It seems that President William Ruto’s handlers have not been doing enough in reading seminal papers and understanding how economics works. This is because they easily swallow hook, line, and sinker the conditions imposed by the Bretton Woods of more tax, big government and more revenue to the government, instead they should focus on growing the economic net for the republic.
I would invite President Ruto and his handlers to read The Modigliani-Miller (M&M) principle. The principle states that the market value of a company is correctly calculated as the present value of its future earnings and its underlying assets, and is independent of its capital structure. At its most basic level, the purport argues that, it is irrelevant whether a company finances its growth by borrowing, by issuing stock shares, or by reinvesting its profits.
The same case would also be said about the Kenyan economy, it is the future earnings that matter and not a positive cash account principle. So, whether we build our economy with subsidies, tax holidays or investments, it does not matter as long as Kenyans will have economic value out of what we do. Although the Bretton Woods are Kenya’s financiers, they are not the voters and so they must not have the ultimate say in our financial decisions as a country. Put it in another way, a V8 is a powerful car, whether it is rented, borrowed or bought by the driver.
When the International Monetary Fund and the sister institution in the world work on lending to a government, one thing that is supreme is the fact that they want to get in and out quickly before profits are swallowed by the law of diminishing returns. As such these are the institutions have been advising Dr Ruto that subsidies are a bad idea. Are subsidies a bad idea really?
I can give an example of the airline industry which has been published extensively. Three years ago, Cathay Pacific the national carrier of Hong Kong was given Kes5 trillion, twice the national budget of the Republic of Kenya. The government of Hong Kong justified this by saying that it was meant to preserve the jurisdiction as the hub of travel in that region of the world.
The governments of Germany, France and the Netherlands proactively started bailing out their related airlines back in 2020. In the Netherlands and France the Government injected Kes12 trillion. Spain, gave Kes1.1 Trillion to carriers related to the country. National Carrier Iberia and low cost carrier Vueling received a combined figure of Kes750 billion. IAG a private airline based in Spain that has always resisted receiving government money took Kes260 billion home.
Closer home, Emirates, a competitor of Kenya Airways, received Kes2 trillion in 2020 and immediately started rehiring retrenched staff. These “shots” in the arm allowed the airline to have packages for those who opted to have unpaid leave. June 2021, the government of Dubai injected another Kes4.2 Trillion to Emirates.
Emirates Airline further received Kes750 billion from Emirates NBD Bank, who’s subsidiary National General Insurance, once employed this writer. In justifying the move, the CEO of the Emirates NBD group, Abdulla Qassem said that the effort would go in a long way in making Dubai a major international travel hub.
All these airlines are performing cash cows that are very successful in their respective economies. Had their governments argued that subsidies are a bad thing, these economic limbs would be in the graveyard where good ideas are all buried.
So we can give another example of growing trees. In order for trees to succeed one has to water them for years. Actually in places like Egypt and United Arab Emirates, trees are watered daily. So subsidies are by no means a bad idea.
To grow the Kenyan economy, President Ruto should have looked at new Foreign Direct Inflows while leaving those of Uhuru Kenyatta and his handlers intact. Currently with the constant sackings taking place, institutional memory is likely to be lost. Moreover new recruits know all too well that service delivery is not the core as to which they have been hired for but political expediency.
During the days of former president the late Daniel Arap Moi, choir masters, such as David Salo, mechanics like Kuria Kanyingi were given plum state jobs. The end result was that Kenya stopped being an egalitarian society where meritocracy is rewarded. Everyone always listened to news at 1:00pm where Mr Moi would reshuffle and fire most of the government employees. Meanwhile, as President Moi did this Lee Kuan Yew of Singapore was busy building an egalitarian society which was in the same level as Kenya was few years before.
The author, Mr Mwangi Ngamate is a technopreneur and a former lecturer at International College Cayman Island. firstname.lastname@example.org