Global Policy Forum

By K. Sawai

The years 2000 and 2001 were a very difficult time for Kenya. The country underwent a debilitating drought, which necessitated a daily power rationing scheme. Unemployment intensified and insecurity increased. Agricultural output dropped significantly.

Kenya was also severely wounded by world oil price increases. As a result it, for the first time, recorded a negative economic growth, -0.3 per cent. Even in such circumstances, the IMF would just not relax its attitude on structural reforms. It continued to force Kenya to implement ever more conditions, which included a leaner budget, retrenchment of civil servants and setting up an anti-corruption agency.

The World Bank was particularly adamant on privatisation of public corporations. Because of the severe demands, Kenya's leadership raised its voice and spoke of a "second colonisation".

The 2000-2001 Government budget had already taken IMF funding into account. However, the IMF recognises that the structural reform process is off-track and will not release funding unless an anti-corruption policy is in place.

The callous IMF behaviour is further demonstrated when it takes no notice of the 2001-2002 growth estimates, whose percentage dropped from 2 to 1. Is it right? Is the IMF's mission to push Kenya until the economy is destroyed? Is an anti-corruption policy really the highest priority during these difficult times?

In a joint statement by the IMF and the World Bank on September 6, 2000, after they were criticised for not making clear their roles, they defined their roles as follows: "The Fund's core mandate is to promote international financial stability and the macro-economic stability and growth of member countries. To that end, the Fund must focus on its core responsibilities: monetary, fiscal, exchange rate policies and their associated institutional and structural aspects.

"The core mandate of the World Bank group is to help countries reduce poverty, particularly by focusing on the institutional, structural and social dimensions of development."

It would be unnatural not to notice a gap between this statement and the IMF's attitude to Kenya. The economic reforms that the IMF demands of Kenya are basically not different from the previous ones. They are based on the assumption that people will behave rationally and that their most cherished economic wants will be realised by means of demand and supply co-ordinating market prices and wages.

But that may be expected only when the market mechanism is working at a certain level, the economic conditions are good, information is communised and the national economy is kept at full employment.

Needless to say, such conditions do not exist in developing countries. In many such countries, nothing can be sold by depending on the market. It is necessary first to create a market that takes cognisance of the uniqueness of the Kenyan situation. Retrenchment of civil servants or privatisation only create widespread unemployment. When economic activity is buoyant, various private sectors can absorb the unemployed. But in present-day Kenya, job-creation is most sluggish. Nothing is produced. Therefore, any policy which only increases unemployment should not be tolerated. This, then, calls for Government intervention with a policy that creates jobs.

What kind of private sector will make investment brisk and become an economic engine in Kenya's current circumstances? Are there such industrial capitalists in Kenya?

The answer seems to be no. Nobody tries to expand investments or take risks when there are various pitfalls in a licentious market situation. In short, we cannot expect a free market to work when the economy is sluggish. Furthermore, there is no market in which all people can share information in the same manner. Prof Stiglitz, the 2001 Nobel economics laureate, said as much. Nevertheless, even if reforms based on that theory are forced as conditions for aid, not much can be expected as an outcome because it will drive Kenya into a terrible situation.

If the recovery programme is implemented from a cornered Kenya, the costs will escalate and the multilateral agencies will become a burden to the bilateral ones. Then is it reasonable to opt for a policy supporting the economy by promoting public works, borrowing finance, utilising unemployment and arousing a market demand?

In adverse economic circumstances, it is reasonable so long as the financial investment (expenditure) is effective and efficient to ensure the benefits correspond to the costs. As I have said, it is difficult to try to activate the private sector by depending upon the market mechanism when the economy is down. If so, the role of Government must be reviewed. A smaller government, as the IMF demands, can affect the economy. It is now time for the Government to intervene. Does increased Government investment increase the national burden for Kenya with its huge debt burden?

With increased taxes, the national living standard can be improved as much in case the investment is for national benefit. Since the people will plough back these benefits to the Government, the national burden will be unchanged. Put that way, one must try to resuscitate the economy by expanding the budget, increasing production and dealing effectively with unemployment. The market mechanism can wait until after economic recovery.

The IMF's method of structural reforms based on neo-classical economics has repeatedly failed. Its position is thus untenable because the Poverty Reduction Strategy Paper (PRSP) will equally fail.

The World Bank is similarly culpable. The market mechanism is not strong enough in Kenya. Thus the IMF stance of neo-classical economics cannot work effectively. The policies of structural reform, globalisation and good governance are all right in principle. However, there must be proper discussion on specifics. Otherwise, the economy will only continue to deteriorate.

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