Deputy President William Ruto addresses a Jubilee Party campaign rally
in Kaptumo, Nandi County ahead of the October 26 presidential election
re-run. FILE PHOTO | NMG
The Kenyan media has in recent weeks grappled with how best to
explain to the public and even to predict the possible effect of the
protracted 2017 presidential election on the economy.
In
their quest to explain this unprecedented phenomenon, journalists are
grappling with the question as to whether this political stalemate will
result in economic slump, boom or stagnation. There is also the question
as to how long it will take the country to overcome this election
shock.
So far, most expert opinions have reverted to
the uncertainty in the business environment and the investors’ bearish
attitude as the only ways we can measure the possible impact of politics
on economic performance.
For macroeconomists,
however, the premise though plausible, does not offer a complete answer
to a complex subject like this one. A full analysis of the subject would
need to be informed by a recent field of economics known as new
political macroeconomics that focuses on political budget cycles.
The trailblazer researcher in this area is Alberto Alesina, a professor of political economics at Harvard University.
New
political macroeconomics negates the imprecise assumption that
government is exogenous with no specific interest on macroeconomic
outcomes.
In traditional optimising approach,
economists view a policy maker as a benevolent social planner whose sole
objective is to maximise social welfare.
In other words, he or she represents the best interest of
citizens when making policy decisions. That has been found to be
fallacious. The alternative is that policy makers conceal political
interests in policy decisions, being as they are political appointees
who represent the ruling government and often stand in the centre of the
interaction between political and economic forces.
The
question we need to ask ourselves (we economists, excluding layman) is
whether the government influences fiscal deficits, unemployment,
inflation, interest rates and economic growth rates for political gains.
Plainly
asked is whether governments use fiscal and monetary policy instruments
for political gains. This is what is referred to as incumbent
opportunistic behaviour in political macroeconomics.
An
intelligible backward-looking analysis of historical growth patterns in
Kenya reveals that for every 10 elections Kenya has conducted, seven
were succeeded by annual economic slowdowns.
Election
years in the country tend to have substantial or stable growth rates on
an annual basis. For instance, in 1997 economic growth was 3.29 per cent
compared to 2.3 per cent in 1998.
Correspondingly, in
2001, Kenya registered an economic growth rate of 5.1 per cent compared
to 2.9 per cent in 2002. A similar pattern occurred in 2013 when growth
rate dropped to 4.6 per cent down from 4.8 per cent.
An
empirical analysis by the International Monetary Fund (IMF) based on a
panel of 52 low income economies, including Kenya, reveals evidence of
political budgetary cycles.
Government current
expenditure irreversibly increases during election period because
incumbents use policy instruments in their quest for re-election.
This results into a permanent displacement effect of government consumption expenditure, which is destructive to the economy.
Secondly,
fiscal deficits widen during election period and decline in
post-election period as government partially rebuilds eroded fiscal
buffers through increased discretionary revenue mobilisation.
Evidently,
government investment and public-financed projects decline or stagnate a
year after election, amplifying the myopic and predatory behaviour of
incumbency in less income economies, especially in young democracies.
The
distortive and policy volatility effect of political budgetary cycles
depends on strengths of institutions to stick to optimal policy paths as
compared to political influence that seeks to run expansionary fiscal
policy reflected in targeted expenditure other than for managing
aggregate demand for long-run prosperity.
Political
budgetary cycles explain why most developing economies experience
sudden rise in inflation and large debt series generated in election
period. In fact, econometricians can easily model public debt patterns
and link them to specific political regimes.
The
problem with politically motivated policies is that they are suboptimal,
inefficient and do not drive prosperity. The fact that growth patterns
expand during elections and dwindle after signal that our democracy has
both growth-retarding and growth-enhancing features.
The
divergence from an optimal prosperous policy to suboptimal
growth-retarding one is the true cost of our politics to the economy.
Which raises the question as to why this happens, and why it appears to
impact some economies more than others.
The answer
lies in the fact that politicians are myopic, their interests are in the
short run, never in the long term and that is why every preceding
political regime often bequeaths its successor a ballooning debt and
other serious economic challenges.
The solution to
political business cycles is to insulate institutions from political
pressure. Monetary policy seems to lean against the wind because central
banks are majorly independent and autonomous.
But in
most countries, fiscal authorities suffer from political capture. That’s
why in democracies, large debts characterised by weak institutions are
hereditary. It is high time policy makers made fiscal rules like a
fiscal deficit cap.
The answer would be to have an
autonomous Treasury which, like Martin Van Buren the eighth President of
the United States, I think is necessary.
Cyrus Mutuku is a research macroeconomist. mutukucmm@gmail.com
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