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                 BREANNA N. MORRISON

 

 


 

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This is a writing sample of an essay written for PPD 250: Development in Third World Cities.

 

 

 

 

 

 

 

Fiscal Policy in Nairobi: The Quest for Stability in a Time of Unrest

 

Nairobi, Kenya suffers from a plethora of social problems that plague its citizens. There is significant civil unrest due to unhappiness with the current governing administration, the basic needs of the citizens are not being met through the provision of water and sewage, and the life expectancy of its citizens is short because of the prevalence of AIDS and other diseases. Nairobi seems to be struck with obvious signs of blight and turmoil, but the lack of finances is not the only hindrance to eliminating the city’s crises. The misappropriation of pre-existing funds has come to prove to be a barrier to healing social ails as well. If Nairobi could come up with a system to revise their fiscal policy, there may be more funds available to create the social programs needed to solve some of Nairobi’s most pressing problems.

The dilemma arises when questioning if fiscal policy should be restricted to just the government and unilateral policies. With the prospect of corruption, which has come to be a major problem with fiscal policy in the past, would it not be more rational to have non-governmental organizations and international authorities play a more significant role? If external influence is detrimental, how can there be a better system of checks and balances to minimize corruption in the local and national governments? These questions are relevant especially in regards to public procurement, or the public services that the city provides from the revenue generated through collecting taxes.

            This paper is an attempt to address the issue of corruption in the government, especially with matters of fiscal policy, in the developing world. First I will give a general description of the developmental potential of Nairobi, and some of the obstacles the city is facing towards development as well. Following the summary, I want to specifically address how corruption in regards to fiscal policy has inhibited the development of Nairobi. In this paper, I will also explore various theories on the role of international organizations such as the WTO, local governments and NGOs in managing tax payer dollars as well as foreign aid, especially in its current state of civic unrest.

The topic of public procurement will be the focus because it is a direct contribution to the local government from the citizens. I expect that the role of managing public procurement will have a great significance in the attempt to refine Nairobi’s fiscal policies. Unlike with other sources of national income, procurement comes directly from the citizens. For this reason, there should be no excuse for the mismanagement of these funds, so I think this source of revenue will be a great start towards actually funding the social services necessary to make Nairobi a more competitively developed city. I also believe that a multilateral approach to fiscal policies and agreements is necessary. If Kenya continues with its unilateral perspective, it may ostracize itself and inhibit the country from receiving more foreign aid later on.

            Historically, Nairobi has been economically tumultuous for a number of years. According to the CIA world fact book, though Kenya is still viewed as the economic center for trade and finance in the East African region, corruption has played a key role in inhibiting the economic growth of the area for numerous years. Kenya itself only received its independence in 1963, when Jomo Kenyatta became the founding president. His reign lasted for fifteen years, until Daniel Moi and the Kenya African National Union became the only political party present in the country. The corruption began to ensue in 1992, and followed in 1997, when attempts to overthrow KANU were initiated by ethnic conflicts and resulted in extreme violence and fraud. Since then, the fraudulent elections have overall continued, and the corruption has infiltrated into governance and fiscal policy as well.

 Kenya’s economic trials also began in 1997, the International Monetary Fund suspended Kenya's Enhanced Structural Adjustment Program as a result of Kenya’s inability to minimize corruption and promote reform. After this suspension of international assistance, natural disaster plagued the country when a severe drought lasted from 1999 to 2000. The drought resulted in a major decrease in water and energy distribution, as well as a significant decline in food production overall. The drought did result in the resumption of international assistance through loans from the IMF. The loans, however, did cease one again in 2001 when the problem of corruption was still not dealt with. When the drought ended in 2001, economic growth was relatively stagnant still due to other problems of low national product prices and minimal international investment due to weak economic policies and strong corruption.

In 2002, the KIBAKI government took over Kenya in hopes to eliminate corruption. This progress towards the ending of corruption lead to an increase in international support, but in 2005 and 2006, corruption scandals made their way through the Kenyan government once again. As a result, the World Bank and the IMF suspended their loans in 2006, but other international aid organizations have continued to lend money to the country, and growth has now increased to 6 percent in real GDP.

In 2007, Kenya’s most recent elections resulted in political and civic unrest again. This time, however, the violence that ensued was not only politically inspired, but ethnically fueled as well. Though there is still some economic growth for the country, citizens in the country like those of Nairobi, are not reaping any of the benefits as a result of the turmoil. Many people are currently living in internal displacement camps, and those in rural areas are starving because agriculture and crops were destroyed by the violence as well. There is a strong need for the domestic funds that Kenya does receive to be invested into social and public services that are oriented towards providing the basic needs of many of the country’s most poor citizens. There is also a need for more domestic funds, which can be created by an increase in the investment on industrial industries to promote greater exports.

In January 2008, Finance minister Kimunya estimated that Kenya would lose about 885 million dollars due to the post-election crisis. This loss is due to the destruction of infrastructure, the decrease in some major industries like tourism and fishing, as well as looting the Nairobi’s business district. This has posed a significant problem for the economic stability of Nairobi recently, and has affected the greater region of east Africa as well.

Despite the crisis, Nairobi, Kenya is unique in that unlike most other cities and countries in the region, Nairobi as a relatively high tax yield. In fact, its tax-to-GDP ratio is over 20 percent. As a result of this high yield, Kenya was much less reliant on foreign aid for government services as some of its neighboring countries until recently with the civic unrest. The problem with Nairobi and the rest of Kenya is that though some funds are available as a result of a surplus and foreign aid, they are not being appropriated efficiently, especially in regards to public procurement.

One initial problem with public procurement is the fact that Nairobi’s current tax system, though better than others, still has its problems. Corruption and ineffectiveness still plagues the taxation system of Nairobi. Corruption allows for a large discrepancy to be present in regards to who tax policies get enforced on, and who is unjustifiably exempt from certain tax policies. Also, there has yet to be a system in place for the tax policies to be flexible with the economic growth of the cities and country. Finally, for many citizens, the tax rates are difficult to comply with and often times difficult to enforce.

How then, can the country better invest in public services with tax money, when there is inequality and inefficiency in the tax collecting process? In the United Nations University’s article on the reformation of Kenya’s tax system, the writers address the discrepancy in Kenya’s taxation process, and offer solutions through means of indirect taxing, instead of direct taxing. Through indirect taxing, tax revenue increases because it is easier to enforce, and tax rates can decrease because the tax burden is shared with a larger portion of the population.

One taxing method used in Kenya is an excise tax on tobacco, beer and high end industrial goods. Though the country has oscillated between specific excise tax polices or ad valorem , the country ultimately ended up with a specific excise tax. The revenues from the excise tax were consistent until smuggled and untaxed goods became prevalent in the country because they were cheaper. As a result, tax rates have decreased to minimize the price discrepancy, and there is also less of a discrepancy on the taxes on malt and no-malt liquor. The change has also resulted in more export revenue because taxes on my high end products in the manufacturing industry were significantly lowered as well.

Kenya has also decided to decrease its corporate income tax so that it can compete for international investments in this global market. Three main changes for the corporate income tax reform policies were to equalize the corporate income tax rate with the personal income tax rate, differentiate CIT for foreign and domestic firms, and use CIT tax incentives to boost their export economy. Through these changes Kenya hopes to increase tax revenue significantly, but rely less on income taxes by boosting up the export economy and receiving revenue from that as well. The problem is, however, that with the recent violent uprisings, much of the industries are at a standstill and the prospect of foreign investment is minimal, especially since Nairobi’s business district was recently looted and destroyed. Though these policies can be beneficial for the future, when the Nairobi has better recovered from its recent crisis, what the main focus should be on is the appropriation of current funds to provide for the city’s struggling citizens.

In Victor Mosoti’s article “Reforming the Laws on Public Procurement in the Developing World: The Example of Kenya”, Mosoti analyzes the current procurement laws of Kenya and the country’s attempt to reform these laws. Two major characteristics of the current procurement laws already in place are the fact that they are already decentralized, and they “provide a procedure of review of tender awards by unsuccessful bidders”(Mosoti 2). The fact that the laws are decentralized means that not only do government officials contribute, but local authorities, as well as universities, colleges and other bodies contribute as well.

The unsuccessful bidders result from the fact the Public Procurement system is headed by a small department called the Public Procurement Directorate. This department has only two directors that are responsible for a multitude of tasks including professional development, ethical standards, and maintaining a tender committee. This results in not only inefficiency, but ineffectiveness as well. The fact that there are only two people in charge of procurement leads to minimal progress, as well as more room for corruption due to a lack of checks and balances.

Kenya drafted a reform bill in 2003 with the main objectives of: making the procurement process more transparent, more economically efficient, more fair in regards to competition, and ultimately more trustworthy. The bill has proposed to add a public corporation called the Public Procurement Oversight Authority that will be used to monitor the procurement process and act as another tier of checks and balances for procurement in the country. Additional checks and balances will be added through the mandatory addition of internal organizations of public entities. These organizations will be the official “whistle-blowers” and are responsible for creating the tender committees.

Finally, the rules of public procurement will be refined and regulated. In these rules, conflict of interest will be minimized through more regulations on contracts. Also, the procurement departments will be subjected to regular auditing, and the tendering process is left open so that bidding can be more fair and competition can be promoted as well. More provisions will be made for tendering as well, so that changes can only be made to documents for grammatical errors and minor changes of that sort.

The World Trade Organization has its own procurement laws which can be summarized by promoting efficiency, transparency, and non-discrimination. Kenya has yet to become a signatory to the WTO’s Government Procurement Agreement, but many scholars think that it would be extremely beneficial for developing countries to adhere to the regulations provided by the WTO. They believe that their reforms will have a much better chance to succeed through a multilateral process. Kenya, however, is unilateral and is reluctant to concede.

I believe that the problem is that Kenya has a dualistic approach to international affairs. This is more than likely a response to the colonial influence in Kenya that is not even fifty years removed. Kenya’s approach to international affairs has even infiltrated the procurement reform bill by stating in part one of the bill that if the regulations of the bill do not completely coincide with the stipulations of other international organizations rules, the requirements of the Kenyan bill reign supreme. I think that this can be a severe hindrance to Kenya’s economic development, because it is obvious that in order to be a global economy, multilateral agreements are becoming more necessary.

Instead of embracing the similarities, and possibly compromising to meet the requirements of any other organizations bills, the policies have to be introduced and adopted by the Kenyan government in order for them to be implemented and followed by the country. This has resulted in Kenya being neither a bilateral nor multilateral government, and may result in being a roadblock to progress and receiving aid further on. I believe that this is especially significant in regards to the country’s current crisis. As a result of much of the industries suffering from the violence, foreign aid is becoming more and more necessary. Kenya should attempt to be more multilateral to establish a better relationship with more inter-continental countries, and possibly have more of a safeguard for the prospect of future crises, whether they be violent or due to natural disasters.

Kenya’s issues with public procurement and tax reform have significant relevance to the city of Nairobi. The extreme opposition to the corruption in the government, and the desire of government officials to maintain their stronghold has led to violence that has had significant economic impacts as well. Nairobi, the capital of Kenya, was right in middle of the conflict, but because of international influence already present, pre-election violence was minimized more than expected. If the problems of corruption, especially in regards to fiscal policy, had been solved already, however, there would have been less political unrest during the election period. Kenyan citizens, especially around Nairobi, have become tired of being unrepresented and not reaping the benefits of the economic growth of the country. As a result, the violence has caused an economic downturn for all Kenyan citizens and has significantly slowed down development. The need to reform fiscal policy does not just have economic implications. Political and ultimately development related issues have come up as a response to the need for reform as well.

Spatial distribution in regards to ethnicity is extremely significant with respect to the public procurement of Nairobi as well. When the political unrest occurred right around Nairobi, the UN, international relief NGO headquarters, and government officials were ready to provide at least some health, food, and housing programs needed to service the citizens. The violence that ensued around the western outskirts of Nairobi made foreign aid unable to effectively service a large demographic of the citizens due to ethnic tensions. Nairobi also has an extremely diverse ethnic make-up that it ultimately spatially separated. This has caused for tensions between ethnic groups, especially between those in power and those not in power, which has resulted in discrimination in economic policy in the past. These ethnic tensions also fueled the recent civic unrest in the city. Now, foreign aid is being used in largely discriminatory ways, and some violent rebels have forced the denial of aid for any ethnicities that are not Kikuyu.

The current conflict is mainly a result of internal corruption in the current administration, however. Those that have opposed the corruption created the ODM political party and actually won the election. The current administration, however, rigged the elections and though there is opposition from a majority of the working-class citizens, few people in the government will oppose the current president. The lack of checks and balances does not just affect fiscal policy, but political infrastructure as well. If public procurement had been used more appropriately early on, there would have been less opposition to the current administration and the crisis probably would not have been to this extreme. With the existing funds, the Nairobi government is still squandering parts of it on propaganda to villainies the ODM party and try to encourage tourism still. I believe that the funds the government is getting could be better used to provide more public services, like using them to get more safety in IDP camps.

I believe that part of the reason why the government cannot provide many of these services is because of the country’s unilateral approach to policies and agreements. Kenya needs to reform its economic policies to include more agreements that involve countries that are not limited to the COMESA. If Kenya was more multilateral, then there could be more negotiations occurring with investors to establish more domestic and international confidence in the economy, even during these tumultuous times. If Kibaki wants to stay in power, then he should adopt the ODMs demands for more transparency in economic management to restore more confidence in the Nairobi stock exchange. Though I feel that it is necessary to work on industry and exports to create a more sustainable economy, I believe that most of the procurements should go towards creating social services such as job development and health promotion, especially in the lesser developed areas.

I also believe that ethnic relations should be able to be subdued by adopting some of the policies Beirut has adopted and create economic divisions instead of ethnic ones. This will minimize ethnic conflict by decreasing the amount of areas in Nairobi sectioned off by ethnicity. This cannot be established, however, until the economy has been more stabilized. I think one way both can be started is by creating job development programs in IDP camps, which have a wide variety of ethnicities. This way the government can unify the ethnic groups through the common need for job training and employment. The International Crisis Group has indicated that members of the private sector would be willing to contribute to this job development. Therefore, there is a significant need for a public-private partnership to be created to create a program that can help with this issue.

I believe that if Nairobi wants to become a more developed city, it should adhere to the regulations present in the global markets. Nairobi has an advantage because it is the trade and economic hub of the whole east African region. I believe that Nairobi should focus less of its policies on COMESA, the regional trade union, and focus more of its efforts on infiltrating more inter-continental trade unions. Nairobi has the potential of becoming a major economic center, and is making moves to eliminate some of the barriers of entering the global market.

If Nairobi and the rest of the country of Kenya choose to join more inter-continental trade unions, then hopefully there will be even fewer opportunities for corruption because there will be more countries holding Kenya accountable for the appropriation of its funds. Minimizing corruption will not just benefit the disenfranchised of the city, but every citizen. By minimizing corruption, there will be more trust in the government, and people will feel less inclined to rebel against it. There are significant amounts of money that Kenya has wasting by grafting and squandering. If Kenyan officials were more transparent and were less inclined to steal from the people, there would have been an even greater surplus available that would have sustained the economy even if a crisis were to occur. There would have been more equality in taxation that would have increased revenue significantly as well. Now, Nairobi needs to focus its procurement funds on providing services that will mend the torn relations between ethnic groups and a majority of the citizens and the government. Investment in job development, which will benefit domestic industry, is needed. Services that will provide damage control are also needed, however, and should be invested in as well.


Works Cited

"Kenya in Crisis." CIAO. 2008. International Crisis Group. 2 Dec. 2008 <http://www.ciaonet.org/wps/icg10465/icg10465.pdf>.

"Kenya." The World Bank. 2008. Data and Statistics. 2 Dec. 2008 <http://web.worldbank.org/wbsite/external/countries/africaext/kenyaextn/0,,menupk:356536~pagepk:141132~pipk:141109~thesitepk:356509,00.html>.

"Kenya." The World Fact Book. 20 Nov. 2008. Central Intelligence Agency. 2 Dec. 2008 <https://www.cia.gov/library/publications/the-world-factbook/geos/ke.html>.

Mosoti, Victor, Reforming the Laws of Procurement on the Developing World: The Example of Kenya(July 2005). International and Comparative Law Quarterly, Vol. 54, Issue 3, pp. 621-650, 2005.

UNU-WIDER. WIDER Research Paper. World Institute for Development Economics Research. Vers. 67. 2005. United Nations University. 2 Dec. 2008 <http://www.wider.unu.edu/publications/working-papers/research-papers/2005/en_gb/rp2005-67/>.

 

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