Without freedom, East African economies will slow down

In my last blog post, I stated that there was no reason for a Kenyan to worry about the fast growth Ethiopia was seeing.

By virtue of its larger population, and therefore larger labour force, it is inevitable that Ethiopia’s Gross Domestic Product (GDP) will surpass Kenya’s.

The idea was not to commence a polemic about whether higher GDP is consistent with development or not, because that is not a useful argument.

One could ask what the longer term prospects of both countries are, given that they both register growth rates above the world average.

Here the story is that the present growth rates may be real but certainly unsustainable, because both countries are likely to run into a growth wall sooner rather than later, for the simple reason that they do not value economic freedom.

READ: Ethiopia to overtake Kenya as Eastern Africa’s top economy

Attaining high growth rates has never been difficult for most nations. The more difficult task is maintaining high growth rates for at least a generation, so as to ensure social and economic transformation.

Kenya and Ethiopia seem to have acquired the first, but the models of development and the status of economic management suggest that they cannot maintain these growth rates for even half a generation.   

The Heritage Foundation, a conservative think tank based in the United States, publishes an annual Index of Economic Freedom report. It ranks sovereign territories against twelve forms of economic freedom, grouped into four pillars: the rule of law, government size, regulatory efficiency and open markets.

With a record of two decades of publication, the IEF has consistently demonstrated that economic freedom is important because it is highly correlated with, if not altogether a determinant of, a country’s prosperity.

Because of the breadth of countries ranked in 2017, it is a sensible tool for understanding why material and social prosperity is distributed differently among countries.

Countries like Hong Kong, Singapore, Canada and Australia are always among the leaders. At the bottom of the scales of the 180 countries are the states with incomplete government consolidation such as the Democratic Republic of Congo and North Korea.

HARDLY PARAGONS

East Africa’s shining stars, Kenya and Ethiopia, are ranked among the “Mostly Unfree”, at 135th and 142nd respectively, and that’s why the citizens of East Africa should be concerned.

Not only is the ranking quite sobering, but it shows how much work is required to achieve the economic promise these countries hold.

The average score for all 180 countries is about 60.9 points, which would suffice to place any nation in the "Moderately Free" category.

Needless to state, these two eastern Africa “giants” are below average, with a nearly identical score of 53.7 and 52.7 for Kenya and Ethiopia, respectively. 

Of consequence however is that the performance of both nations is nearly converging but going in different directions because Kenya’s average score against each of the 12 freedoms has dropped by four points, while Ethiopia has made progress by 1.2 points compared to the previous year.  

Using the year-by-year score as a proxy of reform towards economic freedom, Kenya has had a 10-year drop while Ethiopia has had modest but steady upward improvement.

The trend lines in these graphs may explain why the growth rates for Ethiopia are nearly 50 per cent above Kenya’s, despite Kenya’s higher overall score.

Ethiopia has, commendably, moved from being classified as repressed in two decades while Kenya climbed down from a score of above average.

The lesson for Kenya policymakers is that the one step forward with reforms and another two backwards means that Kenya has not broken out with bold, consistent reforms towards economic freedom. 

The single largest challenge for Kenya is in government integrity, government size and fiscal health, all under the pillar of government size. This is directly a public spending issue, confirming that Kenya is spending as if it were richer than it really is.

On the other hand, Ethiopia’s risk profile lies in the same pillar of government size, but added with challenges in the pillar of regulatory efficiency.

In conclusion, the so-called giants of eastern Africa may be growing at a clip but are hardly paragons of economic freedom.

Citizens should be worried. It is in their common interest for governments here to expand our economic freedoms.  

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