[kictanet] [Skunkworks] Runway inflation?

Mon Sep 8 10:34:51 EAT 2008

Hi,
I agree with you in the most part, just that there are a couple of issues
I've found.

ECONOMICS; An observation.

Economics observes what happens in economies. It does not come up with the
rules. The whole point of the study of economics is to better understand how
transactions etc function. Now, when I say that a farmer in Dundori is hurt
by low pricing, that is reality. His is a low value transaction. It is
unfortunate, but if 70% of the transactions (numerically) are low value,
then they can be financially worth less than the remaining 30%, which
accounts for more, financially. The problem then is how to get the Farmers
out of Farmland trading and into the mainstream market (given that if they
do that, they will increase competition, thereby reducing pricing, while
gaining more money in the same breath).

The policy is left to someone else.

I disagree with the thought that inflation causes rural to urban migration
to recede. Actually, it increases it. The problem is, the guy at Dundori is
so poor that the instant school fees and transport costs rise, he can no
longer afford to make ends meet, so he moves, He's hardest hit by inflation.
He suddenly can no longer afford to buy bread (which has risen, and his
income is still the same paltry amount). It's the same as migration to
foreign nations, once a comfortable life is easily accessible in Nairobi,
then Greencard applications will go down. The sad thing is people from the
citys/towns tend to portray and image of doing well, so the farmer figures
the fortune lies in Nairobi.

In economics, its said that prices are sticky downwards, meaning that an
upsurge in pricing is easy, but an adjustment downwards is almost
impossible. An example? Global crude prices have come down. Fuel stations
will keep the pump prices at that level, and unfortunately, the trend is to
maintain that as their new profit margin. The same can be said about the
matatu industry. Once they increase their fare, they have a new profit
margin, which they will not go below.

UNEMPLOYMENT

For a developing nation such as ours, studies show that a certain level of
unemployment (not the level we have though) is good for the nation, as it
keeps competition for jobs high, making labour cheap, and hence keeping our
goods more competitive globally, and it also spurs entrepreneurship, as
people  are now forced to start businesses when they cannot find jobs.

CAUSE OF INFLATION IN KENYA
Inasmuch as it is popular to blame the government, this particular situation
is  largely caused by government. It has made a series of misinformed policy
decisions which are to blame for the situation at hand.

1. Separation of Kengen & KPLC - This was a case of blindly copying what
happens in other nations without looking at our situation in particular.
This is normally done when the logistics of managing the two becomes too
difficult. Kenya is still a young nation, at most they should have created
two smaller entities, each mandated with a different objective, in line with
what Kengen did with Geothermal power generation. For example, having KPLC
(Mother Company), Kengen and Kenya Power Distributors Limited.

2.Lack of capacity building; Throwing money to fix the problem - When Kenya
first experienced power rationing, the government started buying diesel
generators and installed them at the now popular Kipevu Power Station. Now,
Kenya is one of the countries with the largest capacities for geothermal
energy in Africa, instead of tapping on this, the government spent money on
diesel generation. As a stop gap measure, this was OK, the problem is,
someone realised that this was a way to cover the capacity problems, to meet
the shortfall. That is why the projects to build new power stations take too
long. Now, the global price of petroleum has gone up, we have to pay more
for power, simply because it is becoming a larger percentage of our power
generation. This also increases diesel prices locally, as the demand has
increased. You will have noticed that diesel fuel has increased in price
more than standard Super/Regular, when looked at as a percentage.

3. Poor Transport Infrastructure & Taxes - Our road infrastructure is
dilapidated. This makes transport expensive, however, the tax regime makes
it too expensive. Now fuel is at European prices. Our rail infrastructure is
poor. Transporting milk/bread etc, will cost more for this simple reason.
When matatus increase the fare, this affects the ordinary mwananchi, who
most feels the pain. Women selling goods in markets have to pay more to get
their goods there, and will charge more, increasing cost of food. It is the
same on all basic goods that rely on transport. The handcarts/mkokotenis
realise increased demand, and will increase their pricing as well. This
price will not go down easily.

4. Listing of Kengen & KPLC. While a good decision financially speaking, as
the bearer of policy, the government flopped in this regard. Given that the
companies have been separated, each now has profit targets to meet. The
government had earlier subsidized cost on both Kengen & KPLC's part. Now,
had they not been listed, this would not have been a problem, as the
government would not need them to make profits, however, as things are,
being a listed company, if the stock price falls, the CEO loses his job, as
he has an angry AGM to contend with. Now, we have two companies, each with a
huge profit target to meet, and a government that can no longer afford
to subsidize power. Now the result is, with their new profit regimes neatly
tucked in their pockets, they increase the cost of power, thereby increasing
production of goods. So, the manufacturers raise their prices, the
transporters raise their prices, the farmer, having to contend with rising
prices, raises his prices. Leaving the citizens digging deeper into their
pockets.

Kijiji, we agree in principle, the difference is that you are not content
with the situation. The poverty Kenyans face is real. And I agree, more
SACCOs and other such groups should be created, to allow the farmers to
bargain for better pricing. Ill give an example, I was recently in Dundori
(hence the several inferences), where I saw an old grandmother feed one of
the healthiest and largest batch of cabbages Ive seen yet to her cows. Now,
I asked why? Well, the cabbage (which retails in NBI for 40-60 shillings, in
a market, the price increase, as I pointed out earlier, is due to transport
problems (15 odd km of dirt road + tonnes of middlemen) is bought from her
at 3 shillings a piece. She at least has a cooperative for milk, so they buy
the milk at 23 shillings a litre. She figures, the cows tend to produce
better milk when fed with cabbages, and they will rot, waiting for someone
to collect... And we complain about food shortages? Now, Kijiji, we cannot
say that 10 cabbages are worth 400 shillings. They have retailed at 3
shillings each, meaning that they are worth 30 shillings. That's the farmers
buying power.

Anyway, my two pence, as the tradition is, feel free to punch holes in my
argument...

On Mon, Sep 8, 2008 at 8:21 AM, Kijiji Jazz <kijijijazz at gmail.com> wrote:

> Hi Aki,Skunks,
>
>
> Energy runs the economy, it greatly determines the cost of production.
> What this means is that bottom lines for companies will be greatly
> affected and small companies wont be able to manage.  It basically means
> that small is being redefined especially in urban areas.
>
> For me to answer your question effectively, i have to put some things in
> context.  Firstly in the CNBC thread what you and Phares said about
> price and salaries was on point but.  Salaries or wages are a different
> INDEX from GDP. They are defined as Yp or {Income per Capita}. Thus my
> contention that he was right on YP and wrong on GDP Why is this
> important?  Their are two kinds of economies really.  LDC {Low Developed
> Countries and Medium Developed Countries}.
>
> This brings me to the issue PHARES raised of the JAPAN economy.
> Developed Countries primarily suffer from problems of Devlopment not
> Problems of Growth.  Low developed countries {LDC} or 3rd world
> countries suffer from from problems of growth.
>
> WHAT IS A PROBLEM OF GROWTH?
>
> In Kenya's case a problem of Growth would be retrenchment, high costs of
> living etc.  When an economy is growing it leaves some people behind as
> it grows.  This are the people who do not adapt to the growth.  For
> example 10 years ago a person who had a certificate in Secretarial
> studies could get a job, in Nairobi.  Now their skill set is largely
> irrelevant.  A degree is a prerequisite for a job now.  And the
> situation will get worse.  Thus the argument by Karl Maxx in his book
> "Das Kapital" that " Capitalism results in a reserve army of unemployed
> workers."  He was right!! as we can see from the retrenchments at Telkom
> Kenya etc. However i am a firm believer in Capitalism.
>
> WHAT IS A PROBLEM OF DEVELOPMENT?
>
> A problem of development is more societal in nature.  They say that
> money only makes you more of what you already are.  Thus crime goes up
> in urban areas in terms of drug use and prostitution etc.
>
> INFLATION IS A PROBLEMS OF GROWTH
>
> We all know that property prices in Nairobi have gone in some instances
> by up to 4 times in the last 10 years.  What this means is that urban
> areas are getting expensive to live in.  That has led to increased rents
> etc.  Power is also largely expensive due to the demand for oil from the
> East with their quickly expanding middle class.
>
> This means that small business and low skilled people will eventually be
> unable to survive in Nairobi and relocate to rural areas.  Their are
> already reported cases of people in banks asking for transfers to rural
> areas where life is cheaper.
>
> WHAT DOES THAT MEAN
>
> That then means that rural areas will start to grow and expand into
> urban centres in the long term.  This is because while a person with
> secretarial skills in Nairobi is irrelevant. Their skill set is needed
> in Homa Bay.  It could also be argued that people will not move to rural
> areas but will stay and engage in crime.  Which is also true but unless
> crime is organised it isn't profitable.
>
> HOW WILL RURAL AREAS DEVELOP
>
> Business works in terms of willing buyer, willing seller.  That means
> that the business that succeed will need to be where their are high
> populations to improve their chances of getting more willing buyers.
> Thus when people relocate companies will have to roll out into rural
> areas.  This will stimulate growth and development as seen by Equity
> banks expansion drive, and By OneComms focus on rural areas in terms of
> selling internet access.
>
>
> INFLATION IS THUS GOOD IN THE LONG TERM
>
> This is rather ruthless to say.  However it is true.  Inflation reduces
> rural to urban migration and reduces informal settlements in urban
> areas. By keeping people in rural areas inflation fosters growth in
> those areas.
>
> However inflation is bad if people who are forced to stay in rural areas
> by it have no fallback option.  That means that governments must relax
> regulation of businesses and make it easy for them to expand to rural
> areas.  Kudos to CCK for the converged licence.
>
> Banks are also a big culprit.  At any one time Banks in Kenya are
> holding reserves of up to 60 billion shillings.  Thus Michael Josephs
> statement in the news recently when launching MPESA on PESA POINT where
> he said.  "Banks always have money, at least Kenyan Banks" In developed
> economies banks dont hold vast reserves of cash they lend.  Money should
> be in the economy producing more not in banks.
>
> The more entrepreneurs have access to cash, the more they can do.  thus
> lending should be long term and flexible to foster economic growth.
>
> Therefore what Kenya is experiencing is problems of growth.  As Phares
> pointed out.  It will harm some people but in the long term it will be
> good for the economy.
>
> Small companies will close or change their structure to survive e.g.
> remove permanent employees and higher contract ones or freelancers.  For
> example KQ has frozen employment for the next two years, hiring us
> strictly contractual.  Informal industries such as matatus will have to
> formalise into Saccos or Bus companies or risk closure.
>
> DISCLAIMER:  Our inflation is also artificial due to OPEC.  It is also
> brought about by America and its bloated middle class and Chinas ever
> growing middle class and their demand for oil.  However this is the
> general trend of the economy.  I hope that clarifies stuff for you.
>
> I invite Phares and others to Critic and contribute to this.
>
>
> Kjaz
>
> On Thu, 2008-09-04 at 13:07 +0300, aki wrote:
> > At this stage I wish I knew more about economics than ICT!
> >
> > While these lists are ICT based, if we have an economist on board, it
> > would be a great help to some of us if the person can do some analysis
> > and share it on this list.
> >
> > Some points to consider ( my amatuer input ) :
> >
> > - Electricity runs the economy. At 100% or more increase, what will it
> > mean in the long term, say 3-12months from now?
> >
> > - Closure of businesses, loss of employment, eroded spending power by
> > the consumers or businesses?
> >
> > - How much of the increased costs will affect property business
> > rental prices ?
> >
> > - How will the informal sector handle this?
> >
> > - How will ICT companies fare in this scenario?
> >
> > - Price increases of products, solutions etc lead to a negative market
> > trend?
> >
> > My apology for posting these issues here.
> >
> > Aki.
> >
> >
> >
> >
> > _______________________________________________
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>
>
>
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