Azimio, choose agriculture or manufacturing. Not both

This article is a reply to an article titled “Azimio deal: it’s possible to grow manufacturing agriculture concurrently” by Governor Ndiritu Muriithi.

Milton Friedman, in response to a question, stated that a sound (read conventional) idea is one in which the theoretical claim finds validity in the real world. Everybody has theories about how the economy works and what the proper role of government ought to be. This governor believes that our statement that the most effective role of government should be in the provision of public goods is mistaken because the claim represents conventional ideas that have not worked in Kenya.

In spite of his confidence in economic theory and practice, he merely shows here lack of clarity of thought. The theory of public goods is not only settled, but is also empirically demonstrable because these are goods that governments are best placed to provide in the most efficient way and form the basis for the existence of government, to begin with.

Governments can opt to provide private goods, but that is merely an extension of the arms of government beyond its essential responsibilities. The Government of Kenya’s biggest weakness is not even that it seeks (as does the Azimio la Umoja One Kenya Coalition Party) to provide other functions, but that it presently provides such low-quality public goods that Kenyans sometimes opt out of it by providing their own security, an essential service. Just a couple of weeks ago, three children in Kerio Valley were murdered by a gang of bandits in broad daylight.

That result confirms government failure in the provision of core public goods. Our expectation is that no less than a governor who is at the head of one presidential campaign team would recognise our simple point. The provision of stimulus cash to households is less meaningful and a representation of a reversal of priorities when they have money circulated from taxes into their pockets, but their children are getting shot outside their gates. Focus mister!

The governor also suggested that new thinking requires the government to ensure that, besides treatment, Kenyans are able to find employment, thus his justification for direct government involvement industrialisation.

Reading this leaves us unsure whether the author was serious about these being both “unconventional and innovative ideas”. Economics has a branch that studies the deliberate choices of government to promote specific industries and sectors. Ideas such as export promotion and import substitution are studies of industrial policy and are known to every student of economics, except for Mr Muriithi. Among the main findings of this branch of study is that governments are poor at predicting industrial success.

So, while Azimio, or Mr Muriithi, perhaps both, plan to create steel and machinery manufacturing plants, history suggests that they will not be successful. These industries will merely become centres for corporate welfare and provide an expressway to crony capitalism. Kenya has been here before and history is replete with industries that were intended to be a stairway to highly industrialised status. Only people who are insufficiently acquainted with Kenya’s economic history would eloquently argue for a repeat of this expensive disaster.

Now to conventional classroom economics. The scarcity of resources is the basis upon which economics is pertinent in public affairs. Prioritisation is a key skill that every administration in Kenya must demonstrate. It seems that Governor Muriithi thinks that having to prioritise is a luxury that Kenya, with a serious debt overhang, cannot afford. Isn’t it interesting that his wish list of chosen champions to be fed with public money, including steel, aluminium, tools, machinery and household cleaning products, are highly capital-intensive industries? Good luck finding all that money.

A central claim that we made was that, in the quest to expand manufacturing from 7.5 per cent to 30 per cent of the Gross Domestic Product (GDP) within five years, Azimio was not just aiming too high but perhaps unaware of how structural transformation works. Mr Muriithi appears either to have misunderstood the claim or to have constructed a strawman and wrestled eloquently with it. We restate our claim. It is true that growing the manufacturing sector is imperative for Kenya’s growth and employment opportunities.

What we state is that this desired growth in the share of manufacturing as a fraction of the total economy is unlikely to happen in tandem with the growth of agriculture from 23 per cent to 30 per cent of GDP. The change in the composition of GDP across the three main sectors of manufacturing, services and agriculture means that the desired growth in manufacturing must of necessity come at the expense of the agricultural sector.

A major attribute of rapid industrialisation is that the overall value of agriculture grows but its share of GDP shrinks as it cedes to manufacturing and the services that are associated with making manufacturing work efficiently. Clearly, this is a distinction that the governor and Azimio’s defenders missed from their lessons on the economic consequences of manufacturing growth. Mr Muriithi called on us to use google as a research tool and learn about the nascent semiconductor chip manufacturing at Dedan Kimathi University.

Fortunately for us, we have had this lesson in a public event that we hosted in which the ICT cabinet secretary made a presentation. We have examined it quite carefully and our analysis shows us that there is a modest output of lower complexity semiconductor chips being produced. Here, we illustrate what “big government” enthusiasts such as Mr Muriithi get wrong. Manufacturing of a few units is insufficient if the plant cannot sustain its production and profitability in global competition.

The semiconductor sector bears two interesting characteristics. The first is that it is dependent on high-quality research and development and high capital intensity. Success depends on investment in public goods of university knowledge, which formed the first part of our argument with the Azimio Coalition.

It appears that Mr Muriithi is applauding the second part — the production of a small quantity of semiconductors, which we guess is not on the cutting edge of production similar to Taiwanese, South Korean and Japanese and American production. The foundries in which the best chips are produced usually require an investment of at least $10 billion. The internal economics of the semiconductor industry is complex and that explains why their production is confined to a few firms and even fewer countries.

Towards the conclusion of his article, the author gave an assignment for us to read the Navigation Act of 1651. Our finding is that beyond the statement of the act and the date of its enactment, Mr Muriithi got everything else about its economic effects wrong. We are aghast that he referred us to a policy used by a colonial power intending to exact greater domination of its subjects in the USA, a set of actions that good economists claimed as the primary cause of the American Revolution.

This set of policies is not only loathed for the poverty of its reasoning but also by citizens of the United Kingdom for raising the costs of goods sold to them. Surely, this is not a lesson that is pertinent. Portions of the act were repealed in 1849 and 1854 but were rendered ineffective under the policy of salutary neglect, within a decade of enactment. If there’s a lesson that is to be learned here, it is that mercantilism is a bad policy and that the Navigation Act is an example of what governments should not do.

In conclusion, the response from the governor gave the impression that there was a question about the credentials of those who crafted the plan. The function of the initial article was to apply economic reasoning to the series of claims and proposals in the plan.

To be candid, the published plan contains a lot of claims which contradict known economic policy principles in addition to a good number of unbelievably naive claims whose real-world consequences the set of highly qualified professionals did not care to examine.

Among these are populist statements such as a seven-year tax holiday for all enterprises owned by younger Kenyans. As if such a carelessly drafted law wouldn’t generate the unintended consequence of the permanent establishment of new firms as the clock period for one firm wound down. These are the kind of ideas that Paul Krugman, a Nobel laureate and a fine economist calls “zombie ideas”. They are terrible but it seems that Azimio’s highly qualified professionals will stick to them. Good and conventional thinking be damned, right?