Folashadé Soulé: Thank you for agreeing to give us this interview. The first question we’ll ask is not only in your role as Executive Director of AERC but also as former Governor of the Central Bank of Kenya - what is your analysis of the Kenyan government’s response to the health and economic dimensions to the pandemic?
Njuguna Ndung’u: This is an interesting question and requires us to look beyond Kenya and across Africa. The pandemic found almost all African economies in a very tight position in terms of fiscal space, despite several advisory policy papers on building economic resilience for many years. The first thing when a pandemic hits is to save lives. But this assumes you have the capacity and capability to do that. But with diminished fiscal space, and dilapidated public health care infrastructure, the economy has no ability to do this immediately unless to re-allocate resources to cope with the virus. In most cases resources are re-allocated from development budget to cope with the crisis and so robs the economy the capacity for future growth. The current pandemic is not like other exogenous shocks where people believe it is short term. Rather this virus has shocked and gripped the whole world, and nobody is left out. Second, what kind of short-term measures are necessary? For me, testing. Contact tracing and lockdown were very important steps along with social distancing and putting people in quarantine. This induces personal responsibility at self-preservation. After that, it’s a question of measures such as large-scale education about PPEs for self-preservation, because governments in Africa don’t have the means to provide this for everyone. The lockdown was very quick and covered the important areas, but there is always a big problem in terms of the balance between saving lives through lockdown, to contain the infection, but then what happens during the lockdown? Most Africa governments do not have an efficient and credible safety net system or even efficient social protection program that can work as a base, so obviously it is very difficult to manage the lockdown. People in urban areas must go to work in order to put some food on the table. Many small businesses thrive based on opening their doors – we cannot make an assumption that they have savings that can cushion them during the lockdown period. In addition, and seriously so, there are many people employed in the hospitality and service industry, but as soon as the lockdown was announced they lost their jobs. It talks volume about our labour laws, institutional cushioning/insurance mechanisms. These are some of the pitfalls. We have never thought about the type of safeguards required across economic sectors.
There is the question of healthcare financing and also the affordability across the country. Why has the government not introduced the nationwide reforms aimed at universal healthcare system with insurance and social safety net? We may need to think about this. It is time to focus now how this crisis can have positive ends. How the government can reform the healthcare system and health care infrastructure to make sure it is improved and it is universal. There is no need for more excuses, we don’t know where the next pandemic will come from. We need a universal healthcare system that is affordable for all. In Africa we have weak institutions. In Kenya for example, we have levels of health service for different hospitals – for example, there is level 4, or level 5 hospitals – but there are in deplorable conditions. Why? They are purely managed; medication and facilities do not get to them they leak to other channels mostly private. Governance and institutional issues prevail. The other day the Cabinet Secretary argued that the Ministry of Health officials are very dedicated, but there also bad apples there, my response is that the excuse for bad apples is a refusal to implement far reaching reforms. We should also focus on the availability of protective equipment and its quality. For masks and sanitisers – who has verified the standards for these products? In countries like ours with a large informal sector, these businesses are quick at innovating to address the current constraints. Inappropriate PPEs will give a false sense of protection and this where the second wave of the pandemic will stem from. In summary. An effective and efficient supply of standard PPEs, an efficient safety net programme will be key elements to an effective lockdown. There seem to be good lessons to pick form this experience now. Kenya should take advantage to streamline the response – policy and administrative interventions.
Folashadé Soulé: You mentioned healthcare financing. There have been calls for adequate financing of healthcare prior to the pandemic. These are not new demands. In your opinion what are factors behind the lack of meaningful investments in health on the continent? Is it a financing issue or lack of political commitment or both? What solutions might address this issue ?
Njuguna Ndung’u: This is a difficult question because of the balance between the resources available and the kind of healthcare system you want to build on one hand and the poor institutional DNA we seem to perpetuate. It is interesting to look at the proportion of the government budget which goes to Ministries of Health and what share of this is actually directed at delivering health care, given the cost of wages and salaries. But I do not think it’s really a financing issue, its more a question of the efficiency with which these resources are used. It is an institutional failure problem, as the resources are there and allocated from the national budget and well supported by international funders. The Kenyan Ministry of Health is a devastating example with the interplay of so many actors. It is not the curative system which is the problem here. It is the other side of the pharmaceuticals and equipment, on one hand and physical infrastructure required on the other. This is where the institutional failure drive policy failure in totality. The importation and supply of drugs is a very big business. Let us look both at delivery of healthcare and the supply of drugs and equipment, which is where the massive leakage occurs. Several examples do show medical insurance does work in a limited way but public hospitals are understaffed with doctors, the Government has to contracted Cuban doctors. This is a good way to alleviate short term constraints, but a sustainable long-term solution is an effective incentive mechanism for doctors in public healthcare system. In addition, to be innovative in providing solutions that will sustain the management side of equipment and drugs, the human resource management and finance reforms is utmost urgent. Maybe this will be the best result and outcome of this crisis, it will show how far we have failed and what we need to do. In Africa, there is a dichotomy of government-financed hospitals and private hospitals. Most people who can afford it, will go to private hospitals, where they will receive better care and appropriate diagnosis but they have to pay for it, often using their insurance. But the majority who cannot afford must go to government hospitals, given that it is free or with low user charges, where they get very poor service. There, Doctors may see you, provide the diagnosis but you must then go and buy the drugs from the private pharmacies, which creates another market. If admitted for treatment the majority will not make it, it is like they go to public hospitals to die! Perchance this is a wake-up call to reform the public healthcare system, and really make it inclusive. We can provide examples for urban healthcare centres and hospitals that we see every day, but the rural areas are much more devastated.
Camilla Toulmin: We started this conversation with discussion of the limited fiscal space which most African countries face. Where do you think the Kenyan government could generate greater fiscal revenue?
Njuguna Ndung’u: I was just in a conversation with a friend of mine at the Bill and Melinda Gates’ Foundation, about the optimal taxation, the choice of tax instruments and domestic resource mobilization. We have seen with Covid-19 a surge in the growth of digital platforms, retail electronic payments platforms and businesses, aided by the technological advances in East Africa, especially Kenya and Tanzania, where it has really been working very well. I have published a paper a couple of years ago in Brookings, on taxation of digital financial transactions. My point was that it was the poor people who are using these retail electronic payment systems. If you tax them, you disincentivise them. It is not a booming sector or sub-sector as such. Let us also think about the instruments used for taxation. In 2001, I wrote a paper on the optimal taxation of alcohol products. Every excise tax has a Laffer curve effect because the Kenyan government was taxing alcohol at different levels depending on the product. Beer was taxed at a different level from wine, spirits and aperitifs. The tax on beer, high because of volume, was discouraging beer consumption, rich people were upgrading consumption to wine and spirits, and poor people were downgrading consumption. But there were no guaranteed products below beer, so this created a market for illicit alcohol, which of course was not being taxed. So, the government was losing revenue. Over the last fifteen years illicit alcohol has claimed the lives of three generations of young people, as they cannot afford beer. At that time, I argued with the then Minister of Finance to think about the optimal rate of taxation, and rationalise tax across alcohol products, that is tax rate based on alcohol content – get more tax revenue, capture all, encourage decent consumption and above less distortion in the market. There is a disconnect between Ministers of Finance on the one hand and the revenue authorities on the other, who should be in a good position to advise the Ministry on which tax instruments work best and how might you implement them. Most people are willing to pay tax if you make it simple enough in terms of application and payments. Governments in Africa can improve their tax efforts and revenues, but they need to change gear. I do not think it works well if a product is taxed at 90% because this is punitive. We tax what we can get. If we control imports, then most of the tax revenue will come from imports, the domestic price pass through will be proportionate. And VAT is coming from sales in the market, reflects consumption. With Covid-19, we started from a low base, then followed by a lockdown which brought the revenue lower, it is a downward spiral. The AERC had a special session the Impact of Covid-19 Pandemic in African economies, last Tuesday, 30th June, 2020 on Covid and someone from the Kenyan National Treasury argued that they had registered a 25% fall in terms of tax revenue. So, the government started with limited fiscal space and revenue continues to decline. Inevitably there must be a lot of expenditure reallocation. Often there is no much flexibility, so what is reallocated is the development budget, this has the effect pf eroding the economy’s capacity for future growth and future resilience capability. We have talked about economic diversification and structural transformation for many years, and developing agro-industries but governments have never taken it seriously, and have failed to create the relevant climate and environment.
On Monday, June 29th, 2020 the AERC held a plenary session and four commissioned papers were presented on “Business environment: Competitiveness and growth in Africa”. One of the papers by Prof Shanta Devarajan on African Competitiveness: What do Natural Resources have to do with it? He made the point that the effect of natural resources is not the traditional Dutch-disease effects, but rather the indirect effect of natural resources on governance (public expenditures, etc.) and the effects of governance on competitiveness. These effects can also be extended to commodity boom periods for countries with no significant natural resources but have cycles of commodity booms. The conclusion seem to point out that how booms and bursts are managed as well as management of natural resource wealth, government revenues create a very uncompetitive environment.
But now let us connect the dots as a result of this pandemic - from our policies on taxation to our development discourse, to our enabling environment for markets, we have all failed institutionally and that’s why the markets have failed. We should ask ourselves if we need structural reforms how do we manage them? By the way, AERC was started in 1988 because of the structural adjustment programmes and it was felt that government officials would not implement those programmes because they were not well understood. Reforming markets is also a capacity question. But I still think we have more capacity now so we should reform institutions. Most of our difficulties are due to institutional failure probelms.
Folashadé Soulé: In our conversations with a number of African thinkers, linking structural economic transformation and post-Covid recovery paths have been central. They all agree that now is the time to accelerate change and rethink development models, finding a role for green growth. What for you should be the priority policies for African governments?
Njuguna Ndung’u; First priority, we have to institute reforms in areas where we require different actors to enter the institutional DNAs of African economies and remove the incentives to resist change and reforms. When this pandemic struck, we at the AERC had just finalised a project on the fragility of growth in Africa. We focused on fragile economies suffering from conflict, but we also included economies dependent on commodity prices whose volatility create fragile context as well as weak institutions that condemn African economies to a low-equilibrium trap. Thus, when Covid-19 struck; we came back to these original ideas since the pandemic creates more fragility. It is a crisis but actually reforms occur during a crisis, because people say, “never again shall we repeat this”. So, we must diversify the economic base. The policy debate on diversification, economic transformation is written in all policy papers for the last 50-60 years, but little has taken place. It is time now to focus on using the relative comparative advantage – that is agro-industries – and how we are going to succeed. The import- substitution model failed because we couldn’t push it to the next level. Primary exports failed and we got nowhere because we are in the periphery in the global value chain design. In addition, the complement I find in the period we are living in is the 4th industrial revolution, which everybody is talking about. That is the digital revolution – we must be ready for it. I have fought hard for digital financial innovations to work in Kenya, since 2007. When I won the battles with the market, I realised there were battles with politicians to be won as well. They could not believe what people say, they cannot process the information fast. But today they are coming back to say it is working very well. This is now a support and an inclination to drive the digital revolution to the next level and use it to develop markets. In my last paper I talked about digital technology and state capacity, and I mentioned four areas we need develop in Africa. One is connectivity. Nobody should be left behind. The East Africa region is succeeding because we have fibre optic cables across most urban centres and even now moving to the rural areas in Rwanda and Kenya. It can work with good connectivity as a base for the market innovation and flow of information. Second, the market development, so that it is all compatible and interoperable across retail electronic payments and digital platforms. We started with retail and have gone onto digital financial platforms and a growing range of services through digital means. Third, there is need to secure the market and the only way for this now is to identify who is participating in the market and payments/digital platforms – we need electronic identification system, E-ID. Fourth state and institutional capacity can ruin innovation in the market. Innovations must be encouraged so the state does not stifle new forms of economic activity and investment. We also need institutions which can protect the markets, they should know how the market is working. We need institutions that can regulate the market. regulators should nudge the market into the desired directions and show-case best practices. The regulator is very important in developing the markets, should be an agent of market development.
Let me now go back to the industry, if we start with agro-industry, we must ask what will transform that sector? Rural population and smallholder farmers have been impoverished waiting for these reforms and value addition for their primary produce. And it is the 4th industrial revolution that will be the answer. When we look at the characteristics of East Asia and see whether they can be replicated in Africa, we don’t find a route. Look at global value chains, the problem is that value does not come to African producers/industries. I do hope we have leaders who can shine the light and see how to take advantage of the 4th IR even after Covid-19. Electronic payments have worked very well. They had to raise the threshold of how much cash you can put in your phone and how much you can spend every day to alleviate constraints during the lockdown. It just needed some some direction, support and regulation to make sure the market goes in the right direction. We could have done the same with other successful sectors or subsectors of the economy, but were they there? It is my very strong conviction we need reforms and two issues come to mind – protect private investment, to secure decent jobs, and protect markets which will accelerate economic recovery. We can start now – we do not have to wait for Covid-19 to be resolved, using the tools we have, we can move in that direction.
Camilla Toulmin: The EU-Africa summit is coming up in October. Europe wants to see a new relationship develop with African partners, and they are pushing a green economic recovery post-Covid. Does Europe matter anymore to countries like Kenya – is it still relevant? Should African countries follow a green economic agenda? What would be top of your agenda for the Africa-EU Summit? And how do you see the role of China in all of this?
Njuguna Ndung’u: Europe is still very relevant to Africa and African economies, because production and market structures are very similar, having been developed from the same ideas. Some people jump to trade, reforming the WTO, but for me it is more important to reform the global value chain in terms of where production takes place and where value addition and marketing takes place. Current value chains have created low value in Africa and high value elsewhere. It is the oligopolistic nature of markets, sustained by weak institutions and poor governance in African economies. We cannot share in the gains in production and trade. Africa does not processing most of the raw materials. If African economies move into agro-industries the global value chain mechanisms has to change and balance out the reward system. It will not destroy global value chain system but it will reform it to cater for balanced resource flows upstream and downstream. Second, we have seen climate change is becoming a very challenging issue. I was at the central bank for 8 years. One of the factors that gave me sleepless nights was the emergence of draught. A drought has so many implications for monetary policy. Drought, especially in the Horn of Africa, affects food supply and food prices and also energy prices. Food prices because of production, energy because we depend on hydroelectricity. With drought electricity becomes more problematic, and petroleum has to be sued to run generators. There is thus inflation coming from the supply side and monetary authorities only have demand side tools to deal with inflation. Using the demand side tools will push the economy into a recession but has to be used to dislodge a plateau of high prices. So the green agenda for me is the way to go and to invest heavily for sustainable solutions. Our production processes can be built on green energy. It’s a question of incentives.
On China – why did China come in and Europe didn’t recognise what was happening? China has made resources available for physical infrastructure. For Africa this is a very important investment in this part of the world. It is complementary to private investment in that it lowers transaction costs and enhances the profitability of private investment, and it is also critical to develop an effective competitive private sector. The China model has come with technology to build this infrastructure, but unfortunately also it also been accompanied by a declining discipline in terms of how those resources were disbursed and projects implemented and the cost of those projects. In majority of the cases, there has been no scrutiny. Africa was having its own problems in accessing financing, so China was really important. Europe was having its own problems following the global financial crisis and the real crisis on debt and slow adjustment. China came to fill the void but there are governance issues. For governments without sufficient controls, they will be paying for these projects and debt accrued for generations to come. While many of them are good projects, they were procured in a very expensive way. For the future, there is a lot of space in Africa. Those who want to participate in African economies will find space. But we need order and stronger institutions to protect markets, production process, investments and the appropriate share in the global value chain ecosystem. There are both positive issues and developments that will and have taken place as well as pitfalls. Whenever there are institutional failures, there will be serious policy failures that create problems for everyone in households, markets and even the political cycles. We are proud at AERC for having developed and supplied capacity building across many African economies and institutions. We need more investment in building more capacity to reach a critical mass across critical institutions in African economies to drive reforms for growth, development and shared prosperity.
About the COVID-19 and Africa series: a series of conversations conducted by Dr. Folashadé Soulé and Dr. Camilla Toulmin with African/Africa-based economists and experts about their perspectives on economic transformation and how the COVID situation re-shapes the options and pathways for Africa’s development - in support of INET’s Commission on Global Economic Transformation (CGET)