This week we are featuring a post by one of our newest Luce Graduate Fellows, Rebecca Mugo, a Master’s student at the Hekima Institute of Peace Studies and International Relations in Kenya. This post analyzes the potential consequences of pushing development agendas by increasing borrowing and taxation in Kenya. How can Kenyan officials achieve the “Big Four” development goals without placing undue burdens on vulnerable citizens? We would love to hear from you in the comments!
Kenya’s Economic Policy: Borrowing from China Plus Regressive Taxation is Problematic for Social Welfare and Economic Growth
By: Rebecca Mugo
Intergovernmental Authority for Development (IGAD) countries, like many African countries, have recently turned East in search of affordable and flexible loans. China, in particular, is currently the leading financier of mega projects in Africa. Between 2000 and 2016 China loaned African countries $124 billion and this is set to increase with the unveiling of the Belt and Road Initiative. Despite the respite that African countries are getting from Chinese financing, especially given the numerous conditions attached to grants from the West, there is a looming huge risk of economic turbulence should the Chinese economic bubble burst. The IGAD countries of Kenya, Ethiopia, and Djibouti are especially vulnerable in case of an economic meltdown in China. On March 11 2018, The East African Newspaper carried an article titled If Beijing sneezes, East Africa will catch a bad cold. Should East African countries stop the borrowing spree? We need to consider the unwelcome question of the effects of the insatiable appetite for debt of African governments on their populations, and in this case I focus on Kenya.
Kenya is widely regarded as the economic giant of East Africa. Since 2003, under the incumbency of Mwai Kibaki, the country embarked on a rigorous journey to economic recovery. As a matter of fact, the Economic Recovery Strategy for Wealth and Employment Creation (ERS) initiated by Kibaki in 2003 revamped the economy to grow at 6.1% in 2006 up from 0.6% in 2002. Sadly, post-election violence experienced in the country in 2007/8 slowed down the momentum to 2%. Being a uniquely resilient country, Kenya has been able to emerge from the shadows to continue growing, despite the haunting ghosts of election violence.
The current president of Kenya, Uhuru Kenyatta, is aggressively seeking to develop the country on four fronts, which have become commonly known as the “Big Four.” The Big Four agenda seeks to achieve universal health coverage, affordable housing, enhanced manufacturing, and food security. This agenda is supposed to be achieved against a backdrop of fiscal shortfalls. In the financial year 2017/2018, for example, the government fell short of $14.3 million equivalent of Ksh1.44 trillion, despite significant gains in revenue collection. In the current financial year, the government hopes to raise more funds through borrowing and increased taxation.
Taxation is a rudimentary strategy employed by governments across the world to raise funds for national expenditure. However, unfairly distributed tax burdens can impair the quality of living, especially for the poor, and affect productivity. Creating favorable taxation policies is then a complex balance that must be achieved to promote economic growth and the wellbeing of the citizens.
Other than providing public goods, revenue generated from taxation is also used to offset domestic and foreign debts. It is almost customary for Kenyan taxpayers to be slammed with new tax regimes every financial year. This trend has not sat well with the business community or the general population. Most recently, the treasury announced a 16% tax on all petroleum products, sparking national outrage. While taxation is necessary, how it is appropriated is quite critical. In developing economies petroleum is an intermediate medium- and diversification of economic drivers cannot be overemphasized- that affects the cost of other sectors such as healthcare itself, food security, manufacturing, and housing. When the price of petroleum hikes, especially in an economy so dependent on it like Kenya, virtually all goods and services escalate in price. Subsequently, the poor are pushed deeper into poverty, and many more join in the rut. Thankfully, parliamentarians postponed the implementation of the additional tax by two years, but the reprieve was short-lived. Staring at an economic gridlock, the president utilized his tyranny of numbers in parliament to push through an 8% tax hike on petroleum products. This in itself is a red flag that Kenya’s debt burden is more that it can bear. In effect, substantially increasing taxes on petroleum products in order to finance universal healthcare and affordable housing or any other development agenda is bad policy.
My argument is in line with Amartya Sen’s conception of development. Sen contends that development is actually that which contributes to widening of “freedoms that people enjoy”. In essence, economic growth, industrialization, and technological advancement should actually translate into increased individual freedoms: the freedom to access healthcare, education, good nutrition, and so forth. The government of Kenya has a good vision for its citizens as contained in Vision 2030. The problem is with how it intends to achieve its goals.
Universal health coverage through the National Health Insurance Fund (NHIF) is in line with the UN’s Sustainable Development Goal (SDG) 4 and should be encouraged at all cost. Further, universal healthcare should provide quality health services without undue financial suffering on participants. However, increasing the cost of fuel will lead to higher transport and healthcare costs and eventually making access to health care impossible for millions of poor people. This is especially true in rural areas where peasants travel long distances to get to hospitals. In addition, voluntary contributors whom are largely from the informal sector will default on their monthly contributions and consequently be blocked from accessing NHIF services when in need. They have to pay out-of-pocket which leaves them more impoverished.
Although Kenya has a National Health Insurance Fund which is supposed to be extended to all, it has serious flaws that must be addressed if the dream of universal healthcare will be realized. First, from the outset the insurance fund targeted only formal employees and only scaled up to include the self-employed much later. Second, the insurance has different schemes for different categories of beneficiaries. For instance, civil servants are covered under a scheme with greater benefits than schemes for workers in the private and informal sectors. Presently, China is struggling to rectify similar mistakes which have been proved to hamper the uptake of health care services at certain service points and hence derailed efforts to achieving universal health coverage. In China, different schemes afforded urban employees more beneficiaries than their rural counterparts. In addition, people shunned public healthcare services because of long queues and the risk of poor diagnosis due to the shortage of medical personnel, especially at the level of primary healthcare. Similar challenges are widespread in Kenya’s health sector.
Other than the impact on universal health coverage, high fuel prices will also have a trickle-down effect on individual and household food security. It is commonplace in Kenya for fuel price hikes to be followed by high food prices which ultimately compromises individual nutrition. Poor nutrition leads to disease as well as exacerbating illnesses (and, hence, productivity). Likewise, higher transport costs hikes the price of building materials, raising doubts about the ability to increase affordable housing.
To achieve the Big Four agenda, the Government of Kenya should seriously review the strategies employed in other countries to deliver similar public goods like universal healthcare and affordable housing, and critically analyze what can work in the context of Kenya. Taiwan and Rwanda, for instance, have been very successful in delivering universal healthcare for their citizens. Taiwan imposes a higher premium on high income earners and a 2% supplementary premium on outside salaries such as bonuses, rent income, and dividends. Rwanda has avoided the pitfall of multiple schemes by first granting the poor health insurance before including formal employees. These and more lessons can be invaluable in financing and implementation of universal health coverage and other social welfare goals in Kenya. Moreover, policy makers should exercise care not to exacerbate the quality of life in their quest for economic growth. According to Amartya Sen, the expansion of basic individual freedoms – to access healthcare, education, and good nutrition, etc. – is as critical a measure of development as is economic growth or industrialization.
Rebecca Kathambi Mugo
Master’s Student, Hekima Institute of Peace Studies and International Relations (HIPSIR), Kenya
Rebecca is a Master’s student in Peace Studies and International Relations at Hekima Institute of Peace Studies and International Relations. Before joining Hekima, she was involved in humanitarian work in Northern Kenya where intercommunal conflicts are prevalent. It was from that first-hand experience with the socio-economic impacts of communal clashes that she developed a deep passion for peace building. Her interests include youth and women participation in peace building, social change and governance in Kenya.