Kenya keeps making – and having to reverse – bad policies

Kenya’s economic policy environment is always in flux, trying to respond to problems with one policy statement after another.

While I take most policy measures, as stated, in good faith, bad policy finds implementation in Kenya consistently.

I took a cursory count of the policy declarations that have been made and reversed in the last three years and was reminded to list my signals of a poor policy process, and its outcomes.

Top of my list is the hurried implementation and withdrawal of the Capital Gains Tax (CGT). The quick reversal reflects inefficiencies in policy development and implementation.

Industry, undoubtedly, would be reluctant to accept a new tax regardless of its size, so the vociferous opposition to this measure alone was not proof that it failed. The real signal that it would not work was how administratively onerous it was.

In other words, Parliament was convinced to pass an unworkable tax policy and went on to repeal it without asking why it failed. It was poorly designed and too complex, the first signal that it could fail or cause large distortions.

Ideological rigidity is a great signal of poor policy thinking and it is plainly evident in Kenyan policymaking. Last year, Kenya’s currency depreciated by about 10 per cent in comparison to the US dollar, leading to woe and hand-wringing, as if the economy itself was grinding to a halt.

Enormous political pressure was placed on the Central Bank’s leadership to respond, without questions being asked about whether this was good policy. What was argued, even in the business press, was that depreciation of the Kenyan shilling is bad while appreciation is good.

SUBSTITUTES FOR HORSE TRADING

Accordingly, currency depreciation somehow represents bad management and therefore should be corrected by strengthening the currency at all costs.

People forget that with the exception of Germany, few countries have maintained a strong currency and benefitted from it.

This “currency strength” fallacy is of concern, because it means that important economic decisions are being made based on national pride and posturing, as opposed to calmer analytical resolve.

There are definite costs for keeping a currency stronger than it should be, and if Kenya’s currency is much stronger than it should be, as I think it is, the time of reckoning will still arrive.

Another source of bad policymaking comes from the reality that in an endangered but plodding democracy, public confidence can be gained through populism. So slogans like “being a digital government” become substitutes for difficult horse trading and the acknowledgement of trade-offs.

Instead, the urge to use technology to solve every genuine and imagined policy problem takes over.

It’s been a year now since the government imposed a cashless fare collection mechanism on public service vehicle operators in Nairobi. This experiment collapsed very quickly, partly because of the flawed assumption that the relatively advanced technology behind it made it a good choice.

The school laptop project runs an equal risk of becoming an expensive policy blunder for the same reason: highly popular but provably bad policy. An American teacher I met said that the most effective technology products he ever used to teach Advanced Placement algebra in high school were a pair of whiteboards and pens of different colours.

TAXES ON BEER

Bad policy choices can also result whenever the quest to maximise revenues drives policy at the expense of other goals. A good example is the excise taxation law, which places higher taxes on one particular type of alcoholic beverage.

Beer is by far the most popular of the alcoholic beverages consumed in the formal market in Kenya, but accounts for a far lower volume of pure alcohol consumed.

The relative ease of collecting taxes on beer means that the law has established a tax that is disproportionately borne by consumers who prefer beer, despite the fact that other products, such as wine and whisky, contain a greater alcohol volume.

Whereas the legitimate objective of excise taxes on alcohol is to reduce the harmful effects that result from consumption, the need to maximise revenues results in the consumers of one product subsidising other consumers.

This unconnected train of thought reminds me that all arms of government and Kenyans must take policymaking more seriously. We cannot hide bad economic policy under digital clothing, populism or the obsession with raising taxes.

Good policy thinking starts with the compatibility of goals and methods while conceding that there must also be trade-offs.

Kwame Owino is the chief executive officer of the Institute of Economic Affairs (IEA-Kenya), a public policy think tank based in Nairobi, Kenya.Twitter: @IEAKwame