needs to adopt so that its income per capita matches that of developed countries such as France. I am convinced that the Solomonic economic model is the answer.

According to the Solomonic Economic model, earning higher salaries per household in order to increase household per capita can be achieved by acquiring higher productive capabilities either through industrialisation, deindustrialisation or reindustrialisation.

Through industrialisation, Kenya needs to grow its manufacturing industry from the current 15 percent of the GDP to about over 50 percent like developed countries.

Deindustrialisation means the growth of a country mainly through its service sector. Since this is based on a knowledge economy, and there are a lot of knowledge inequalities, deindustrialisation eventually creates a lot of inequalities. However, it brings technological advancement.

Then comes reindustrialisation in which there is highly automated and cheaper manufacturing using robotics, automation and digitisation.

Jobs created in developing countries due to cheap labour are now lost since robots can do the job.

The Solomonic model of economy aims to move Kenya towards acquiring such capabilities that will make it possible to sustain higher living standards over a long period of time, so much so that a reasonable price of unga won’t cause any alarm…for citizens will be able to buy it, and still remain with money to spend.

This will need a deliberate decision to invest in the education of the citizens so as to make them more productive, earn higher salaries and as a result boost their purchasing power.

This also requires investing in better machines, up-skilling workers and technological research.

At last, everyone will benefit, because if Unga eventually retails at Sh350, which will soon happen, and everyone can afford it, then all the players in the value chain - the farmers, the input (seeds, fertilisers etc) suppliers, millers, cultivators, harvesters, transporters, wholesalers and retailers among others will be able to earn, thus making them happier and richer, and ultimately making Kenya a richer Nation.

PAYE Tax Calculator

Note: The results are not exact but very close to the actual.