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Friday, November 27, 2009

Communism through the back door

Someone once said something I would like to paraphrase, "when we think of Equality, we only think of parity with those more wealthier than us, not those less wealthier than us"
The Committee of legal experts have made economic prescriptions that they themselves do not understand... when it comes to economic prescriptions, all I saw in the draft was share, share, share! What is this we are sharing exactly? Why is one individual being forced to share with another?
All is see is Kenyans with PhD mentality (Pull him Down!). It seems that in Kenya, to achieve parity, the average Kenyan would rather pull down the hardworking than work harder to catch up with him. This is a sad state of affairs.
The reason why South Korea and Indonesia are ahead of Kenya in terms of gross domestic income par capita, is more to do with productivity of the average worker than any other factor. They logic is simple. They earn more because they not only work harder, but they work smarter too.
When Kenyans will stop sitting on their behinds and start putting in some hours, you'll begin to see the growth of a middle class worth talking about. Otherwise, the performance of Kenya will worsen with all this welfare being thrown at us. Remember, money is nothing if not backed by increased productivity.
Even though its not advisable to look to government for solutions, there is one thing the government can do for us... get out of the energy and food sector and the problems of Kenya will begin to sort themselves out.

Wednesday, November 25, 2009

Why we are on the slow road to state sponsored collectivism

If you can stay calm, while all around you is chaos...then you probably haven't completely understood the seriousness of the situation. so they say... they were right.
New constitution? Chaos! Old Constitution? Chaos! Kenyan economy? Chaos! Government finances? Chaos! What to do?
And it looks like its going to get worse, the government is finding it, more and more, difficult to get any finances as it moves on. Note that the government is expected to incur a higher debt burden because of the compounding nature of debt.
How then do we get ourselves out of this hole?
Smaller government and increased productivity- very unpopular but very necessary!
Are we going to see this? No! Why? We are going to, more and more, see an intrusive government that will tend to tax more and control more to limit the damage of its intervention. In the next five years, we will be printing money, be in danger of defaulting and the currency will be tending towards worthlessness.

Monday, November 23, 2009

Social Security?

The root of the 20th and 21st Century economic discourse... so far the communist's economic system collapsed just like Freidrich August von Hayek said it would and the mercantilist economic theories were put to death by Adam Smith and Ricardo. So far the right is winning over the left.
The collapse of communism is attributed to the lack of a price system which, as Ludwig von Mises put it, deprives the participants of the economy important information such as overproduction or underproduction- also known as the economic calculation problem.
Mercantilism, as Adam Smith and Ricardo put it, is not necessarily an economic system, rather, it is a selfish growth system that uses tax payers to favor a certain clique of people to make money. It usually is about using state resources to favor this clique and protectionism is usually the name of the game... but the resources used to sustain this game are usually more than the benefits that accrue from it.
Now there are only three economic systems worth looking at... the Keynesians, the monetarists and the Austrians. The first two are not really distinguishable in that both have some degree of central planning in them though the Monetarists are not necessarily in favor of government spending.
Austrians on the other hand seek for market based economic systems with minimum government involvement.
The current debate on what caused the Global Economic Crisis and therefore solutions are actually a debate on which system caused it (nb. it cannot be Austrian therefore it is not supposed to be examined but because it is about free markets, it gets dragged in).
The central question in this debate is, "Is it the freedom in the markets that caused the GEC or was it government intervention that caused it?
It is, more and more, becoming clear that there was overcapacity in the economy in various sectors brought on by easy credit. The credit became 'easy' due to manipulation of the interest rates by the fed. It is this same low rates that make the financial engineering that went on possible- classic business cycle as described by Hayek and Von Mises.
What does this have to do with Welfare and Taxes one may ask? The need for social justice, whatever that means, is what drives the government to central planning... you will remember the communist dictum 'to each according to his need, from each according to his ability'. This need for government to control and to reduce 'inequality' leads to a taxation system that can both support welfare ventures that can support 'the needy' and at the same time reduce income inequality. What the government ends up with ultimately is an economy of lazy people and the lack of productivity ultimately leads to a collapse of the economy.
This was von Mises prediction of a communist country, and one that is not communist will get hit time and again by violent business cycles. That's what von Hayek predicts for Kenya should we adopt that clause in the bill of rights.

Thursday, November 19, 2009

Harmonised Constitution?

Someone referred to the draft constitution as lacking harmony... he could not have been more right. the draft lacks internal consistency. When I heard one Nzamba Kitonga go on and on about the principle of separation of powers, I wore a guarded smile. Guarded because I don't trust anyone who calls themselves experts... I prefer them to let me judge that for myself.I was nevertheless smiling because for the first time I thought Kenya will have an executive that does not have any member from the legislature and vice-versa.
I thought we are finally going to have a legislature that legislates, an executive that executes and mercifully a judiciary that arbitrates in the name of justice. Clearly I was mistaken. The so called Committee of Experts (COE from now henceforth since I can't bring myself to call them experts) lack even the basic knowledge of principles of governance, the theories of power etc. The most sorry part of this all is that the COE let themselves get dictated to by a bunch of know-it-alls and ne'er do wells who came to them submitting 'wisdom' under the banner of wanjiku. Its sad but true... just look at the clauses of the Central Bank. First of all, who even says that we necessarily need a Central Bank. Even if we decided we needed a Central Bank, do they know that the CBK is just but one player in the financial markets. Even then, the COE goes even further to prescribe a mandate that they know nothing of.
The primary responsibility of a Central Bank is to ensure price stability so that money in the economy can be viewed as a store of value, otherwise it loses other functions such as a unit of accounting or even a unit of exchange as no one would exchange their goods or services for certificates that are volatile in value or even valueless. Sadly COE did not think that they needed advice from experts from the fields of money, finance and economics so all we can do is stare at the draft in amazement before we can know what to do with it.

The new Bill of Rights

I heard someone somewhere saying that the bill of rights is fantastic. I haven't read it all except for a small provision within the bill or rights.
Social security
61. (1) Every person has the right to social security.
(2) The State shall provide appropriate social security to persons who are unable to support themselves or their dependants.


So this part is supposed to have been genius... except for one thing... it is probably the clause that will finnish Kenya as a country. Does anyone think I'm exagerating?
Lets take a walk through history. USSR anyone? Used to be one of the largest countries in the world! what happened? it has something to do with " from each according to his ability, to each according to his need!" What about California, one of the largest economies in the world? Broke! Venezuela? Broke! Cuba? Broke! Western Europe? In dire need of social reform... Germany is already taking steps with the new government towards that end!
One may ask, what has that got to do with social security?
The answer lies in the means of financing it. Who's gonna pay for it? As we speak Kenya is broke! How do I know that? We have a budget deficit that no one knows how we are gonna pay for it. Our Honorable Finance Minister directed during his last budget speech that all statutory pension funds should buy nothing but bonds. This is exactly what the Argentine government did before defaulting on debt. I see the Kenyan government walking down the same road.
Kenya needs to cut down spending for two reasons:
1. To balance the government income and expenditure
2. To cut taxes so as to stimulate the economy to grow.
Even right now, government cannot afford to undertake any more social welfare. As it is, we need to reform the government run pension fund. The current system is broke! That is the reason why government pushed the retirement age to 60. The healthcare system is becoming unmanageable and the education system is proving too heavy for the government. On the other side, the government is beginning to miss revenue targets that the government had set for the Kenya Revenue Authority. We need to solve that first and allow the private sector to flourish if we are to avert a looming disaster! Remember the riots in Argentina or the collapse of the USSR, or more pertinent to Kenya, the rise of Mungiki, Sabaot land defence force?
You can make up your mind on whether the problem in Kenya is primarily political or just trying to push an unsustainable economic system that has its roots in Communism/Socialism.

Tuesday, November 17, 2009

New constitution

Wow, have you seen the work done by the committee of experts... I know how they got it done. Its called cut and paste. How anyone is supposed to vote yes for this unphilosophical document is beyond me. Did I call it unphilosophical? Let me take that back, the underlying philosophy for the draft is called compromise- It is the art of harmonizing two extreme positions.
Why did they do this one may ask. They were interested in harmonizing various individuals' views whether one point of view is wrong or not. In fact, they harmonized views of two completely wrong points of view. To put it in perspective, if they were King Solomon, there's a baby who would have been split into two! Luckily, the Jews had Solomon as their King.
I think the reason why I could not be accused of being in expert is because I subscribe to the view of GIGO... GARBAGE IN GARBAGE OUT!

Monday, November 16, 2009

New Kenya?

The funniest thing occurred to me today...Kenyans actually think that they will solve their problems by enacting a new constitution. I got news for the rest of us... our biggest problem is economic in nature and is caused by the one agent everyone is looking to solve their problems... its called GOVERNMENT!
Kenya is in trouble and our biggest problem isn't distribution of resources or income disparity. The problem with Kenya is productivity... or rather, the lack of it. Being in Kenya, there is virtually no incentive to be productive in almost any sector. ICT- high licensing fees, agriculture- de facto price controls, finance- over-regulation, energy- not liberalized, and finally the kicker, the high taxation that government imposes on its people. The taxes that do the most damage are:
1. Value added tax (VAT. By its very definition, it is a tax on productivity. It should not exist in a country that wants to progress economically. It is probably one of the reasons why France needs Francophone Africa to survive otherwise their economic model is not sustainable... even the French prefer to start businesses in London than in France.
2. Income tax- It is not a bad tax per se but if government would be acquainted with the laffer curve, at least the basic philosophy of the concept, they would realize that the income tax code is poorly designed and is a big disincentive to work.
3. Licenses- Suppose the license for ICT services were not Kes +1bn, how many companies would be offering 3G services. The licensing regime was clearly a rent seeking venture by government and the only beneficiary was Safaricom... guess who sits on the board... government!
4. Quantitative easing- like VAT, printing money is a stealth tax on those who save and only serves to benefit government.
There are many more but I'll stop there for now. The taxes only serve to do one thing, shift wealth from the most productive part of society (private sector) to the most unproductive unit in the economy (the public sector)