Economic Management in Kenya: Diagnosis and Prognosis

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ECONOMIC MANAGEMENT INKENYA: DIAGNOSIS AND

PROGNOSIS

by

John Thinguri Mukui

Paper prepared for the seminar on Kenyas Future Policy Options,organized by the International Commission of Jurists (Kenya

Section), Aberdare Country Club

12-15 May 1993


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ECONOMIC MANAGEMENT IN KENYA: DIAGNOSIS AND PROGNOSIS

1

By their fruits you will know them(Matthew 7:20)

The study of money, above all other fields in economics, is the one in which complexity isused to disguise truth or to evade truth, not to reveal it. Most things in life automobiles,mistresses, cancer are important only to those who have them. Money, in contrast, is equallyimportant to those who have it and those who don t. Both, accordingly, have a concern forunderstanding it. Both should proceed in the full confidence that they can. John KennethGalbraith, Money: Whence It Came, Where It Went, Houghton Mifflin, Boston, 1975

INTRODUCTION

1. Development planning has had its strongest roots in economic management of centrally

planned economies which were basically one-party, monolithic political structures. The manifestoof the ruling party formed the basis of formulating the plan. After defining development targets, thedevelopment plan laid out the framework through which these targets were to be achieved. Theimplementation of the Plan was carried out by policy makers who were assumed to have adequateunderstanding of the consequences of their economic choices, and have the interests of thegoverned. The political and economic collapse of one-party states of Eastern Europe clearly showedthe drawbacks of centrally planned economic development.

2. The economic and political changes taking place in Kenya do not rule out the role ofdevelopment planning entirely, but the approach has to change in order to make the planningmeaningful. To have meaningful planning, two conditions are necessary though not sufficient. First,

the development planning process has to be realistic and consider the constraints and opportunitiesin the economy. Secondly, there has to be commitment by the political system since policy makersdecide on allocation of resources and how to mobilize those resources. Planning should mainly becentred on creating the socioeconomic framework within which economic development takesplace, e.g. provision of well-maintained and reliable basic infrastructure, management of budget andexternal account deficits, tariff policies, and fiscal and monetary policies. There is therefore a casefor a shift from medium-term planning in favour of strengthening capacities for policy analysis andshort-term macroeconomic management, geared towards achieving long-term economic and socialobjectives.

DEVELOPMENT PLANNING EXPERIENCE IN KENYA

3. The ritual of development planning in Kenya takes the form of sessional papers that set thebroad long-term development agenda. Only two sessional papers setting the long term economicagendahave been issued in Kenya since independence: Sessional Paper No. 10 of 1965 on AfricanSocialism and its Application to Planning in Kenyaand No. 1 of 1986 on Economic Management forRenewed Growth. The sessional papers are implemented through a five-year development plan,which is traditionally supposed to be implemented during the lifetime of a Parliament. However,the latest 1994-96 Development Plan, released in December 1993, has a reduced useful life of three

1 This is a slightly expanded version of my paper titled Kenya: Economic Performance and Future

Prospects, prepared for the Law Society of Kenya conference on The Rule of Law and Democracy in the

1990s and Beyond, Safari Park Hotel, Nairobi, 4-6 March 1992.


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years. The development plan is given operational meaning through the annual budget speeches bythe Minister for Finance.

4. The Sessional Paper No. 10 of 1965 on African Socialism and its Application to Planning inKenyawas the first attempt at a broad-based policy package by the independent Government, as it

laid down the development path which Kenya has tried to follow since Independence i.e. a mixedeconomy with growth as the major objective. The Sessional Paper emphasized that Governmentsefforts at reduction of unemployment, increased Africanisation of the economy, and subsidization ofeducation should not compromise economic growth. Although Kenya had just acquiredindependence and majority of the population did not have access to basic needs like education andhealth, the Sessional Paper emphasized the need to put more Government resources into directlyproductive activities than in provision of free or highly subsidized basic needs.

5. Although the objective of development planning has remained the same (i.e. economicgrowth with the aim of alleviating poverty, ignorance, disease and income inequalities), theemphasis has changed over the years. The first Development Plan (1964-1970) after Kenya attainedindependence was superseded by a thoroughly revised Plan covering the period 1966-1970, since

the time for the preparation of the first Plan was too short. The Development Plan 1966-1970,which for all intents and purposes is considered as the first Development Plan in independentKenya, represented the first cycle in the implementation of Sessional Paper No 10 of 1965.

6. The second development plan (1970-1974) emphasised balanced economic developmentthrough rural development. This theme was later revisited in 1983 as the District Focus for RuralDevelopment (DFRD). However, the District Focus strategy was viewed by some people as a meansof allocating more resources to certain districts, while denying resources to others, as reward forpolitical support and punishment for dissent. This is hardly surprising: the more you focus, thesmaller is the field of view.

7. Kenyas third development plan (1974-1978) was written during the time the world wasexperiencing negative external shocks arising from international exchange rate instability (late 1971)and the oil crisis (late 1973), although the preparation of the Plan was completed before the onset ofthe oil crisis. Due to balance of payments difficulties and increased inflation, in late 1971, theGovernment imposed import controls and direct price controls on domestic retail prices (Kenya,1972;Vinnai, 1972), which were supposed to be short-term measures for maintaining price andexchange rate stability, but became a long-term feature of Government interference in economicactivities. The Plan emphasised that the enhanced role of Government in directing the economy interms of price and import controls and other regulations would be relaxed or removed entirelywhen the inflationary pressures eased.

8. The 1979-1983 Development Plan was the first to be written when President Daniel arap

Moi came to power. During that time, the popular economic thinking was with regard to alleviationof poverty and provision of basic needs. The experience of the decade of the 1960s, when theeconomies of the emergent independent African countries were growing, had shown that thetrickle downdevelopment theories as embodied in Sessional Paper No. 10 of 1965 had failed toalleviate poverty for the majority of the population. Therefore, the emphasis of the fourthDevelopment Plan shifted to alleviation of poverty without losing the objective of economicgrowth.

9. The 1980s saw a change in emphasis in international economic thinking from basic needsapproach to structural adjustment. Economists had started feeling that the inability of the lessdeveloped countries to emerge from their economic deprivation was due to policy and structural


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rigidities. In order to renew economic growth after the devastating 1984 drought, the KenyaGovernment authored Sessional Paper No. 1 of 1986 on Economic Management for RenewedGrowth, which was to guide Governments development policy to the end of the century. However,despite the Governments stated commitment to economic reform, it takes the muscle of donors tomake the Government implement changes already proposed in its official documents. The

suspension of donor balance of payments support in 1991 was aimed at pressurizing theGovernment to institute macroeconomic reforms and parastatal and civil service reforms, in order tofacilitate resumption of economic growth, in spite of the existence of a similar reform package in theSessional Paper No. 1 of 1986. This basically confirms that these documents are not prepared out ofcommitment to the stated policy objectives and framework, but are only meant to be shopping listsfor foreign aid.

STATEMENTS OF INTENT AND REALITY

10. A person who is not familiar with Kenya but has read Kenyas policy documents wouldconclude that Kenyans are in a state of Nirvana. There are, however, wide disparities betweenstatements of intent and reality due to (a) slow implementation of stated policies, (b) policy reversal

(backtracking), and (c) some occasional blackouts in information on actions being undertaken. Thelack of commitment to stated policies is illustrated by (a) the policy on foreign commercialborrowing, (b) the liberalization of the grain marketing system, and (c) official reaction to recentincreases in money supply

.

11. The public debt incurred in the 1980s was mostly in the form of concessional balance ofpayments support (in support of structural adjustment programs) from the International MonetaryFund (IMF), the World Bank and other donors, and grants from a number of bilateral agencies.However, there has also been borrowing on high-interest short-term maturities, mainly for theTurkwel Gorge Hydroelectric Power project. Donors have also insisted on limitation of foreigncommercial borrowingbecause of its short-term effects on debt service (due to short maturities and

high interest rates), and because it reduces the net worth of concessional lending if the concessionaldonor money will make it possible for the recipient country to repay debt from commercial sources.In his Budget Speech for fiscal year 1991/92, the Minister for Finance stated that we have setourselves rigid annual ceilings on our non-concessional external borrowing with a view tocontrolling such debt (Kenya, 1991a). Despite Governments stated commitment to limitation onforeign commercial borrowing, there have been attempts by the government to borrow (orguarantee) commercial debt, but this has sometimes failed due to local pressure groups and thelimitations on commercial borrowing in the donor-sponsored structural adjustment operations.

12. To implement minimum producer prices and make the National Cereals and ProduceBoard (NCPB) the sole buyer of the surplus scheduled crops, the Government established abureaucratic machinery to control grain movement and marketing. The market dominance has

been secured by statute by the NCPB and its predecessors since World War II. As early as 1942, themaize marketing system was described as a misbegotten scheme and the most barefaced andthorough-going attempt at exploitation that the people of Africa have ever known since Josephcornered all the corn in Egypt one of the most reprehensible incidents of Old Testament history2

2Colony and Protectorate of Kenya, Legislative Council Debates, Second Series, Volume XIV: columns 302-

372, 21 August 1942; and column 373, 15 September 1942. The comments were in reaction to the system ofmaize control that (a) grant a boosted price or make any direct discrimination in the price paid toEuropeans as against the native grower for the same quality of article, and (b) a producer price for thenonnative which was higher than the price maize was sold to the public. A native grower was getting Shs4.90 for a bag of K.2 maize compared with Shs 9 to a nonnative grower, while maize was sold to the public

at Shs 8.60.


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(also cited in Mosley, 1983; and Mosley, 1986). In the maize industry, academic articles have beenwritten from as far back as 1959 (Miracle, 1959) and commissions of inquiry appointed from time totime (in 1946, 1952, 1955, 1958, 1963, 1966 and 1972) but their recommendations are neverimplemented, principally because political expediency takes precedence over careful economicanalysis. During the 1980s when every structural adjustment program mentioned the reform of the

grain marketing system, the staff of NCPB increased threefold, making it necessary to (a) raise themargin between producer and consumer prices to compensate for inefficiency, and (b) subsidize itsoperations from the Treasury.

13. The case of the massive increase in money supply (defined as currency outside banks,demand deposits, call and 7 days deposits, and savings and time deposits) in 1992, estimated at 35percent, represents a case of blackout in official communication on the consequences ofGovernment actions. The increase in money supply put pressure on the external account through(a) increased demand for imports and domestically produced goods with an import content, and (b)capital outflows caused by increased preference for foreign assets as a result of downward pressureon real domestic interest rates, which necessitated a massive devaluation to mop up excess pressureon external reserves. However, the official version of the story was that the local currency lost value

due to donorsconditionality to liberalize the exchange rate.

14. The most devastating effects of inflation fomented by the increase in money supply weremainly distributional. Real incomes were shifted from people with fixed incomes and providentfunds, and from savers to debtors since nominal interest rates did not adjust fully. In general,inflation is a tax on those with fixed incomes and gives unwarranted claim on resources to therecipients of the increased money supply (Government and/or private individuals). With or withoutexchange rate liberalization, official devaluation (and its accompanying increase in importedinflation) and the impact of increased money supply on domestic demand, would have caused a risein the general price level.

15. The investment climate has two main elements: the set of economic policies in support ofthe private sector, and the business confidence in the regime, especially the perceived probability ofpolicy reversal. This is mainly because a structural adjustment operation is a sequence of consistentactions, known in advance. For example, the liberalization of the grain marketing system wassequenced to begin with gradual relaxation of movement controls and end with abolition ofmovement permits and conversion of the role of the grain marketing parastatal to a buyer and sellerof last resort, maintenance of strategic reserves, and stabilizing prices. In the case of liberalization ofthe external account, the sequence of reforms was initiated in 1988 with the rationalization of theimport tariff structure coupled with prudent exchange rate management, to increase in categories ofimports with unrestricted licenses, in an effort to liberalize the current account of the balance ofpayments. The final phase - the liberalization of the capital account - included the introduction offoreign exchange bearer certificates (Forex-C) for capital inflows and deregulation of the exchange

rate in March 1993 which opened capital account outflows. A sequenced reform programmerequires a systematic implementation timetable, and policy backtracking is harmful to businessthrough (a) losses or windfalls made when policies are reversed, and (b) the poor response of theprivate sector to economic incentives due to the perceived probability of policy reversal.

REASONS FOR POOR POLICY IMPLEMENTATION

16. The factors outlined below include (a) deteriorating governance, mainly in assigning theprovincial administration developmental roles, the decline of institutions especially producercooperatives, and centralized decision-making; and (b) inadequate public sector management,especially the impact of dilapidation of the infrastructure, the disproportionately large share of


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personnel emoluments in the central Governments recurrent account, the effect of inefficiency inthe parastatal sector on private sector costs of doing business, and corruption.

THE FALL OF THE GOVERNANCE REALM

17. The Provincial Administration: At independence, Kenya inherited aprovincial administration which was designed by the British to facilitate control of the African andhis resources. Although the administrative setup has not changed, it has increasingly been assigneddevelopmental roles that it is ill-equipped to handle. The climax came up in 1983 when the DistrictFocus for Rural Development came into being, a strategy that was mooted in the secondDevelopment Plan (1970-1974).

18. The introduction of district focus saw the responsibilities of the provincial administrationenormously expanded. At the same time, there was rapid promotion of inexperienced and lesseducated staff based on political considerations (the technical know who rather than technicalknowhow or potential employees certificate of origin) rather than merit. With the district focus,districts were turned into centres of power and control of Government resources. The District

Commissioner is in charge of most Government resources and personnel in his district. This gradualpoliticisation of the administrative apparatus has led to deterioration in efficiency in formulationand implementation of developmental programs.

19. Decline of Institutions

: In June 1982, Kenya became a de jure one-partystate, which facilitated consolidation of power in the executive. This culminated into (a)constitutional amendments that withdrew security of tenure of the Attorney General and Controllerand Auditor General (November 1986) and High Court and Court of Appeal Judges and members ofthe Public Service Commission (August 1988), among other legislations and administrative fiat; and(b) emasculation of organisations with grassroots support as they were viewed as potential ground togroom opposition. This political interference caused management of such organisations to

deteriorate and some even collapsed, leading to decline in economic welfare for the communitieswhich benefitted from the organizations. The Government also became increasingly suspicious ofnongovernmental organisations (NGO) especially those operating at the grassroots. In order to curbthe activities of NGOs, legislation was introduced, namely, Non-Governmental Organizations Co-ordination Act, 1990and Non-Governmental Organizations Regulations, 1992such that the NGOscould be controlled by the central Government.

20. There has been a lot of interference with (or outright emasculation of) statutory boardsand cooperatives dealing with agricultural produce. In 1983, the farmers lobby group, the KenyaFarmers Association (KFA), was forced to reorganize as the Kenya Grain Growers CooperativeUnion (KGGCU). The only one that has survived with some degree of autonomy is the Kenya TeaDevelopment Authority (KTDA), mainly because the statutes and operational autonomy in the

smallholder tea industry were designed to outlast political regimes (Lamb and Muller, 1982;

Stern,1972; Stern, 1991;Leonard, 1991, chapter 6). The tea factories are owned by farmers (hence thedifference in pay for green leaf by factory) while KTDA operates as a management consultant,receiving fees from the tea factories for services rendered. According to Barkan (1992), theGovernment sought to discredit the Kenya Tea Development Authority ...by authorizing theestablishment of the so-called Nyayo Tea Zones under separate administration. The organizationalstructure and statutes governing the tea industry should be studied with a view to replicating toother subsectors, to make it difficult for future political regimes to interfere with economic(producer) associations and cooperatives.

21. The move towards more authoritarian rule hostile to grassroots organizations, producer


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cooperatives and NGOs has only succeeded in alienating the public from the Government. As aresult, the public increasingly saw the Government as a source of, rather than the remedy to, theirproblems. The people therefore failed to identify themselves closely with developmentalprogrammes implemented by the Government. Developmental programmes originating frompoliticians were taken with reservations since in most cases there was little or no accountability in

the use of resources. In addition, the widespread use of politically-appointed commissions to runcooperatives, local authorities and producer organizations alienated the public and investors.

22. Centralized Decision Making: It is important to democratize thedecision-making process and to view economic reform programs as a social contract between thecitizenry (through their elected representatives) and the Government. For example, theGovernment in March 1993 backpedalled on its economic reform programme with the donorcommunity. While one may not support the Government in its standoff with the donor community,the reform program that the Government had embarked on in the previous week, namely,liberalization of the exchange rate, was illegal as the laws that govern exchange control andremittance of profits by foreign companies located in Kenya (mainly the Exchange Control Act andthe Foreign Investment Protection Act) had not been amended by Parliament. The Foreign

Investment Protection Act allows for remittance of profits by foreign companies resident in Kenyain the approved foreign currency and at the prevailing official exchange rate. The Government, byreneging on the reform programme, was simply reminding the public and the donor communitythat the laws had not changed. Although the Exchange Control Act gives the Minister power to giveexemptions in particular clauses, a sustainable reform programme should have been accompanied bymore fundamental amendments to the Act. If the exchange control regulations had been amendedby Parliament, a private individual who was adversely affected by the policy reversal would havebeen able to defy the administrative fiat or sue the Government for any losses incurred as a result ofthe policy reversal.

23. Previous reforms, e.g. in repatriation of profits by foreign companies located in Kenya and

the partial grain marketing liberalization, had been accompanied by amendments to the ForeignInvestment Protection Act and the February 1991 legal notice on maximum quantities of maizemovements that did not require a permit. The current economic structure is founded on an array ofGovernment controls embodied in the statutes. If various aspects of economic reforms are effectedthrough Parliament by changing the laws that govern private sector behaviour, this would signalGovernments long-term commitment to the reform agenda, and reduce the scope for directlyunproductive activities (e.g. rent seeking). It is surprising that the donors allowed the Governmentto flout its own laws by implementing a reform programme that was not accompanied byamendments to the legal structures. That is one of the lessons that Kenyans and the donorcommunity should learn from the decision by the Kenya Government in March 1993 to suspend itsreform programme with donors.

24. In addition, it is important to highlight the contradiction inherent in StructuralAdjustment Loans (SALs) in support of economic reform. The SALs, which have been the enginebehind Kenyas economic performance in the 1980s, have already been granted to support policyinitiatives in agriculture, industry, finance, health and education. Due to changes at the global scene,balance of payments support is not likely to be a major source of financing in the years to come. Inany event, if a sectoral structural adjustment programme is fully implemented, further funding foreconomic reform in the same sector becomes unnecessary; if they are not implemented, morefunding is unjustified. Structural adjustment is supposed to make the economy self-sustaining, butnot to create dependency on foreign financing.

25. An illustration of unaccountable policy implementation process is the recent increase in


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Central Banks direct advances to the Kenya Government through overdrawing of the PaymasterGenerals Account, which was in excess of the limits set by law. Section 48 of the Central Bank ofKenya Act (Cap. 491 of the Laws of Kenya) states that the Central Banks direct advances to theGovernment shall not at any time exceed twenty-five per centum of the gross recurrent revenue ofthe Government as shown in the Appropriation Accounts for the latest year for which those

accounts have been audited by the Controller and Auditor-General. Gross recurrent revenue forfiscal year 1990/91 was K 2,286.2 million, which implies that Central Banks direct lending to theGovernment should not have exceeded K 571.5 million from May 1992 when the 1990/91Appropriation Accounts were published until the audited reports for the following financial year,i.e. 1991/92, were released. During the period 1990-93, the monetary authorities violated section 48of the Central Bank of Kenya Act. The Governments overdrawing of the Paymaster GeneralsAccount led to increase in money supply.

26. Another case of official breach of law was the illegal payment of 15 percent compensationfor diamond jewellery and gold, over and above the normal 20 percent export compensationprovided for in the Local Manufacturers (Export Compensation) Act (see 1990/91 AppropriationAccounts, pp. 11-12). The 1991/92 Appropriation Accountsstated that no evidence has so far been

seen to confirm that the gold and diamond jewellery claimed to have been exported and for whichcompensation was claimed and paid, originated and was processed in Kenya and that the importcontent of the goods did not exceed 70% of the ex-factory value of the goods as required by LocalManufacturers (Export Compensation) Act. The validity of the total payments of K 73,977,521made to the firm as of March 1993 as export compensation cannot therefore be confirmed as

due

and payable under the Local Manufacturers (Export Compensation) Act or any other law. TheEconomic Survey 1992 mentioned that the 1991 export earnings increased by 31.0 percent over1990 partly occasioned by a sharp rise in exports of gold and other related jewellery, but the 1991export earnings were corrected in the Economic Survey 1993 to remove the statistical anomaly3.Regardless of whether exportation did take place, the payment violated (a) the Restrictive TradePractices, Monopolies and Price Control Act (1988), for awarding one company the sole rights to

export diamond jewellery and gold, and (b) the Local Manufacturers (Export Compensation) Act forpaying a higher rate of export compensation than allowed by law.

27. Another example is the enactment of the Petroleum Development Fund Act, 1991, which,for the first time in the history of Kenya, gave a line Ministry the power to tax, to spend and to holdany outstanding balances. It is curious that section 5(d) of the Act exempted the Fund from audit bythe Controller and Auditor-General unless if so directed by the Treasury. The Road MaintenanceLevy Fund (1993) purports to be payable in respect of any vehicle for use on any classified road,while it is levied through purchase of petroleum fuel rather than in the process of using a classifiedroad. Automotive fuel is also used in running stationary machines (e.g. water pumps and maizemills) and motor vehicles which do not usually use classified roads (e.g. farm tractors, boats andtrains). The Road Maintenance Levy shall therefore be payable by non-motorists, in addition to the

fact that the classification of roads is not within the control of Parliament. The Government soverdrawing of the Paymaster Generals Account beyond the limits prescribed by law and the illegalpayment of 15 percent compensation for diamond jewellery and gold over and above the normal 20percent export compensation provided for in the Local Manufacturers (Export Compensation) Act,reflects on the lack of unambiguous sanctions and penalties to those who flout the laws they areentrusted to implement and safeguard.

3Another commendable feature of the Economic Survey 1993was the admission that production in Rift

Valley and certain parts of Western province was hampered by tribal clashes leading to abandonment offarm activities at critical periods of land preparation, weeding and harvesting. Consequently, the aggregate

output of all major commodities including tea, sisal, pyrethrum, cotton and sugar-cane registered a decline .


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INADEQUATE PUBLIC SECTOR MANAGEMENT

28. Infrastructural Development: The major role of any Government is todevelop infrastructure e.g. roads, schools, hospitals, electricity generation and telecommunications,

so as to create an enabling environment for the private sector and households to operate. Thedevelopment of such infrastructure should respond to demand so as to ensure that scarce resourcesare put where the rates of return on investment are high. The Kenyan economy has beencharacterised by a strong public sector either directly (in terms of investment) or indirectly throughcontrols and regulations on the private sector. However, a strong public sector has had negativeimpact on the overall efficiency in the use of resources. This has come about because inefficiency inthe public sector has made private sector costs of doing business very high. The road network, forexample, is dilapidated due to poor maintenance. This has increased private sector vehicle operatingcosts; the increase is estimated to be about three times the additional expenditure necessary tomaintain the roads. The urban transport problems - poor road maintenance and congestion - alsoincrease private sector cost of doing business through increased costs of vehicle repairs, gasconsumption and time wasted in traffic jams (World Bank, 1990a). The decline in the standards of

education will also affect the productivity of students when they are finally absorbed in productiveemployment, thus lowering labour productivity in the private sector.

29. In Kenya, infrastructural development has in some cases not responded to demand but tovested political interests, which have been sanctioned by both local interests and the donorcommunity. The Turkwel Gorge Hydroelectric Power project is a case in point. On the local level,infrastructural development had tended to be undertaken as a form of political reward. The failureto have any infrastructural development in an area has been taken as a political tool to damage thegrassroots support of a politician. Since Kenyans have been made to believe that individualparliamentarians, rather than the government, bring development to their areas, there is alwayspressure on members of parliament to initiate new infrastructure like roads, schools and health

centres in their constituencies despite existing infrastructure being incomplete or in a state ofdisrepair. The multiparty parliament should therefore ensure that investments with high returns arepassed through the budgetary system. Furthermore, properly-managed development ensures thatother national objectives (e.g. containment of budget and external account deficits) are taken intoaccount while approving new projects.

30. Personnel Costs: There has been rapid growth in public sector employment,which has partly been in response to increased demand for labour and partly due to other factors.One of the factors behind the growth of government employment has been the proliferation ofministries with overlapping functions, in order to increase the relative size of the front bench inParliament so as to facilitate passing of Government-sponsored bills. The Report of the PresidentialCommittee on Employment chaired by Philip Ndegwa (Development and Employment in Kenya: A

Strategy for the Transformation of the Economy, 1991b) states that it is common to find a situationwhereby the same farmer is visited on different days by several extension officers from variousMinistries who may give either conflicting advice, or similar advice but with different emphasis.Jurisdictional disputes between Ministries also occur from time to time.The splitting of ministriesand institutional fragmentation also affects coordination of donor-supported projects. For example,the World Bank Project Completion Report for the Agricultural Sector Adjustment Operation(ASAO) observed that the slackening in implementation was partly attributable to creation of newministries to handle the agricultural sector (World Bank, 1990b).

31. One of the difficult policy areas is civil service reform, since it touches on retrenchment(downsizing) of public service employment. In the public service it is not unusual to find an officer


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with two or three secretaries, a messenger and tea-maker, which is completely uncharacteristic ofthe private sector. This creates imbalance between various cadres of employment, with a thin layerof professionals and overstaffing in the lower grades. The large expenditure on salaries reduces fundsallocated to nonwage Operations and Maintenance (O&M), which reduces efficiency in delivery ofpublic services. That gives the common scenario of doctors without syringes, teachers without

chalk, and veterinary officers without insemination equipment and transport. There is thereforeneed to reduce the share of salaries in recurrent expenditure (now more than 70 percent) so as tofree resources for nonwage O&M. With such skewed allocations of the O&M and personnelemoluments in the recurrent budget, it has been infeasible to implement development programmesmeaningfully.

32. The disproportionate allocation of recurrent expenditure between personnel emolumentsand nonwage O&M has not escaped the attention of the Controller and Auditor-General. In theAppropriation Accounts for financial year 1990/91, the Controller and Auditor-General stated thatvery limited funding appears to have been made available for the procurement of the necessaryinputs and other essential supplies and services to enable the personnel to perform the duties forwhich they are paid... This was particularly so during the last three or four months of the financial

year when the funds available were mostly used to pay the personnel costs with very little left foroperating and maintenance costs.

33. During the early 1980s, the Government established a number of regional developmentauthorities (notably the Kerio Valley and Lake Basin Development Authorities), ostensibly tocoordinate development in their areas of jurisdiction. There is need for a detailed assessment of thebenefits of their costs, focusing on their achievements vis--vis sector ministries (e.g. agriculture,energy) and the regulatory agencies handling agricultural produce and providing essential serviceswithin the same areas (e.g. Kenya Sugar Authority, Cotton Lint and Seed Marketing Board, andKenya Power and Lighting Company Ltd). The initial conjecture is that regional authorities wereintroduced to bring about equitable development between regions; but have only succeeded in

duplicating the roles of sector ministries, complicating licensing of private sector firms that intend toengage in agro-industries, and expanding public sector employment.

34. Parastatals

: The parastatals had their role in the takeover of the economy afterIndependence, but their economic rationale had evaporated a decade or two after Independence4.Over the years, parastatals have grown in number, size, and in their range of activities. Parastatals,including state-owned banks, have also been used to frustrate and choke up domestic privateenterprise. However, their political role (mainly in the patronage system) is unquestionable. SinceIndependence, individuals regarded as valuable to political regimes have been appointed toregulatory agencies and state-owned corporations, which has even aided those who lose in electionsto renew their electoral mandate in future elections.

35. Despite their political role, the Government has accepted the need to restructure anddivest its holdings in the industrial and agricultural sectors, and to lessen its grip on regulations onthe market. The rationale for privatization has been the parastatalsrecourse to the exchequer to bailthem out of their perennial financial difficulties, thereby putting pressure on an already precariousbudget deficit. However, the greatest harm of government investment in industry is that they crowdout private sector development - by undertaking commercial activities which would otherwise be(better) performed by the private sector.

4A detailed and informative analysis of the performance of the state as entrepreneur and the state as

controllerin an African setting is provided by Killick (1978).


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36. Cost recovery reform measures undertaken by parastatals increase their revenue basewithout the necessary changes in efficiency-enhancement and prudential reporting requirements,thereby making the parastatals afford a higher level of corruption and misappropriation of resources.The Government has stated its commitment to parastatal sector reform, both in its policy documentsand the policy content of the structural adjustment policies agreed with the donor agencies. Despite

the policy pronouncements, progress in parastatal sector reform has been slow and discontinuous, asillustrated by the cereals subsector.

37. Besides the constraints which the parastatals have posed in economic development due tomisallocation of resources, they have affected the private sector by increasing its costs of doingbusiness. For example, the Kenya Posts and Telecommunications Corporation (KPTC) has beenincurring losses despite being a monopoly. In order to remain operational, such parastatals increasethe prices of their goods and services unnecessarily to finance their inefficiency. In addition, poortelephone and postal services have made private firms to resort to the use of messenger motorcycles,courier services, and radio transmitters. If the public postal and telecommunication services wereefficient, private firms would not start their own supply of such services. The starting of privatesupply of such services raises the private sector costs of doing business.

38. The water supply problem in major urban centres like Nairobi, Mombasa and Kisumu hassimilar implications. Due to the poor reliability of the public water supply, especially during thepeak tourist seasons, some hotels in Nairobi and Mombasa have invested in private boreholes anddesalination equipments. Manufacturers have also done the same to ensure they have water supplyat all times. Such investments are unnecessary if the public authorities responsible for public watersupply were efficient.

39. The electricity supply is a similar case. Due to frequent power rationing and blackouts,firms have found it necessary to invest in standby diesel generators to avoid unwarrantedinterruptions to their production schedules. Furthermore, such power interruptions lead to high

spoilage of machinery and equipment e.g. computers. The performance of the public sector hastherefore adversely affected the implementation of development programmes directly andindirectly. This has come about due to inefficiency of resource use in the public sector which hasresulted into poor performance in the private sector, through reduction of output and increase inthe costs of doing business.

40. Corruption: Corruption poses special constraints on development, by raising thecosts of doing business and in muddling the process of prior estimation of private sector costs.Official corruption comes through two major avenues: licensing and procurement of Governmentsupplies. An area that needs reform is the wide array of regulations that govern private sectorbehaviour. Multiplicity of rules and licences create room for rent-seeking by the public officers whoissue the favours (licenses), as a license ensures one a place in the industry. Wherever there is an

official limitation of access to profitable opportunities (opportunities which may have been createdby government actions), there is potential for corruption since government officials have controlover the disposal of lucrative property rights(Ryan, 1979). Licensing procedures can also affect thepattern and rate of economic growth by creating monopoly profits for the recipients of the licencesand the subsequent lowering of rewards for hard work. One cannot recommend scrapping oflicensing completely as it enables the Government to compile data on the structure andperformance of the economy; but the conditions for granting of such licenses should be transparent,predictable, automatic (for those who fulfil the required conditions) and subject to appeal.

41. The imputed value of Government services (e.g. education, health and infrastructuraldevelopment), corruption, and differential access to well-paying jobs for similar levels of educational


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attainment, have implications for personal and regional income distribution. This is to suggest thatproperty rights theory, which encompasses any tangible and intangible assets that give a claim onincome (e.g. land, educational attainment, licenses, patents and copyrights) need to include thedegree of meritocracy in job placements and rent-seeking opportunities. The literature also suggeststhat, in rent-seeking societies, women have less access to illegal transfers from the state and the

market.

42. In the recent past, there has been much public debate about pricing of government storesand government imports. In the case of some projects of dubious economic value, there are always aseries of appraisal reports which must have doubted the viability of the projects. The fact that theprojects are implemented (at a great deadweight loss to the economy5) is a sign of lack of enforceablemechanisms in the process of project selection and implementation, and pricing of capital and otherinputs. In other instances, a feasibility study could be made to portray a positive picture if thefinancier has commercial interests in funding the project.

43. The mechanism of pricing government stores need to be reviewed. The Ndegwa report(Kenya, 1991b) dwells on this issue to some length, but the Government has expressed reservations

about the recommendations on the procurement system (Kenya, 1991c). Other pricing issues relateto procurement of petroleum products. If government-procured imports are overpriced, this couldprovide a conduit for capital flight and conversion of government revenue to private bank depositsabroad.

TOWARDS IMPROVING POLICY IMPLEMENTATION

44. Kenya will need to raise its level of implementation of its developmental programmes if ithas to contend with the various challenges currently facing the economy. Some of the urgentproblems include high population growth rate and increasing unemployment, the budget andexternal sector deficits, deterioration of the agricultural sector and subsequent food insecurity, and

the standoff with the donor community. In order to raise the level of implementation ofGovernments development programmes and projects, the following are suggested:

DEMOCRATISATION OF DECISION MAKING

45. As earlier noted, grassroots organisations have been emasculated with the result ofalienating the public from participating in making decisions that affect them. The result has beenlack of accountability within the public leadership. Democratization of policy-making, especially atthe grassroots level, through the use of rightfully elected leadership will raise transparency andaccountability in the use of public resources.

46. One of the urgent agenda is the reform of institutions that make the government more

responsive and accountable to public demands. An example is the role of the Executive vis--visParliament in policy making. The Cabinet, which is selected by the Executive, deliberates onprojects and major economic issues -- including the policy content of donor-funded projects andprograms. In future, such decision-making should be more transparent and open to Parliament anda wider cross-section of Government and the civil society. The laws should also be amended to give

5Deadweight lossis costs to society caused by inefficient allocation of resources e.g. monopoly pricing and

cartels, price controls, rent controls, price floors (e.g. minimum wages) and commodity taxation (Harberger,1964; Tullock, 1967; Diewert, 1981; Daskin, 1991; Besley and Coate, 1991). For a nontechnical treatment ofthe deadweight loss of rent controls, see Mishan (1971); and Murphy, Shleifer and Vishny (1991) on howallocation of talent in university courses between, say, engineers and lawyers, affect economic growth as

lawyers are indeed bad, and engineers good, for growth.


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less discretion to Ministers with a view to enabling Parliament to play its rightful watchdog role.

As argued by Kydland and Prescott (1977), policymakers should follow rules rather than havediscretion. The reason that they should not have discretion is not that they are stupid or evil but,rather, that discretion implies selecting the decision which is best, given the current situation. Suchbehavior either results in consistent but suboptimal planning or in economic instability.

47. Policy formulation should not be the preserve of Government officials and the donorcommunity. For example, the Development Plan 1966-1970 stated that the University is expectedto play a part in planning activities largely through its research and advisory contributions. Inparticular, the Institute of Development Studies ... is expected to contribute in an important way tothe analysis of data necessary to the planning operation and will advise...The close collaborationbetween the Government and the University of Nairobi, external scholars and developmentagencies led to continuous academic analysis of Government projects and programmes, the 1966Kericho conference on Education, Employment and Rural Development (Sheffield, 1967) and thesubsequent creation of the Special Rural Development Programme (SRDP) 6, and the setting up ofthe International Labour Office (ILO) research team that produced the seminal report onEmployment, Incomes and Equality: A Strategy for Increasing Productive Employment in Kenya

(1972). The 1972 ILO report led to the publication of Sessional Paper on Employment in 1973 asGovernments official policy response to the report. The collaborative efforts between theGovernment and scholars led to advancement of knowledge that has earned Kenya an importantplace in the academic literature, including the Harris-Todaro rural-urban migration model usingexpected income hypothesis (Harris and Todaro, 1970), the concept of the informal sector (ILO,1972), and the development of analytical tools for poverty analysis (Crawford and Thorbecke, 1980;Foster, Greer and Thorbecke, 1984).

48. In a chapter titled The Myths of Kericho: was SRDP Experimental? Professor Mutiso(1975) argues that, although Kericho conference for a lot of Kenyans was soldas a local effort, inKericho, there were few locals. Mutiso (1975) stated that the myth of Kericho ought to be thrown

in the garbage heap of history so that we can develop meaningful rural development systems outsidethe intellectual framework of the sixties. According to Mutiso, perhaps the real lastingcontribution of SRDP was to really bring back to the fore the question of the developmental role ofthe Provincial Administration, an issue we are still debating on twenty years later. Despite theshortcomings of Kericho and the subsequent SRDP, the intellectual linkages that were then in theirformative stage would have been nurtured on the basis of lessons of experience.

49. The Governments past style of seeking sound intellectual basis for policy initiatives inacademic and policy research ought to be revived. In the immediate future, some of theprofessionals might not be able to give independent professional judgements on many issues due totheir affiliation with party politics on both sides of the divide, i.e. ruling and opposition parties.Some academics have also rewritten Kenyas history to berate the systems and institutions of the

Kenyatta regime in an endeavour to demonstrate that the Kenyatta era was a mere gap in Kenyaspolitical and economic history.

50. Atieno-Odhiambo (1974) was right when he argued that (a) historians should not bebiased in favour of the African incumbent politicians, and that (b) if the accomplishments of theincumbent politicians are overvalued, this would be at the expense of the real challenges whichremain. However, the context of the debate was an attempt by the historian to

resist

glorification ofresistance to colonial rule, arguing that, by 1947, Britain had already evolved a strategy fordecolonization on which it could bargain with an African group eager to agree to marriages of

6 See also, Institute for Development Studies, 1973; Leach, 1974; and Holtham and Hazlewood, 1976,

chapter 5.


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convenience all along the line (Atieno-Odhiambo, 1974). As Donders (1974) argued, futuregenerations of historians will rewrite that history again and again. The recent experience in theSoviet Union, where changes in the political system have turned some heroes into villains, isprobably relevant. Kenyans need to go back to the drawing board to discuss where they are goingand to rediscover where they are coming from.

51. The Government has largely co-opted the intellectual giants through appointments tosenior positions and directorships in Government and the parastatal sector, thus compromising theirintellectual independence. It is, however, important for the link between the Government planningmachinery and the academia to be revived, so as to give the Government a forum to test its owneconomic agenda as well as receive criticism, and to give the academic community feelers on thestatus of economic reform and the state of the economy. The Ndegwa report (Kenya, 1991b, para1.22), recommends the establishment of an institute for economic and social research, under an Actof Parliament, to undertake long range strategic planning. The proposal was accepted by theGovernment (Kenya, 1991c, para 1.2).

52. Another formidable problem will be that of finding national consensus on developmental

issues and in sharing of resources due to heightened ethnic consciousness as manifested in the landclashes7. Ethnicism is defined as the deliberate use of ethnic symbols and codes of conduct to rallyround, to defend or to attack others, in pursuit of what are perceived as the group s aims(Arizpe,1992). Arizpe (1992) argues that, in situations where jobs and opportunities came to a standstill,competition for them grew. Immediately, the comparative advantages of each ethnic groupbegan to be perceived as an unfair advantage over the others, and, more gravely, as a betrayal of thedemocratic ideal of equal opportunity. In countries with incomparably fewer resources to goaround, the same kind of rivalry has easily led to violence, for example: against the Kikuyu inKenya. In simple-minded economic terms, ethnic strife is therefore seen as a symptom ofcompetition for property rights (e.g. land and employment opportunities) under conditions ofdiminishing resource base (environmental stress), high population growth rate and economic

stagnation. The dynamics of competition for scarce resources, if not checked by ebbing ethnicconsciousness, might spill over into racial competition for resources i.e. racial strife.

53. The politicians should divest themselves of the responsibility of creating the intellectuallinchpin to the planning process. For example, issues on the structure of the education system andschool curricula should be left to scholars and other professionals in Government and the privatesector. The Government should consider the professional advice and make any alterations it deemsnecessary, and allow for continuous criticism of its performance. In this way, the systems wouldevolve and mature based on lessons of experience. The Government would gain from the relativelyfree professional advice, and manage to parcel out blame or compliment for failures andachievements to the wider cross-section of the Kenyan society involved in the planning process.

54. Considerations should also be given to the creation of a multidisciplinary Council ofEconomic Advisors, consisting mainly of lawyers and economists, and with representatives from thebusiness and farming community. Since the wide array of economic controls are founded on thelegal structure, the initial agenda of the Council would be to deliberate on economic policyformulation, assessment of performance, and advise on the necessary amendments to the legal

7The economic rationale behind ethnicity was recognized long ago. For example, a World Bank Country

Economic Report on Kenya (1975) stated that most land is regarded as the exclusive domain of a particulartribe; and a major impediment is tribal exclusiveness -- the unwillingness of one community, such as atribe or clan, to allow members of another community to establish rights in lands which they regard as theirexclusive domain. This unwillingness can and does lead to violenceThe probability of dispute over land

rights and usage is ever present, threatening social stability.


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structure that may be impediments to privatization and economic reform. The author is aware oftwo consultancy reports, one on the Kenyan laws that govern private sector economic activity, andthe other on the legal impediments to privatization.

55. To reduce misuse of power and political patronage, senior parastatal and civil service

appointments should be based purely on merit. There should be full disclosure of operations ofevery parastatal, with every parastatal head appearing before a parliamentary select committee toexplain the performance of the previous year. Currently, parastatal heads appear before aparliamentary select committee to answer for returns which might be five years old, when theremight have been a different parastatal head, thus making the process meaningless. The publicaccounts committee should refer to the Attorney General cases of mismanagement andmisappropriation of funds, for further investigation and possible prosecution. In addition, there maybe need to subject some key appointments e.g. parastatal heads and permanent secretaries toconfirmation by a parliamentary select committee.

56. As earlier noted, the District Focus for Rural Development Strategy gave the provincialadministration a bigger role in development which they were ill-prepared for. There is an urgent

need to either abolish the provincial administration or divest it of affairs of economic managementat the local level. In future, the role of elected leadership in development should be very high.

57. Is there a relationship between political and economic liberalization? In other words, istransparency and accountability in Plan implementation possible under a single-party politicalsystem? On one hand, it is possible for a benevolent dictator to prepare and implement developmentprogrammes that uplift the welfare of the citizenry. However, there will be perpetual risk of policyreversal, which leads to lagged response by the private sector to economic reforms. In addition, inthe event of change of guard, the country would not have put in place systems of checks andbalances to sustain transparency and accountability in its conduct of economic affairs.

58. It is necessary to create a system where economic decision-making and implementationare conducted in a transparent manner. The important ingredients are: an effective Parliament;independent Attorney General, Judiciary, and Controller and Auditor General; and a system ofchecks and balances to operationalize the concept of accountability. The role of Parliament ismainly in making legal amendments to effect reform programmes, and to ensure that there istransparency and accountability in implementation of policies and projects.The Judiciary (definedin the economic sense as a caretaker of credible commitments as one of the solutions to the time-consistency problem) is a critical component of governance due to its role in enforcing contracts, asavoidance of contractual hazards arising out of discretionary powers and/or an imperfect judicialsystem has important implications on investment decisions that rely on credible commitments(Kydland and Prescott, 1977).

IMPROVED ECONOMIC DATABASE

59. Kenya has, by African standards, a fairly developed statistical database on macroeconomicaccounts. However, there has been serious underfunding of Government institutions that generateeconomic data. For example, the latest estimates of living standards pertain to the late 1970s, arisingfrom a series of surveys undertaken within the framework of the Integrated Rural Surveys. In the1980s, the Central Bureau of Statistics (CBS) undertook major surveys on rural and urban householdincomes and consumption patterns. The results of these surveys have not been published althoughsome summary statistics have been provided in capsule form in past issues of the Economic Survey(see, for example, Kenya, 1988, 1989a, 1993).


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60. The delay in releasing results has a number of undesirable consequences. First, it is a wasteof resources given that data collection takes a larger share of survey budget compared to dataprocessing. Second, the Government and other interested researchers and institutions lackimportant parameters on economic welfare to guide in interpreting trends and designingappropriate policy responses. It is also tempting to interpret survey results as pertaining to the period

of release rather than when the fieldwork was undertaken. The paper therefore recommends thatfield data be gathered to allow a new generation of researchers and Government analysts to revisitthese issues. In the past, household survey data was considered sensitive, as it would have enabledresearchers to use the survey results to establish trends in poverty and income disparities betweenpersons and regions.

61. Given the budgetary implications of implementing the remedial actions necessary toimprove the national economic database, the Government should reduce the budget devoted toeconomic analysis in the Ministry of Planning and National Development headquarters and transferthe resources (personnel and financial resources) to cater for the creation of a reliable and timelydatabase at the Central Bureau of Statistics. It is futile for the Ministry s staff to spend time andresources in the construction of elegant economic models grounded on shaky economic data. In

addition, it is recommended that a closer link between CBS/Ministry of Planning and local andforeign universities would reduce the analytical burden on the staff. It is important to note that thegradual slippage in the quality of the national economic database is partly explained by decliningbudgetary allocations for these activities. One solution towards long-term improvement of theeconomic database is to make the Central Bureau of Statistics a semiautonomous institution with itsboard of directors, and authority to incur expenditure and to source for funding directly from donoragencies, without being required to answer to the parent Ministry on a daily basis.

62. The scenario being created here is that of an up-to-date database on macroeconomicvariables and household/production data, and a stream of local and external scholars using the datain writing academic and policy-oriented papers, and thesis. It should be recalled that research

papers written using Governments economic database provided the intellectual foundation ofeconomic planning in the 1960s and 1970s. The link between Government planning machinery andscholars assisted the Government in the planning process and was also an intellectual boost touniversity scholars. To recreate the scenario of the 1960s and 1970s, it is also important to focus onthe needs of the universities if they are to recover their past intellectual glory and face thechallenges outlined in this paper. However, the necessary reforms to the local university scholarshipare not the subject of this paper.

RECENT POLICY CHANGES

63. Beginning 1993, the Government has made some far reaching policies aimed at reducingthe role of the state in production, enhancing efficiency, and reducing corruption. For example,

policy reforms in foreign exchange allocation and in the banking sector have reduced future scopeof corruption by reducing the supply of rent-seeking opportunities. Structural adjustment provides amarket-based channel for reducing monopolistic tendencies and rent-seeking opportunities, whichis far more efficient and impartial than anticorruption squads.

64. In the banking sector, the Government in October 1993 merged the inter-bank and theofficial exchange rates, thereby eliminating preferential benefits to those who could access foreigncurrency at the official exchange rate, including the Government itself. In August 1993, the CentralBank of Kenya transferred the responsibility of managing the clearing house to commercial banks,thus closing the loophole that was used to pump liquidity and advance money to distressed politicalbanks. Under the new clearing house regime, commercial banks are expected to discipline their


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delinquent members, and prevent kite-flying cheques and fraudulent overnight lending. Themanagement of the clearing house by commercial banks is an illustration of the potential ofproducer and relevant participant organizations in the management of the economy.

65. An outstanding agenda in the liberalization of external trade is the administration of laws

relating to customs duties, in order to increase revenue to the Exchequer and reduce the scope forrent-seeking. Customs tariffs could be collected through commercial banks so as to reduce contactbetween importers and customs officials, thereby consolidating the gains so far attained in theliberalization of the current account of the balance of payments.

66. Within a deregulated economic environment, the role of short-term macroeconomicmanagement has been elevated. In late 1993, the Government abolished maize marketing controls.Since maize is a major staple, it will in future compete with Treasury bills and the dollar as analternative (financial) instrument that will react to changes in money supply, as well as a means ofpayment in a futures contract. This implies that, if monetary policies are relaxed, the price of maizewould increase, thereby making the survival of the poor more dependent and directly linked to thequality of short-term macroeconomic management than ever before. The economic fortunes and

the basic livelihoods of those on the margin of survival can now be wiped out within a day throughexcess money supply. The close nexus between the Governments fiscal and monetary policies andvulnerability of the poor makes it imperative to transform the Central Bank of Kenya into aconstitutional office subject to Parliament, and audit and censure by the Controller and Auditor-General. The Central Bank of Kenya would then have the muscle to resist Government overdrawingof the Paymaster Generals Account, thereby controlling Government expenditure and moneysupply.

67. It is important to try to apportion the recent changes in the Kenyan economy betweeneconomic reform and economic mismanagement, i.e. a distinction between the Social Dimensions ofAdjustment and the Social Dimensions of Mismanagement. For example, what would be the

counterfactual interest rates, domestic commodity prices, and exchange rates if Kenya liberalizedwithout printing money or engaging in directly unproductive activities (e.g. rent-seeking)? Myconjecture is that a big share of the blame for the bad state of the economy today is more due to theprocess of economic mismanagement rather than the essence of the economic reform package.

68. Unfortunately, many of the commendable reform efforts already undertaken by Treasuryand the Central Bank have not been ratified by Parliament through amendment of the statutes.Ratification of the reform measures would send signals to the private sector of Government s long-term commitment to the policy reforms as well as reduce the probability of policy reversal andfurther reduce rent-seeking. Since the exchange control regime that existed in 1992 is still intact inthe Kenyan statutes, the Government can reverse the entire reform package through a verbalcounter-decree. The recent economic reforms underscore (a) the role of structural adjustment in

reducing rent-seeking opportunities, and (b) the pivotal role of monetary policy and theperformance of the Central Bank of Kenya in a deregulated economic environment.

CONCLUSION

69. The paper has briefly reviewed Kenyas experience in economic planning sinceIndependence, to highlight the route the country has taken and the lessons to be learnt. The paperhas emphasized the need to change the rules of conduct, for example, the role of the Executive armof Government vis--vis Parliament in economic decision-making, meritocracy in hiring ofparastatal heads and civil service employees, the array of licenses and interference that deny entry(and exit, in case of labour redundancy laws) and increase the cost of doing business, transparency


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in project selection, and government procurement system. The economic decision-making processesshould undergo changes in tandem with the social and political changes that are currently sweepingacross Kenya. However, a formidable problem will be that of finding national consensus ondevelopmental issues and in sharing of resources due to heightened ethnic consciousness asmanifested in the land clashes.

70. The paper has attempted to demonstrate that the quality and consistency of Governmentpolicies and efficiency of the public sector - including central Government, local authorities andparastatals - have a profound impact on the performance of the private sector. Some of the factorsidentified include the quality and pricing of amenities and infrastructure (e.g. water, electricity,telecommunications services, and the road network) and the overall coefficient of governance. AsPaul Baran put it, though in a slightly different context, the question of whether there will be meatin the kitchen is never decided in the kitchen(cited in Leys, 1975).

71. Kenyas economic philosophy has always been pragmatic and oftentimes in line with theconventional economic wisdom of the day: from the balanced budgets of the 1960s, through theKeynesian expansionary policies of the 1970s, the populism of the 1980s, and the hard reality of

structural adjustment since the mid-1980s. It is sometimes difficult to relate reality with the well-written policy documents, and the paucity of economic data does not make the task easier. Due tothe big discrepancy between actions and official statements of intent, there is an urgent need toexamine the entire system of economic decision-making so as to make it responsive, transparent andaccountable. The domestic economic system seems to be observing the physical law of entropy(defined as the tendency for order to degenerate to disorder), a term introduced by the Germanphysicist Rudolf Clausius (Clausius, 1867) and which is based on the Second Law ofThermodynamics (Georgescu-Roegen, 1971). There is therefore an urgent need to reverse thedecline in order to avert an imminent collapse.

72. In Kenya, the entropy process has been accelerated by a high coefficient of ignorance on

the interrelatedness of production processes. As Georgescu-Roegen (1971) argues, to keep a spadein good working condition, a farming process needs, among other things, a file. The file... must alsobe kept in good order and, hence, it calls in turn for another tool e.g. a wire brush; this tool calls foranother, and so forth. It forbids us from dealing with micro-processes, a plant or an industry. Youcannot wreck one sector of the economy or dismember some regions and expect the rest of theeconomy to perform well, mainly due to regional comparative advantages especially with respect tocategories of agricultural crops.

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Economic Management in Kenya: Diagnosis and Prognosis

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