Why dumping illegal sugar in the Indian Ocean was bad policy

A few months back, I was trying to convince eager students of law that an integration of economic principles in their education is essential. Understandably, they took my claim for the fact that every occupation or profession in Kenya not only tries to ingratiate itself with government, but takes to the air to argue that it is indispensable.

Last Saturday, one among that group sent to me this news piece. The article states that the Cabinet secretaries for Industrialization and Tourism oversaw the dumping of 400 tons of contraband sugar into the Indian Ocean.

I suppose that the sender of the link was asking whether, like those Cabinet secretaries, I considered this a moment of pride both to display opposition to tax evasion and intolerance towards imports that are considered harmful to local industry. My response was that this is a deeply embarrassing display and shows instances where stagecraft is supplanting good policy thinking in Kenya.

In my reckoning, at least half of all professional economists in Kenya work either for the government or institutions affiliated with it. That their response to the issue of illegal imports is to pour up to 400 tonnes of sugar into the sea illustrates that the economists in government do not get to offer policy advice in these ministries.

CREATING A SPECTACLE

This is because though the sugar was imported without applicable taxes being paid, the marginal decision would be to recover those taxes from the owner of that property and then to charge them for tax evasion. If a proper response had been required and public-sector economists asked to device a response, they would have engineered at least half a dozen sensible responses.

Since the contraband sugar was already in the custody of the Kenya Revenue Authority (KRA), the primary interest ought to have been the recovery of due taxes that formed the basis for impounding that property in the first place. That the property was impounded before entry into the retail markets suggests that somebody at the revenue service was sufficiently vigilant despite the attempts at deception through false declaration.

However, it beats logic that the Cabinet secretaries think that it is better to forgo those taxes and instead create a spectacle by pouring 400 tonnes of a valuable commodity into the ocean. If any one of the economists sitting in the Ministry of Industrialization were asked, it would have been clear that the sugar should be auctioned with the proceeds appropriated by the revenue service for lost revenue first.

FAILING SUGAR MANUFACTURING

An implied argument in the speeches made is that “cheap” imported sugar for which no taxes have been paid also leads to unfair competition conditions for local industry. Thus the destruction of imported sugar is seen as buttressing the market positions held by local manufacturing plants. After three decades of failing sugar manufacturing despite the wall of protection from imports, this idea is only convincing to the most optimistic and uncritical policy watchers. Destruction of the imported sugar does not help any local firms or consumers though it harms the importer, especially since Kenya has a deficit of local production that is met through imports.

An alternative would be to auction the impounded sugar in the domestic market, extract the taxes that were due and then divert the modest balance of resources towards strengthening the competitive ability of local sugar manufacturers. That this was not even contemplated shows that the aggressive policy against imported sugar in Kenya is not really informed by the need to protect either consumers or local manufacturers. This is because it is an oxymoron to claim that government policy is aimed at creating welfare improvements for individual citizens and then rail against cheaper sugar for the same families.

INEFFICIENT TAX STRUCTURE

The value of the sugar that was destroyed was estimated to be Sh38 million, of which more than one half would be tax value. That a single importer would import that much sugar and disguise it as other equipment in the attempt to evade import taxes is also a direct signal that the tax structure in place is inefficient and creates strong incentives for cheating. Dumping imports into the sea doesn’t resolve this issue.

Strictly speaking, this destruction by saturating the sea with sugar is equivalent to throwing away half of that sum in cash just to make a point before cameras. Under no circumstances at all should a ceremony be made of destroying property in the name of stopping counterfeits and sending a message to tax cheats. The two Cabinet secretaries should honour the economists in their departments by taking their advice. This will prevent them from creating the spectacle which shouts economic illiteracy on their part.

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