By: KWAME OWINO
When this year comes to a close, the pundits will tie up the country’s overall performance to the weakening of the shilling, which has depreciated by almost 15 per cent since the year began.
Going forward from this statement, there are suggestions and arguments among observers of Kenya’s policies asking what it would take to reverse this trend and get the shilling back to the exchange rate that obtained in mid-2014.
The bad news is that this is not going to happen at all and even if it did, the country would have to surrender a lot of other objectives just to support the ability to boast of a strong currency. This contention reflects bad economics reasoning and the habit among Kenyans to look back to what was supposed to be the good old age.
The most dangerous idea connected to the policies being pushed forth by the posh and serious is that Kenya needs a stronger currency and that this should be achieved by reducing imports while simultaneously expanding exports.
EXPORTS AT ALL COSTS
This argument is inexcusable because this “exports at all costs policy” was refuted solidly some two centuries ago. The idea that a country should restrict imports and expand exports is not only absurd but shows how popular economic reasoning can sometimes lead to bad policy.
It is true that a number of countries that grew rapidly in the last century managed to expand their exports substantially. This means that part of their success was related to the ability to find new markets for manufactured products not just among their neighbours but principally in countries with higher incomes.
This fact does not mean that there is an economic law stating that exports are the one and only way to rapid growth. What it means is that when a country has good policies that allow for growth to occur, exports will feature prominently in the trade situation.
And so to look at Japan, China and Taiwan, it is clear that an export orientation was right but it also means that domestic production rose as well.
This fallacy of “exports good, imports bad” also comes from the inability to make a connection between imports and exports. There is no special reason to export products except that it provides income for the exporters in the form of foreign exchange.
Now, foreign exchange on its own is also not consumable but is an asset that enables the person who has earned that income to buy other imported products. In essence, it is all good to run up exports but the purpose for that is so the same exporter may purchase imports from the gains made.
Thus a country that exports much more than it imports is able to keep a larger amount of foreign reserves with the view that it could use them in the future.
Part of the reason that people have a problem with imports is the thinking that imports deplete national wealth by diverting them to a foreign country. This contention is also wrong for a couple of reasons.
To begin with, while the trade statistics are aggregated by country, they represent the incomes of firms and individuals based in countries and not the government. And for a comparatively open economy as Kenya’s, exports and imports are the property of the exporters and not government.
To make a big call for limiting imports is to ask the government to use coercive power to prevent firms and individuals from making their own consumption choices.
That is not consistent with the freedoms in the Constitution. Many times imports represent good value for money because manufacturing all products internally would be a waste of resources.
If every nation decided to freeze imports and hope to export to other countries, then the world would not only be poorer but nobody would buy Kenya’s coffee or tea or travel to the Maasai Mara. This is because the quest to limit exports by all means would lead to a total freeze in trade.
This has happened before and the effect is that it leads to painful recessions. It would be clever by half to think any country would buy Kenyan exports while knowing that Kenyans are trying to keep anyone else from selling here.
Nobody would argue with the idea that exports should be expanded in Kenya. The widening gap in the trade position for Kenya means that local production capability is poor and that firms have not found the right conditions to enable them to produce products that could be purchased by other firms globally.
Building Kenya’s ability to manufacture and export products is a domestic policy issue and not the fault of those who choose to consume imports.
SOURCE: DAILY NATION