Recalculating Kenya’s GDP: Kenyans may pay for the appearance of wealth

2
7613
views
Facebook Twitter Email

In his column for the Daily Nation, our Co-Editor Nic Cheeseman argues that rebasing Kenya’s GDP is a positive move, which allows the country to more accurately appraise its economic progress. However, this move comes with costs, and the government must ensure that it is not the country’s poorest citizens who pay.

Following the example of Ghana and Nigeria, Kenya plans to ‘rebase’ its GDP. This means that the country will update the way that it calculates the worth of the economy in order to reflect its changing nature. This is good economic practice. A briefing published by Morten Jerven in the journal African Affairs last year found that Ghana and Nigeria’s leap to ‘middle income’ status was based on real economic change, rather than creative accounting.

In order to accurately reflect how quickly the economy is growing, GDP figures need to capture the most important sectors of the economy. This means that they need to be revised over time, as the shape of the economy evolves. The need for rebasing is clear if we think about the changes that have taken place within the Kenyan economy over the last 10 to 15 years.

Some sectors have been consistently important, such as tourism. But others, such as mobile phones and communication, have expanded rapidly. In the future, the composition of the national economy will change again, as oil comes online and East African trade accelerates in response to the development of a more effective regional infrastructure.

By updating the base year to 2009, and taking into account a new set of data sources, Kenya’s GDP figures will better reflect the performance of the most important parts of the economy. It is understandable that some commentators are excited that Kenya will emerge as a middle-income country once it has completed this recalculation.

In an article in the Financial Times, Katrina Manson estimated that Kenyan GDP in 2013 could rise as high as $50 billion, which would equate to a GDP per capita of $1,136. This would represent an increase of $193 on the current estimate of $943 GDP per capita, pushing Kenya above the threshold of $1,036 that the World Bank uses to identify middle-income countries.

In case economic figures leave you cold, let me put it another way. Under the new calculation, Kenya will become the fourth-largest economy on the continent, behind only Nigeria, South Africa and Angola. Moreover, the gap between Kenya and some of its competitors will increase substantially. The fifth biggest economy in sub-Saharan Africa belongs to Ethiopia, but on the basis of the new numbers the Ethiopian economy is worth less than half of its Kenyan counterpart.

But before cracking open the champagne, it is important to probe what these numbers mean a little more closely. An increase in GDP per capita does not necessarily mean that ordinary Kenyans will be any better off. No one will wake up in the morning and find an extra $193 in their pocket. Rather, ordinary Kenyans will be just as poor – or just as wealthy – as they were a year ago. All that the new GDP figure tells us is that the economy is worth more than we thought. It tells us nothing about how this is distributed.

GDP per capita may sounds like it is a measure of the wealth of each citizen, but in reality it is nothing of the sort. Rather, it is simply an indicative average calculated by dividing the total worth of the economy by the number of people in the country, and does not take into account how national wealth is actually shared. This means that countries with the same GDP per capita may have radically different levels of poverty and inequality.

So let us take another look at the situation facing the majority of Kenyans. According to a recent report by the World Bank, between 34 per cent and 42 per cent of Kenyans live in abject poverty. This is lower than previous figures, but according to the Kenya Economic Update, Kenya’s poverty has ‘declined slowly, at between 1 percentage point per year’ and ‘remains at very high absolute levels about 42 per cent in 2009’.

Moreover, poverty remains endemic in many rural areas, where (55 per cent) continue to lack access to clean and safe water. There is no excuse for these outcomes, which are significantly worse than other countries in East Africa that face the same challenges as Kenya but have significantly weaker economies.

Despite much lower levels of GDP, Tanzania (28 per cent) and Uganda (24 per cent) have performed much better when it comes to the proportion of their citizens that live in poverty. Indeed, only Burundi is ranked worse than Kenya – a country with one of the smallest economies in Africa that has been consistently been rocked by conflict over the last decade (67 per cent).

So why is Kenya becoming richer when so many of its people are not? The sad answer is that the benefits of economic growth are not being equally shared. There are four main reasons for this.

First, a significant proportion of government resources are lost to various forms of misallocation, ranging from inefficiency to the diversion of resources from their intended target to outright theft. Second, much of the wealth the economy generates is going towards higher salaries for those living in thriving urban areas, such as central Nairobi. This is great news for the middle-class, but does little for the rural poor.

The third reason is that not enough national resources are devoted to providing basic public services. Despite the Constituency Development Fund (CDF) and the devolution of resources to the county level, the amount of money that actually reaches health clinics and hospitals has so far been insufficient to transform the services available to the poor. The provision of free primary school has been one major advance in this regard – for which the former Narc government deserves great credit – but it has not been followed by similar improvements in other areas.

Fourth, successive governments have failed to deal with some of the major infrastructural problems that prevent the poor from working their way out of poverty, such as bad roads, a lack of clean water, and the absence of electricity.  In short, over the past 20 years Kenyan governments have tended to practise trickle-down economics, emphasising economic growth rather than poverty alleviation, hoping that a ‘rising tide lifts all boats’. But the problem with ‘trickle-down’ economics is that unless specific policies are put in place, wealth doesn’t actually trickle down.

This is particularly significant, because in some ways achieving middle-income status will actually make it even harder to transform the lives of the poor. Manson quotes Ragnar Gudmundsson, the IMF representative in Kenya, as saying that rising GDP will make it easier for Kenya to borrow money from international markets, because it will give the government access to Fund’s non-concessional facility.

This is true, but as Manson also notes, the cost of such borrowing has increased in recent months, and this situation will probably get worse before it gets better: international credit ratings agencies are likely to downgrade Kenya if terrorism and corruption continue to disrupt the economy. If they do, the cost of borrowing will increase further, and foreign investors will take their capital elsewhere. The cumulative effect of these developments will be to undermine the capacity of the government to undertake new projects.

While loans will get more expensive, aid will become harder to come by. The wealthier that aid recipient countries become, the less willing international donors and international financial institutions such as the World Bank and the International Monetary Fund are to provide aid. This will not impact the assistance the country receives from China, but has serious implications for the funding available to international supported NGOs, whose work currently helps to alleviate poverty in some of the most economically marginal parts of the country.

This is the great paradox of Kenya’s recalculation of GDP: a process that has made the country ‘wealthier’ is likely to leave some Kenyans worse off. What does all this mean for Kenya moving forwards? I am not suggesting that Kenya should abandon its plans to rebase GDP. It is important to have accurate economic figures, and to celebrate the success of Kenyan business people and entrepreneurs. But rising inequality is a major cause for concern. Academic researchers have often found a relationship between inequality, crime, and political instability – especially in parts of the world with divided societies and new political institutions. The wealthier the country is, and the richer the ‘haves’ become, the more alienated and frustrated the ‘have nots’ are likely to feel. This means that as the economy grows, government action to reduce poverty becomes more important rather than less.

This blog was originally published in the Daily Nation on 26 April 2014.

2 COMMENTS

Join in the debate... let us know what you think!