Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Understanding Reform Process in Kenya Final Draft Maureen Were1 Rose Ngugi2 Phylis Makau3 Joseph Wambua4 Linet Oyugi5 March 2005 1 Kenya Institute for Public Policy Research and Analysis (KIPPRA), 2KIPPRA and University of Nairobi, 3Ministry of Finance, 4Central Bank of Kenya (formerly KIPPRA), 5 Institute of Policy Analysis and Research (formerly Ministry of Planning). Correspondence: [email protected] Abstract The study analyzes the reform process in Kenya in the 1980s and 1990s. Like some other developing countries, macroeconomic instability preceded economic reforms. However, despite the economic crises of the 1970s, the government was not willing to implement the market-oriented reforms. Donor pressure in the form of conditionalities for funding was more effective in pushing the government to embark on the reform process. The 1980s were characterized by structural adjustment programmes, of which a major component was liberalization of imports and a shift from import-substitution to export-promotion strategy. However, the period saw minimal achievements and was marked by lack of commitment to the reform process. The political establishment became repressive and dictatorial, leading to agitation for political reforms. Thus, the 1990s saw implementation of comprehensive economic and political reforms. Stringent conditionalities leading to suspension of donor funding ensured a speedy and broader implementation of reforms. In particular, the multilateral financial institutions—IMF and World Bank—set the pace and the reform agenda throughout the process. Besides donors, civil society was also critical, especially in pushing for political reforms and good governance. The business community seemed passive, perhaps for fear of retribution. Weak commitment to the reform process strained relationship between donors and government, leading to stop-go pattern in lending and reform implementation. More often than not, reforms were simply undertaken to hoodwink donors. Thus, reform ownership remained weak. Even when the government demonstrated its commitment in various policy papers and documents, or through appointment of reformists in strategic positions, implementation process was often marred by delays, non-commitment or policy reversals. Weak commitment was rooted in the political structure that was not supportive of reforms, especially because of the vested interest groups such as the inner cabinet, which feared loss of political patronage and power bases with the changes. Resistance to reform and policy reversals can be attributed to limited consultation and consensus building with key stakeholders in the design and implementation of reforms, as reforms were hastily undertaken in a bid to access funding. In some cases, failure to capture public support and spell out the expected short-term effects of policy changes resulted in policy reversals. This was exacerbated by the inherent political uncertainty of reforms. While the government made bold moves in implementing certain reforms like trade liberalization, others such as good governance and public sector reforms were a major challenge, especially because public institutions sustained patronage. Despite undertaking the reforms, there were marginal gains in economic and investment growth as depicted by the dismal performance, especially in the 1990s. Additionally, reforms disproportionately affected the poor and worsened the asymmetries in income. ii Acknowledgements We would like to thank Christopher Wambua of the Communications Commission of Kenya, Njeru Kirira, Solomon Kitungu and Dr. Kang’ethe Gitu for their critical comments on an earlier draft. We are also grateful to the Global Development Network for their financial support. Errors and omissions are ours. iii Table of Contents Abstract ............................................................................................................................... ii Acknowledgements ............................................................................................................. iii List of Abbreviations and Acronyms .................................................................................... v 1. Introduction................................................................................................................. 1 2. Analytical Framework .................................................................................................. 3 3. Political and Economic Structure Prior to Reforms...................................................... 8 3.1 Political Structure after Independence .................................................................. 8 3.2 Economic Background....................................................................................... 10 4. Economic Reforms in the 1980s ................................................................................ 12 4.1 Driving Forces of the Reform ........................................................................... 13 4.2 Phase I: 1980-84................................................................................................. 15 4.2.1 Economic Reforms ........................................................................................ 15 4.2.2 Performance with the Reforms....................................................................... 17 4.3 Phase II: 1985-1991............................................................................................ 19 4.3.1 Political Developments ............................................................................. 19 4.3.2 Economic Reforms ........................................................................................ 21 4.3.3 Performance with the reforms........................................................................ 25 5 Reform in the 1990s: .................................................................................................. 28 5.1 Driving Forces of the Reform ............................................................................ 28 5.2 Phase III: 1991-1996 .......................................................................................... 30 5.2.1 Political reforms ............................................................................................ 30 5.2.2. Economic Reforms.......................................................................................... 32 5.2.3 Government-donor relationship..................................................................... 41 5.3 Phase IV: 1997-2001................................................................................................. 44 5.3.1 Political arena................................................................................................. 44 5.3.2 Economic Reforms ........................................................................................ 45 5.3.3 Government-Donor relationship.................................................................... 51 5.4 Economic Outcomes ......................................................................................... 53 6. Winners and Losers................................................................................................... 57 7. Conclusion ................................................................................................................. 58 References.......................................................................................................................... 62 Appendix Table 1: Summary of the Reform process ............................................................ 1 iv List of Abbreviations and Acronyms AGOA- African Growth and Opportunity Act ASAO – Agriculture Sector Adjustment Operation BOP – Balance of Payments CBK – Central Bank of Kenya CG – Consultative Group CKRC – Constitution of Kenya Review Commission COMESA- Common Market for Eastern and Southern Africa DGIPE – Department of Government Investment and Public Enterprises EAC-East African Community ECS- Export Compensation Scheme EPZs- Export Processing Zones ESAF – Enhanced Structural Adjustment Facility ESTU – Executive Secretariat and Technical Unit GDP – Gross Domestic Product HCDA – Horticultural Crops Development Authority IDA – International Development Association IEA— Institute of Economic Affairs IFIs- International Financial Institutions IFS- International Financial Statistics IMF – International Monetary Fund KACA- Kenya Anti-Corruption Authority KADU- Kenya African Democratic Union KAM – Kenya Association of Manufacturers KANU – Kenya African National Union KIPPRA— Kenya Institute for Public Policy Research and Analysis KNUT- Kenya National Union of Teachers KPTC – Kenya Posts and Telecommunications Corporation KTMM—KIPPRA-Treasury Macro Model LDCs- Less Developed Countries MoH-Ministry of Health MTEF – Medium Term Expenditure Framework MUB-Manufacturing under Bond NARC—National Rainbow Coalition NBFIs – Non-Bank Financial Institutions NBK – National Bank of Kenya NCCK – National Council of Churches of Kenya NGO – Non-Governmental Organizations NPE-New Political Economy ODA- Overseas Development Assistance PIC- Public Investment Committee PRGF – Poverty Reduction and Growth Facility PRPC- Parastatal Reform Programme Committee PRSP- Poverty Reduction Strategy Paper SAL – Structural Adjustment Loan SOE – State–Owned Enterprises TBR-Treasury bill rate v UNDP – United Nations Development programme URG – Ufungamano Review Group vi 1. Introduction Kenya attained independence from Britain in 1963. Since then, the country has gone through a number of political and economic phases. Like most African countries, Kenya’s economy in the 1960s and 1970s was characterised by controls and a protective, inwardlooking trade regime. The economy was able to achieve an outstanding economic growth rate of 6.6% over 1964-73 period. Economically, Kenya was more or less at the same level as some of the East Asian tigers such as South Korea. However, after a remarkable economic performance witnessed in the first decade of independence, there was a series of economic crises, following terms of trade shocks and fiscal indiscipline coupled with several structural distortions in the 1970s. The oil crises of the 1970s compounded problems by exposing the country’s vulnerability to external shocks. This was a major blow to the importsubstitution industrialisation strategy inherited at independence. The government responded to these crises by tightening the trade regime and seeking financial assistance from donors. By late 1970s, economic management had deteriorated, but the government resisted dismantling the control regime. It took the government some time to implement marketoriented reforms.1 As the economic crisis deepened, the softest option of borrowing from abroad demanded liberalization of the economy. Thus, the government, reluctantly, embraced economic reforms under Structural Adjustment Programmes (SAPs) in the early 1980s. Little was, however, achieved in the 1980s, as the efforts made were sporadic and characterized by reversals, delays in implementation of planned activities and lack of commitment. As a result, the relationship between the government and the development partners began souring, and the financial support disbursement was delayed. It was not until the 1990s that a comprehensive reform program was implemented. Even then there were a lot of demands and pressure from the development partners for the government to show commitment and ability to implement the reforms. 1 For details on definition and measurement of market-oriented reforms, see Loayza and Soto (2003). 1 This study attempts to document an in-depth analysis of the reform process in Kenya with an emphasis on the key economic reforms that were undertaken. The main purpose of the paper is to contribute to the demand for understanding reform, with specific reference to the Kenyan experience. The paper seeks to investigate the reform process, with the aim of analysing and explaining the motivation factors for reform, the role of stakeholders especially donor community, political and economic constraints faced in the implementation process, as well as the success and failure of the attempts to undertake reforms in the 1980s and 1990s. Several questions are raised in an attempt to understand and evaluate the reform process in Kenya. What motivated the mounting of the reform process? What was the role of the main interest groups and stakeholders? Was the capacity of the government adequate enough to see through a successful implementation of the reforms? How were the losers compensated in the process? Was the reform precipitated by a major crisis? Did the reform enjoy the support of the main political actors? How did the underlying political system contribute to the success or failure of the reform? What role did the international community play? 1.2 Hypotheses Some of the questions raised above lead us to the following hypotheses. a) The more severe the domestic economic crisis, the more the government was compelled to undertake the market-oriented reforms. For instance, although the need to reform the economy was realized in early 1970s, it did not materialize until the early 1980s when fiscal and balance of payment (BOP) crises persisted. Even then, a comprehensive reform programme was only implemented in 1990s after the economic crisis deepened. Tight budget constraints exacerbated by suspension of donor funding, and deterioration in economic performance increased the intensity and speed of implementation in the 1990s. b) Hasty implementation without adequate consultation with key stakeholders and proper sequencing led to resistance and policy reversals. This was largely occasioned by the fact that whenever funding was curtailed, reform measures would quickly be put in place in a bid to satisfy conditionalities and access funding. c) External pressure, especially in the form of donor conditionalities was the main driving force for broader reform implementation, particularly in the 1990s when funding became 2 increasingly predicated on actual implementation of reforms. In the 1980s, the government could afford to get away with piecemeal reforms since it still enjoyed relatively easy access to bilateral and multilateral aid. d) Political uncertainty about the effects of reform, vested interests, rent seeking opportunities and political patronage led to lack of commitment, delays and policy reversals that were witnessed in the implementation of reforms in various sectors. Exacerbated by the strong executive, the patron-client political structure was used by president and the ruling elite for maintaining political power by providing discrete private benefits such as public sector jobs. It was, therefore, difficult undertaking reforms that would interfere with such a system or jeopardize political support and power. e) Reforms had adverse outcomes for the poor and vulnerable groups. In particular, retrenchment programmes, cuts in public spending and the introduction of cost-sharing in the social sectors disproportionately affected the poor and the vulnerable groups. f) Policies that were purely donor-driven in the form of external donor conditionality were undermined by problems of local ownership and poor implementation. The paper proceeds as follows. Section 2 outlines the analytical framework while section 3 describes the political and economic structure prior to reforms. The reform process is analysed in four phases. Section 4 analyses reform in the 1980s under the SAPs. This period is divided into phase 1 (1980-1984) and phase II (1985-1990). The reforms in the 1990s are discussed under section 5, which also covers Phase III (1991-1996) during which comprehensive political and economic reforms were undertaken and phase IV (1997-2001) during which constitutional and governance issues became critical. The winners and losers of the reform process are discussed under section 6. Finally, section 7 gives the conclusion. 2. Analytical Framework Economic reform is a complex process that calls for various issues in understanding the process. Moreover, reform is a dynamic and multi-faceted process. This calls for a multidisciplinary approach, in which, at the very least, conceptual issues from political science, history and economics are involved (Fanelli, 2003). We employ the concepts of institutional and political economy, as well as foreign aid and conditionality since the latter has been critical to Kenya’s reform progress. 3 Olson (1965), as cited by Remmer (1997), had long recognised the relationship between politics and economics by arguing that when economic development influences political change and political change in turn influences economic development, the two relationships should be considered together. The now famous “new political economy” (NPE) literature, as it has become known, views politicians not as benevolent social planners, but as individuals who maximise their objective functions given the constraints they face and information they have (Romer 2001). Likewise, voters are viewed not as mechanical actors but as rational economic agents. A key puzzle has been the striking cross-sectional differences in economic development, notably the economic success of the East Asian countries relative to African and Latin American nations. Why has development programmes succeeded in some countries while failing in others? In addressing this and other related questions, research work increasingly revolves around the study of the complex interplay of political institutions, preferences and economic policy outcomes. This approach is suited to the study as reform process often entails interplay between political and economic forces. The recent wave of democratization in developing countries has sparked renewed interest in the politics of adjustment. Economic reforms have distributive consequences, creating benefits for some while creating hardships for others, or simply winners and losers. Thus, the success of reforms hinges on the government’s ability to mobilize political support for the programme and also to manage opposition (Haggard and Webb, 1993). It also implies that ‘vested interests’ become very crucial in assessing the performance of reform efforts. Fidrmuc and Noury (2003) note that interest groups are organized to basically protect economic rents and political power. If individuals are highly risk-averse, they may resist change due to inherent uncertainty. People faced with uncertainties about the outcomes of the reforms may prefer the status quo. Politicians and bureaucrats also become reluctant to the reform process as they rely on the interest groups for political support, votes and money. Haggard and Webb (1993) and Liew et al (2003) observe that economic reforms have a political element given the distributive consequences, and as a result, politicians may resist reforms if it constrains them from sustaining their political power. These arguments are 4 critical in analysing how the political establishment influenced the design and implementation of reforms in Kenya. In addition to interest groups, one of the key concerns has been the implication of the type of political regime for reform. It has been argued that authoritarian regimes might be more successful in initiating reform than democratic ones, particularly given the weaknesses of democratic institutions in developing countries (see Haggard and Webb, 1993). However, this claim assumes an enlightened and rational dictator who seeks to maximize the present value of consumption through pursuing policies that enhance growth, in contrast to a dictator with predatory behaviour. Empirical support of this hypothesis is usually cited for the case of Latin America and East Asia (Republic of Korea, Taiwan, Singapore and Hong Kong) where countries undertook crucial policy reforms under the authoritarian or administrative auspices. China’s reform experience has also been cited to show that economic and political liberalization need not go hand in hand (Deyo, 1989; Haggard, 1990; and Wade, 1990; Qian, 2001). However, what is perhaps more relevant in the Kenyan case is the issue of predatory behaviour and how it undermines the success of reforms. Baumol (1990) observes that wealth gained through productive entrepreneurship can easily be lost to the predatory actions of officials. While there is no one-to-one correspondence between political and economic regimes, there is consensus in the literature that successful economic reform in most developing and transition countries must involve some changes to economic and political institutions (Liew et al., 2003). Rius and van de Walle (2003) contend that political clientelism shapes the government’s economic policies. They define political clientelism as political systems in which politicians primarily maintain their political power and legitimacy by providing discrete private benefits to key constituencies—e.g. public sector jobs, privileged access to scarce goods, exemption from taxes or licenses, etc. As NPE has continued to receive more focus, institutions have emerged as important sets of explanatory variables (Remmer, 1997). The advocates of the New Institutional Economics (Coase, 1992; North, 1997; and Williamson, 1994) recognize that a good market economy requires not only “getting prices right” but also “getting institutions right”. This is because 5 institutions set the rules that affect the behaviour of economic agents in a fundamental way. These include secure private property rights protected by the rule of law; impartial enforcement of contracts through an independent judiciary; appropriate government regulations to foster market competition; effective corporate governance; transparent financial systems, etc. However, Qian (2001) notes that while this type of perspective to institutions is useful in providing a benchmark of “best-practice institutions” with which today’s most developed economies have achieved to the development frontier, it does not provide enough intellectual power for insightful investigations of how reform worked or did not work in many developing and transition economies. For example, a comparison between Russia and China over the last decade shows striking outcomes. Neither of them had the rule of law, secure property rights, effective corporate governance, or strong financial system, but they exhibited massive performance differences, which obviously cannot be attributed to the presence or absence of the best-practice institutions. To understand how reform works in developing and transition countries, Qian (2001) argues that one should also study how imperfect institutions have evolved to complement the initial conditions and to function as stepping stones in the transition toward the goal. China’s reform path has, thus shown that when the growth potential is large, reformers can devise efficiency improving institutional reforms to benefit all, including and especially those in power (Qian, 2001). Khan (2002) also argues that distribution and disposition of political power in society is a key determinant to successful enforcement of institutions, and that why institutions that work well in one context may fail badly in another. The role of political institutions in shaping economic reform is well discussed by Rius and van de Walle (2003), who distinguish between “medium level” set of rules that regulate the behaviour of agents in the economic sphere and “high level” rules, which determine who has power to make policies or set regulations that influence the functioning of markets. Of relevance to the study is thus, the need to analyse not only economic institutions but also how Kenya’s critical institutions of the executive, legislature and judiciary as entrenched in the constitution affected reform process. Besides the concepts of political economy and institutions, one international dimension that is of great importance to Kenya’s reform experience is “conditionality in lending”, which is 6 a central feature of IMF and World Bank lending. Conditionalities are said to play an important role in ensuring that the respective governments invest in longer-term policy adjustment if the funding is to be continued. Thus, conditionalities are considered advantageous in the sense that borrowers may benefit from the imposition of conditions that increase the probability of loan payback; if it makes lending more available; overall goals of the programme are mutually accepted, implying that conflicts are mostly second order (disagreements in terms of the time frames, optimal ways of achieving goals etc); and time inconsistency problem is overcome, as conditionalities may be used as a commitment device. However, critics of conditionalities have argued that the design of conditionality is inherently prone to failure (White 1997). It is far from clear whether conditional aid or lending results in better policies. Some of theoretical models suggest that the structure of conditionality is likely to produce slippage (as recipients are encouraged to sign up policies they do not intend to implement) and to result in donors condoning bad policies since they want to disburse the funds anyway (see White 1997). Conditionality debate relates to the issues of how effective the conditionalities have been. If the conditionalities are in the interest of the recipient countries, why are they not pursued by the policy makers? Conditionalities may be seen as an impingement of a country's sovereignty, forcing it to take actions, which are not in its interest. Hence, Drazen (2002) contends that conditionality makes little or no sense if there is full ownership, but it also makes no sense if there is no ownership. Furthermore, the success of the reform programme depends on its implementation, which in turn reflects the political constraints. Thus, Drazen (2002) contend that a political economy perspective may be useful in understanding the issues of ownership and conditionality. Given the critical role of IMF and World Bank, it is important to analyse how conditionality has influenced the reform process. Generally, understanding reform and the questions that it elicits gives rise to difficult methodological issues. Since the aim of the paper is understanding reform, the approach adopted should be problem-driven rather than theory-driven research endeavour (Fanelli, 2003). The analysis is guided by three key questions: why reform? What kind of reform? and how well did the reform perform? These questions are basically aimed at addressing the context, content and outcome of reforms. In seeking to address these issues, analytical narrative 7 approach is suggested.2 Analytic narrative of the reform experience can help us to understand some of the subtle issues and gauge causal and logical relationship in the reform process in Kenya. This is importantly so, given the nature of the subject—reform process entails political, institutional and social factors that cannot be effectively handled through the traditional time series or panel data econometric models. 3. Political and Economic Structure Prior to Reforms 3.1 Political Structure after Independence Throughout the colonial period, the country was fostered as a unitary entity in which the colonial centre in Nairobi exercised overwhelming authority on the localities. The decision by the outgoing authorities to replace such a system with a loosely organized federal structure was bound to fail, as it did, largely because the country had no meaningful experience with power sharing between the centre and localities in the governance process (Oyugi, 1994). The preponderance of a unitary system of government took place against a background of an acrimonious power struggle between the existing two national parties, the Kenya African National Union (KANU) and the Kenya African Democratic Union (KADU) during the transitional (self-government) period and early years of independence. Upon winning the first post-independence elections, KANU, which favoured a unitary system, assumed the reins of government and embarked on a deliberate effort to destroy the opposition and the federal constitution (Tamarin, 1978). The new government used the state machinery to harass and frustrate the opposition. In the face of mounting frustration by the state, KADU politicians found it difficult to operate and ultimately defected to the ruling party. The demise of the opposition was quickly followed with the dismantling of the federal constitution, which by all practical purposes had ceased to function by the end of 1964 (Oyugi, 1994). Attempts by other ethnic groups to organize opposition parties were suppressed, and by 1969 Kenya had become a de facto single-party state (Throup and Hornsby, 1998). 2 For more on the methodology of analytical narrative, see Bates et al., 1998 and Bates et al., 2000. Also refer to Levi (2003) and (2001). 8 The Kenyatta government quickly “Africanised” the civil service and other public sector appointments in order to consolidate national sovereignty (O’Brien and Ryan, 2001). The President’s ethnic group, the Kikuyu, the main beneficiaries of education and employment in the formal sector during the colonial period, became the logical candidates for appointments to public sector jobs (Barkan, 1995). They were also favoured by the new government in the allocation of agricultural land and credit. Having assumed the reins of government at a very advanced age, Kenyatta surrounded himself with a group of trusted ministers and personalities, drawn largely from his ethnic community, who constituted the “kitchen cabinet”. The group had vested interest in maintaining the presidency in the central province (the president’s home province) to protect and perpetuate their political and economic interests. The foundation of deepseated politico-economic client system was slowly being laid. The stakes were very high, and the group orchestrated a series of manoeuvres to dilute the independence constitution (Oketh-Ogendo, 1972). Before the first decade of independence, the constitution had been amended ten times to strengthen the position of the presidency over parliament. The powers and authority of the executive were enhanced through interference with bureaucratic neutrality and professionalism. The constitution was changed to make provisions for the president to appoint and dismiss civil servants without reference to the Public Service Commission. These powers were used discriminately on the basis of patronage, as senior civil servants understood that they served in their positions at the pleasure of the president (Anyang’ Nyong’o, 1989). The civil service, however, enjoyed more powers over routine and technical policy issues during the Kenyatta era relative to the subsequent regime. This was because Kenyatta’s inner cabinet was content to dominate public policy making process on politically sensitive matters, and to leave mundane technical policy issues to the civil service. By the mid 1970s, Kenyatta had grown old and feeble. Without any opposition party, the inner cabinet became dictatorial and resorted to assassinations and detentions of government critics mainly backbenchers in parliament. As a result, parliament was reduced to a mere rubber stamp for decisions already taken elsewhere by the executive (Odhiambo-Mbai, 9 1998). The period 1975 to 1978 was characterized by a degree of corruption previously unknown in Kenya. The forcible acquisition of both urban and rural property by members of the kitchen cabinet and their friends became widespread. Corruption, nepotism, favouritism, and inequity grew dramatically over every aspect of the Kenyatta administration’s sunset years. It is against this background that Daniel Arap Moi assumed power in August 1978 following the demise of Mzee Jomo Kenyatta. He moved fast to assure the mourning Nation that he would follow the footsteps of his predecessor. True to his assurance, the new president embarked on the business of leading the country using the same state apparatus. Thus parliament remained subdued. In public policy making, the presidency and the civil service continued to dominate the process. In no time, Moi resorted to issuing populist policy statements and directing civil servants to implement them (Odhiambo-Mbai, 1998). The presidential decrees were meant to consolidate him in the presidency and there is no evidence to suggest that the decrees were discussed by parliament before the president announced them. By early 1980s, the constitutional amendments had created an overarching executive with immense interventionist powers in the economy (Gacheru and Shaw, 1998). 3.2 Economic Background At independence, Kenya inherited an import-substitution industrialization strategy, which was highly characterized by a protective trade regime. The economic framework in the early post-independence years was influenced by the prevailing development paradigms for developing countries—import substitution largely based on the infant industry argument, significant role accorded to the state in the economy through government intervention—and the economic system inherited from colonial era. After independence, the government expanded its involvement in productive activities through state-owned enterprises (SOE)(O’Brien and Ryan 2001). This move was largely motivated by Sessional Paper No. 10 on African Socialism and its Application to Planning in Kenya, which sought to ‘Africanise’ the economy and jumpstart industrialization. The colonial government had already instituted public agencies such as marketing boards to control economic activities. 10 Like most African countries, Kenya’s economy in the 1960s and 1970s was predominantly characterized by controls in virtually all key sectors—domestic product market, foreign exchange and financial markets, among others. That notwithstanding, the country experienced a relatively stable environment and remarkable economic growth in the first decade after independence—with an average Gross Domestic Product (GDP) growth rate of 6.6% during the period 1964-73 (Republic of Kenya 2002). There was expansion of output and employment fuelled by expansionary fiscal policy and expansion of exports to Tanzania and Uganda under the East African Community (EAC) common market (Wagacha, 2000). However, the situation changed drastically as Kenya started experiencing macroeconomic instability in the 1970s, exacerbated by a series of external shocks witnessed during that decade. For instance, in 1971, Kenya experienced deterioration in terms of trade, which led to the first BOP crisis. This was also accompanied by an expansionary fiscal and monetary policy. Following the first oil shock of 1973, the economy experienced escalating BOP and current account problems. The government responded by introducing import controls. For the 1973-75 period, inflation rose from 9.3% to 19.2%, domestic credit increased by over 60 percent and government’s external and internal borrowing also increased (Ndung’u 1993). Then came a positive shock in the form of commodity (coffee) boom in 1977, which sparked of a spending spree for government and private consumption, leading to a fiscal deficit of 9.5 percent of GDP in 1975/76 (O’Brien and Ryan 2001). No attempt was made to sterilize the coffee money although both the IMF and Central Bank of Kenya (CBK) were in agreement for the need to do so. The economy was also set back by the collapse of EAC in August 1977. The second oil crisis of 1978/79 compounded the problems and exposed the country’s vulnerability to external factors (Were et. al., 2001). In response, import controls were tightened further. However, while this reduced imports, it did not stop the decline of foreign exchange reserves. This seemed to signal the inadequacy of the controlled policy approach to macroeconomic management in tackling external shocks. But the government was not ready to dismantle the controlled policy regime. Instead, government reacted to these crises by tightening the trade regime and seeking external financing assistance. For instance, to restore macroeconomic stability, the government sought assistance from IMF in 1975 and standby 11 credit agreement was agreed upon in August 1979. But the financial assistance was not for free—certain conditionalities had to be met. The agenda then was mainly stabilization, fiscal austerity and dismantling of controls. Initially, government failed to meet most of the conditionalities agreed upon. For instance, with the export boom drawing to a close, the ceiling on Central Bank credit to the government proposed by the IMF was greatly exceeded, and as a result, there were no disbursements of the August 1979 IMF credit. Despite the shocks, the economy performed fairly well in the 1970s, and was able to achieve a real GDP growth rate of 5.6 percent for the period 1974-1979. In particular, the exceptionally high GDP growth rate of 8.2% in 1977 was largely due to the coffee boom effect. The domestic saving rate averaged 16 percent in the 1970s. However, the country had serious problems of unemployment and underemployment, income distribution and land ownership (Ng’ethe and Owino, 1998). It is clear from the turn of events that there was need for reform from as early as the beginning of 1970s. 4. Economic Reforms in the 1980s The 1980s were characterized by the triumph of what has become known as the first generation of reforms. In most African countries including Kenya, reforms typically entailed implementation of SAPs initiated by International Financial Institutions (IFIs)3. In the early 1980s, with increasing pressure for structural adjustment reforms, the government began, though reluctantly, to show some attempts towards adopting liberalization policy— a major component of which was a shift from import-substitution to export-promotion strategy and removal of import controls (Were et al. 2002). Going by Swamy (1994), the SAP period can be classified into two phases: 1980-84 period forms the first adjustment attempt while 198591 period forms the second attempt. These will be characterized as phase I and II of the reform process respectively. A summary of the entire reform process is given in Appendix Table 1. 3 Throughout this paper, IFIs refer to IMF and World Bank. 12 4.1 Driving Forces of the Reform By the early 1980s, it was clear that the macroeconomic policies pursued had glaring loopholes. At the same time, the economic management had begun to weaken and fiscal indiscipline was rising. The public sector was overextended. By the end of the 1970s, the government had equity in about 250 commercially-oriented firms (Ikiara 2000). The large state-owned enterprises sector was not only lagging behind in economic performance but also heavily drained the budget. The inability to control expenditures was partly a result of general lack of discipline in expenditure allocation and execution. Most of state corporations were highly inefficient despite enjoying economic privileges such as direct subsidies in form of low interest rate loans, below market rents on government buildings, and exemption from tax. By the end of 1991, the SOE’s external debt was estimated at US$ 1,021 million, which was about 18 percent of total public external debt (Aseto and Okello, 1997). In the social sector, the advent of the economic crises in the late 1970s, coupled with the overstretched public sector and increased inefficiency became a major challenge to an otherwise ambitious programme of free university education and health care in public institutions. Appendix Table 2 shows some of the macroeconomic indicators during the reform process. The Table shows that in the early 1980s, the time the reform process was getting initiated, the BOP and current account were hugely in deficit. For example in 1980, the deficits amounted to US$ 317M and US$ 818M, respectively. There was also scarcity of foreign exchange reserves as exemplified by the huge negative net foreign reserves. In addition, the ratio of budget deficit to GDP in 1981 and 1982 was over 7% and the inflation was relatively high. The economy was in a crisis. Some action had to be undertaken. This happened to be the time when the IFIs were ready with reform recipe in the form of SAPs. While initially the government resisted dismantling the control regime, the softest option of borrowing from abroad apparently demanded liberalization. Consequently, with the rising pressure from the IFIs, the government started to liberalize the economy through the famous SAPs that were widely recommended for most of the Less Developed Countries (LDCs). It was initially conceived that SAPs would restore macroeconomic stability in developing countries following disruptions of the 1970s. These would be achieved through greater reliance on market forces and the private sector in most cases by reducing the role of 13 government in the economy.4 Generally, these reforms included deregulation, privatization, currency devaluation, social spending cuts, lower corporate taxes, trade liberalization and removal of foreign investment restrictions. SAPs were meant to help many developing countries to come to terms with the difficult economic situation these countries were facing in the beginning of the 1980s. Kenya was the first Sub-Saharan African country to receive structural adjustment lending from the World Bank and later on the first to receive an Enhanced Structural Adjustment Facility (ESAF) loan from the IMF (O’Brien and Ryan, 2001). Hence, besides the domestic economic problems, there was also pressure from outside— notably IMF and the World Bank— to implement reforms as part of the preconditions for donor funding. The reform programme was therefore driven by both domestic and external factors. The domestic factors were mainly the economic crisis propagated by such factors as budgetary problems, imbalances in external accounts, inefficiency problems, deteriorating economic performance and increasing demand for services (e.g. health and education) in the face of declining per capita real public expenditures. The external pressure from the IFIs acted as a catalyst, hence facilitating the process. These institutions also set the reform agenda, mainly in the form of conditionalities as a prerequisite for funding. Stallings (1992) argues that international influences can impact on domestic policies. However, as cited by Liew et al., 2003, Kahler (1992) points out that the prominence of IFIs and lack of alternative sources for finance in the 1980s did not increase the leverage of IFIs as expected because the proposed programmes were in conflict with the political interests in developing countries. Despite the economic crisis that had evolved by early 1980s, the government was not willing to deregulate and liberalise the economy, and only managed to implement piecemeal reforms as a way of accessing the badly needed financial assistance from the IFIs. Among other factors, the control regime was still attractive for maintaining status quo, providing rent-seeking opportunities and political patronage. The situation was exacerbated by political uncertainty of large-scale reform implementation. Additionally, the wave of ‘Kenyanisation’ witnessed after independence, coupled with political patronage, 4 For details about the experience of SAPs in Africa, see Helleiner (1992) and Husain and Faruqee (1994), among others. 14 passed on industries to politically-connected people, who in the wake of liberalization, feared competition from imports and thus created pressure to resist reforms. Nonetheless, the IFIs played a critical role in ensuring that government, though unwillingly, began undertaking SAPs. 4.2 Phase I: 1980-84 4.2.1 Economic Reforms The first phase of reforms mainly targeted the BOP, with the removal of import controls. The government presented a structural adjustment programme in Sessional Paper No. 4 of 1980 on Economic Prospects and Policies. Among other policy changes, the programme suggested the need to eliminate quantitative restrictions on imports and replace them with equivalent tariffs, relax industrial protection under import substitution strategy and the need for a relatively high interest rate structure. It also proposed elimination of the No-Objection Certificates and automatic system of allocating foreign exchange in accordance with demand and foreign exchange availability instead of depending on administrative scrutiny of import licences, which caused undue delay. The No-Objection certificates to Kenyan enterprises gave them the right to prevent all imports viewed as a threat to their domestic market. The fourth National Development Plan for 1979-83 also recognized that the process of industrialization and expansion through import substitution had inhibited growth of exports and had reached its limit, and spelt out the need to reduce protection, expand and diversify exports. The economic policies contained in the Sessional paper were largely in line with the World Bank and IMF recommendations and thus, served as the basis on which first Structural Adjustment Loan (SAL) was agreed upon and subsequently signed in March 1980 between the World Bank and the Government of Kenya. With the escalating economic crisis, the government urgently needed quick-disbursement, which happened to coincide with the World Bank’s decision of medium-term BOP support (programme lending) to help countries adjust to the oil price shock. A planned industrial sector loan was thus converted into a SAL by adding conditionalities. These conditionalities included the replacement of quantitative restrictions with tariffs and their rationalization by 1983 (Mwega 1999). This was done with the hope of effecting a quick response in exports, but the response did not materialize as expected. However, in the 1980/81 budget, some of 15 the proposals were implemented. For example, import controls were relaxed and interest rates adjusted upwards. A new system of licensing was put in place in November 1981. At the same time, it was proving difficult to contain government spending and to achieve the income policy. It was also felt that adopting an export-oriented strategy could adversely affect some firms. Thus, the rationalization of trade and tariffs policies was to be complemented by measures to assist firms with transitional problems. Studies were initiated with the assistance of UNDP to understand the cost structure of the firms and phase in the new trade regime by end of 1983. In 1982, the government approached IMF again, faced with worsening economic status, and also requested for another SAL from the World Bank. However, by mid 1982, Central Bank credit to the government had exceeded the agreed ceiling and the agreement was thus suspended. The second SAL was even more ambitious, taking upon trade reforms, grain marketing, interest rates, energy and family planning (Swamy 1994). However, the trade reforms were largely not implemented and the grain marketing was not liberalized. The Sessional Paper No. 4 of 1982 spelt out further attempts to reform import controls, where items could be removed from the quota-based schedules to quota-free ones, at a rate to be determined by the availability of foreign exchange. But because of the growing foreign exchange crisis, this shift was never implemented. The individual scrutiny of import licenses was reintroduced in mid-1982. In terms of export promotion, the idea was to reduce anti-export bias and increase industrial efficiency. The proposals included simplifying the administration of incentive system, and introducing an export insurance and finance system. These were in addition to Export Compensation Scheme (ECS) established in 1974, primarily to compensate exporters of eligible products for the additional input costs due to the imposition of duties on imported inputs whose burden was considered pretty high. The scheme allowed the exporters of eligible goods to claim 10% of the value of export. New and additional exports were compensated at 15% rate. In 1984, compensation was revised upwards to 15% for general ECS and downwards to 10% for additional exports, with the objective of providing an incentive for producers to improve their performance. 16 4.2.2 Performance with the Reforms By the end of 1983, when the exercise was expected to be complete, minimal achievements and policy reversals had been witnessed. Moreover, to the extent that quantitative restrictions were removed, tariffs were raised on restricted items to even over 100%. In addition, with the foreign exchange crises of 1982/84, tariffs were increased by 10% across board. CBK was concerned that the removal of quantitative restrictions would result in loss of control over the BOP with the dwindling level of reserves. In addition, the programme was implemented without a consistent framework so that the imposition of high tariffs on some goods and reduction of tariffs on others were done in an ad hoc manner. Efforts to improve BOP position, therefore, had very minimal achievements. The fixed exchange rate regime was not conducive for export promotion while the ECS did not function well. The designing of ECS was flawed, as it left loopholes that could easily be exploited, thus defeating the purpose of the reform. For example, it was felt that the additional compensation was paid for the price variation and not for the increase in exports. Again, given that new exporters were eligible for the additional compensation, all they needed to do was to change the company name and qualify for it. There was also mounting pressure from the urban elite group who were thought to be a political threat if drastic changes were to be implemented. The group consisted of urban salary and wage earners, especially employees of state corporations. Swamy (1994) argues that this episode of import liberalization was not successful because it coincided with a period of macroeconomic crisis, which was followed by rapid stabilization, hence making trade policy to become hostage to the needs of stabilization. He summarises the first adjustment attempt (1980-84) as one marked by lack of compliance, partly due to design and timing problems, and lack of government commitment to reform process. The pervasiveness of the import licensing and regulatory system created enormous opportunities for rent seeking and for executive discretion. Commitment to the stated policy changes was limited to a small coterie of top civil servants. The group seemed to underestimate the strength of the vested interest or overestimate the World Bank’s willingness and ability to enforce the conditionalities. Due to the unsatisfactory implementation, there was a pause in adjustment lending for nearly four years. 17 Vested interests aside, the reform agenda was over ambitious and underestimated state capacity constraints in undertaking a myriad of reforms within the stipulated time. This confirms the observation made by Rius and van de Walle (2003) that the first generation of reform programmes typically did not view implementation issues as paramount. However, as they rightly argue, state capacity is generally posited to be positively correlated with the level of development, but it would be a mistake to treat state capacity as entirely exogenous to the political system. The Government’s capacity to implement reforms was compromised by a weakening economic management brought about by the policy drift of the late Kenyatta years and a corresponding loss of influence of the Cabinet and civil service technocrats (O’Brien and Ryan 2001). The constitution powers bestowed on the president to appoint and dismiss top civil servants at will interfered with professionalism of the civil service as other factors such as ethnicity, tribalism and patronage became central in appointment and promotion within the service. Unlike Kenyatta, Moi lacked adequate room for manoeuvre and the personal authority that Kenyatta enjoyed. He also lacked a broader ethnic political base comparable to Kenyatta’s (Hyden, 1995). He thus resorted to concentrating power and authority to the presidency in order to maintain control of the state. In 1982, the president made a major Constitutional amendment, which made Kenya de jure one party state. During this period, the presidency increasingly dominated public policy making process, especially through presidential decrees (Odhiambo-Mbai, 1998). The civil service was relegated to the position of mere policy implementers. Even in situations where technocrats had been empowered to come up with coherent policies, the policies could be contradicted by the ‘presidential decrees’ at the implementation stage. In terms of economic outcomes, the first half of the 1980s performed poorly, with real GDP growth rate declining to about 3.4 percent. Although the economy showed some stability between 1982 and 1984, virtually no progress was made toward structural adjustment. Like in many countries, SAPs paid off rapidly in terms of macroeconomic equilibrium such as lowering of inflation and fiscal deficits. For instance, the stabilization programme undertaken with the IMF support succeeded in reducing the fiscal deficit to about 2.4 percent in 1983 at the expense of investment and growth (see Appendix Table 2). 18 4.3 Phase II: 1985-1991 4.3.1 Political Developments In the political scene, the president continued to consolidate his power. Moi’s dictatorial tendency intensified and Parliament was subordinated to the ruling party, KANU. In the mid 1980s, the Moi regime attempted to revitalize the sole political party in the country and to make it an instrument for public policy making (Odhiambo-Mbai, 1998). KANU national elections, which had not been held since 1966, were held. The disciplinary arm of the party was strengthened to deal with errant members. MPs were coerced to toe the party line and support the policies and reforms undertaken by the government. The president also bloated the cabinet by making several appointments so that more than a third of the sitting members of parliament found themselves bound by collective responsibility as members of the Cabinet or assistant ministers. Further, the president weakened the judiciary by removing the security of tenure of the attorney general and the Controller and Auditor-General so that the two were exposed to manipulation by the executive. The government also increasingly became sensitive to criticism, and resorted to intimidation and sometimes detention of its opponents. Political arrests and harassments, tortures and deaths in police custody increased so much that in 1986, Catholic bishops accused Moi and KANU of “assuming a totalitarian rule”. Press freedom was curtailed, and human rights abuses became the order of the day. All these measures were geared towards manipulating the political system in a bid to consolidate Moi’s hold on power (Munene et. al., 1995). Besides serving the regime’s narrow political interests, the party by and large did not play any serious role in the public policy making process. Towards the close of the 1980s, the government changed the electoral system to provide for queue-voting, which was more amenable to abuse. In the 1988 general elections, the government used state machinery such as the provincial administration and the police to coerce voters to queue behind pro-government candidates (Munene et al, 1995). The brazen rigging that took place unleashed a wave of protest over KANU’s continued monopoly over political power and intensified the clamour for political pluralism. Moi responded by 19 clamping down on the oppositionists, who now included lawyers, academics, politicians and the clergy. Although the business community remained silent fearing the retribution by the state, few of its members quietly helped finance several small publications that were to form the core of an independent press that critically examined the policies of the Moi regime. Harassment of government critics was perpetrated with the complicity of an acquiescent judiciary, which was increasingly used to consign multi-party advocates to detention. The brutal manner in which the regime sought to silence its critics caught the attention of international human rights bodies. The system was, however, vehemently defended by a coterie of sycophants who had amassed fortunes through state power (Munene et al, 1995). This self-seeking elite had by now become a predatory parasite, which manipulated patronage to its personal advantage, but to the detriment of the Kenyan economy. The international community was not amused. Emboldened largely by the end of the Cold War in 1989, and disillusioned by poor governance (especially massive corruption) and wanton abuse of basic human rights, western powers demanded the liberalization of the political system and the economy. Besides the IFIs, United States represented by its outspoken ambassador Smith Hempstone, Germany and the Scandinavian countries were in the forefront in demanding for reform (Hempstone, 1997; Munene et al, 1995). The regime retorted that formation of multiple party system would plunge the country to chaos. However, to deflate domestic and international pressure, the government in 1990 abolished the unpopular queue voting in favour of the secret ballot. At the same time, the constitution was amended to restore the independence of the judiciary. The judiciary, which had become inordinately corrupt and politicised, however, continued to pander to the autocratic whims of the executive. Pressure for democratic change accelerated in earnest in 1990 with civil society movements and religious leaders providing the momentum and push that ultimately challenged the hegemony of the Moi state. In a period of three months an informal grouping of churchmen, lawyers and disgruntled politicians called for a multi-party political system. The demands to end the one-party system had culminated in the detention of Charles Rubia and Kenneth Matiba. The detentions, however, did not stop citizens from coming out for the 20 planned Saba Saba rally on 7th July 1990, which culminated into riots in Nairobi, thereby leading to scores of deaths. The deliberate weakening of the democratic institutions, it was felt, created an environment, which encouraged mismanagement, corruption, inefficiency, excessive political interference often based on parochial or personal reasons and harassment of indigenous entrepreneurs. This threatened the welfare of the people who were left with no option but to intensify their agitation for restoration of democracy, which it was hoped, would help to spur economic growth. The situation seemed to confirm Olson’s (1990) observation that the absence of regularized turnover and political competition can give rise to more pervasive and intractable corruption. 4.3.2 Economic Reforms Due to the lack of adequate commitment to the reform process and limited implementation in the first phase, the international funding agencies had to slow down the pace of an otherwise ambitious reform programme and increase pressure for further demonstration of government’s commitment. In response, the government prepared the Sessional Paper No.1 of 1986 on Economic Management for Renewed Growth as an indication of its commitment to the reform process and a demonstration that it had a clear reform strategy. In the policy document, the government committed itself to adopt an outward-looking development strategy and proposed several measures to liberalise the economy. For example, the Sessional Paper contains policy statements on reforming agricultural marketing, reducing protection to industry and controlling public expenditure. In line with the development paradigm of the day, the government also acknowledged the need to limit its primary role in the development process to facilitating growth of private sector by developing a stable political and economic climate; providing critical infrastructure; and establishing marketbased incentives. In terms of comprehensiveness, the document marked a major policy shift towards liberalizing the economy in principle. It was a major departure from Sessional Paper No. 10 of 1965 that was rooted in the ideology of increased government participation in economic activities. However, the institutional structure with an executive with immense interventionist powers in the economy remained intact. 21 With minimal achievement having been made in the implementation process, there was a shift in the implementation strategy from broad to sectoral basis with the support from the World Bank. The IMF was to continue monitoring the macroeconomic balances. This was justified on the basis of limited implementation capacity of the government, and the need to build greater consensus in support of the reform process (Swamy, 1994). Hence, adjustment programmes were developed in agriculture (supported by two sector loans in 1986 and 1990), industry (1988), financial sector (1989), export development (1990), and education (1991) (O’Brien and Ryan 2001; Swamy 1994). During the reform period, some attempts were made to liberalise the economy, but the level of progress was still limited. In regard to import liberalisation, the reform programme was first to reclassify imports into five categories: schedule I (unrestricted licensing), II, IIIA, IIIB, and IIIC, with progressively stricter licensing requirements (Swamy 1994). Over time, automatic or unrestricted licensing was extended to schedules II, IIIA and IIIB. Trade liberalization had started with conversion of quantitative restrictions to tariffs equivalent in the early 1980s, though less successful. The tariff reform made some progress as depicted by a declining trend in the economy-wide average tariffs in Table 1 below. In 1990, the government embarked on a phased tariff reductions and rationalization of the tariff bands. The highest tariff rate was reduced from 135 percent to 60 percent, while tariff rates on noncompeting imports were lowered. Table 1: Economy Wide Average Tariffs, fiscal years 1985-92 (in percent) All schedules 1985 1988 1989 1990 1991 Unweighted 40 39.6 41.3 41.0 38.8 Import-weighted . 29.6 27.3 24.5 22.0 Source: Swamy 1994 That notwithstanding, liberalization process was far from complete. The tariff rates were still on the higher side (hence high effective protection), the import licensing system was still in place with considerable executive discretion and foreign exchange restrictions were still in operation. 22 Under the export promotion strategy, a host of export incentive and promotion programmes were initiated. These include Manufacturing under Bond (MUB) and Export Processing Zones (EPZs) established in 1988 and 1990 respectively. Other export incentive schemes were Export Guarantee and Credit Scheme, revival of the Kenya Export Trade Authority, Export Promotion Council and the Export Promotion Programmes Office for tax rebates on imported inputs for exporters. To promote non-traditional exports such as horticulture, the Horticultural Crop Development Authority (HCDA) was formed to coordinate the horticultural industry, advise the government on national policies and farmers on production and marketing of horticultural crops. Others included the Kenya Exporter Assistance Scheme and Export Development Programme funded by the World Bank. In addition, the general rate under ECS was increased from 15% to 20% while additional compensation was abolished following concerns over its sustainability. There were also attempts to decontrol domestic prices in the economy. In 1988, Kenya Association of Manufacturers (KAM) commissioned a study on the experiences of price controls, which revealed high cost of compliance in terms of time-consuming procedures for presenting requests for price changes, bureaucratic hassles and the administrative delays (KAM 1988). It also revealed that price controls effectively protected many inefficient firms established under import substitution policy and increased opportunities for corruption. With the survey results, manufacturers successfully lobbied the government for price decontrols. This is one of the limited cases, where an organised non-political interest group was pro-reform, hence influencing the trade policy. It managed to conquer resistance from the monopolies created under the import substitution strategy, perhaps because they were not formally organised. Restrictive Trade Practices, Monopolies and Prices Control Act was passed in 1988 to guard against abuse of fully liberalized pricing regime by producers’ cartels and monopolies. In the financial sector, very little was achieved, as actions were limited to amendments to the Banking Act and adjustment of interest rates. Following the mushrooming of Non-Bank Financial Institutions (NBFIs) and building societies in 1980s, the Banking Act was amended in 1985 with the aim of strengthening monetary authority control over the banks and financial institutions, as well as protecting depositors. The licensing procedures were also 23 tightened. Further, amendments were made through the 1988 Finance Act, to enhance penalties charged under the Banking Act and allow for more transparent disclosure of information relating to the banking institutions balance sheets to the public. These actions were motivated by the insolvency problems that some of the financial institutions experienced in the mid-1980s. In June 1987, maximum lending rate for NBFIs was lowered as an initiative towards aligning interest rate structure for commercial banks and NBFIs. In June 1988, minimum saving rate for both commercial banks and NBFIs was lowered with the aim of giving the commercial banks more room to compete and more flexibility to meet the differing needs of the customers. In 1989, a comprehensive financial sector reform programme was adopted characterized by policy and institutional reforms aimed at restoring monetary control, improving efficiency of banking institutions and facilitating creation of a market-oriented financial system. The Banking Act was revised in 1989 to strengthen the activities of the CBK. The shift to indirect monetary policy instruments was initiated in 1988 while Treasury bill rate was liberalized in November 1990. The government was also under pressure to implement cuts in expenditure on social sectors, particularly health and education. In the health sector, for instance, this meant a shift from “free” health care policy to user charges in public health facilities. The government’s intent to levy fees in government health facilities was first announced in 1979-83 Development Plan and later reiterated in the subsequent Development Plans of 1984-88 and 1989-1993. However, despite repeated announcement of policy intentions, the government was still reluctant to implement the reform. It was not implemented until a decade later. This can be explained in the context of looming uncertainty over the outcome of reform implementation—especially political uncertainty regarding the reaction of the masses after having been used to consumption of ‘free’ health care services and the consequences on the poor. It took a lot of effort, through a series of donor-funded studies and considerable pressure from donors for the government to finally levy user charges. However, no consensus had been reached about their probable effect on service demand by the time of implementation (Mwabu 1995). Though hesitantly, the government finally introduced the user charges (cost sharing) in public hospitals and health centres on 1st of December 1989 through a government Cabinet 24 Paper. As a compensatory mechanism to the losers—basically the poor and the vulnerable, preventive services and treatment for catastrophic illnesses were exempted from the fees and the poor were exempted from paying on production of evidence of inability to pay. Meanwhile, the government dispensaries continued to provide outpatient services free of charge. However, the policy was reversed in September 1990 by suspending the outpatient fee, only after nine months since its inception. After implementation, there was a public outcry through the press that the poor were being denied access to services and there was no improvement in quality (Collins et al., 1996). This shows how sensitive the government was about the public response, and was not fully confident despite having implemented the reform. The media played a key role in highlighting and exacerbating the unpopularity of the reform. 4.3.3 Performance with the reforms In general, the extent of reform and pace of implementation was unsatisfactory, as most of the conditionalities were not met. For instance, by 1991, the last year of the ESAF, three out of the four quantitative performance criteria were not satisfied, including the ceilings on net domestic assets of the domestic banking sector, government borrowing from the banking system and net official international reserves. Swamy (1994) observes that though effort was made to build broader consensus in the second phase and the pace was incremental, commitment was patchy and intermittent throughout. There was concern that macroeconomic management was deteriorating as a result of lack of budgetary control on the expenditure front and slow progress in other areas of economic reform. Little was achieved as the reform effort was characterized by policy reversals, delays as well as failure in implementation of planned activities. This led to donor dissatisfaction, occasionally resulting into a halt in adjustment lending as the relationship with development partners began to sour. The actual implementation of the reform strategy can be described as sporadic and limited to selected issues. In fact, reforms were just undertaken on the periphery. The most sensitive ones, especially those with a direct impact on the electorate or constituents such as retrenchment in civil service and user fees in social sector were deferred or reversed during implementation. The intricacies of implementation capacity notwithstanding, major reforms 25 were basically deferred because of the looming political uncertainty of the effects of reforms. Fidrmuc and Noury (2003) note that if individuals are highly risk-averse, they may resist changes because of the inherent uncertainty. The government was highly risk-averse as the controlled policy regime was lucrative for economic rents and political patronage. External pressure thus coincided with strong domestic patronage and rent-seeking interests especially by top state elites, thereby ensuring that government was still able to keep enough elements of control. This situation confirms Rius and van de Walle’s (2003) observation that when governments oppose the reform but feel compelled to undertake partial implementation, they are likely to choose undertaking the least onerous, the most easily reversible component of the reform, and or the one that has the least impact on the status quo. To understand the reform process, one also needs to understand the context in which the reforms were being undertaken. For one, the policy-making process was highly centralized, where public decision-making was exclusive to a small cadre of public elites. Most policies were a secret of top government officials but would be well known in the circles of development partners, who after all, were the main driving force and initiators of policy reforms. Ministries would just be shown a paragraph or sentence to implement, without a clear understanding of the broader picture. The Cabinet, on the other hand, was not given copy of the agreements, but a synthesised version by top civil servants. The closed decisionmaking process also meant that the reform process was subject to manipulation by vested interest groups such as political elites, often to their own advantage. Lack of consultation was thus, a common phenomenon employed by the government in development of its policies. This limited the scope of consensus building about the design and implementation of reforms with relevant stakeholders. It is hence, not surprising that the reform effort was prone to resistance and reversals. Societal groups for which the policy outcomes had a direct impact were rarely able to have their preferences or concerns taken into account before policies were implemented. Such groups have been argued to assert their social power and influence during the implementation phase, well after policies have been decided upon (Rius and van de Walle, 2003). This was manifested in the case of user fees reform in the health sector, where the public outcry forced an intimidated government 26 to reverse the policy. A similar manifestation was later on witnessed under the civil service reform. The implementation problems and resistance in the introduction of user charges in the health sector can be explained by lack of consensus building among the different stakeholders, especially in terms of adequately educating and involving the public and the health providers, as well as inadequate institutional capacity at Ministry of Health (MoH) to implement and manage the reform programme. Additionally, political interference of the civil service undermined the government’s capacity to implement reform. Senior civil servants often understood that they served at the pleasure of the president and hence owned their loyalty to him. The situation was further aggravated by a constitutional amendment in 1988 that gave the President power to fire members of the Public Service Commission, Judicial Service Commission and the Judiciary. President Moi used the powers to reduce the preponderance of Kikuyu civil servants, especially in the higher ranks of the civil service. He replaced them with candidates largely from his community under the pretext of promoting social cohesion. The parastatal jobs became an opportune avenue for this venture. This policy had the effect of undermining efficiency in the public sector, and to a certain degree, replacing one group of rent-seekers with another, many of whom lacked the experience to run the organizations they inherited (Throup and Hornsby, 1998). Public institutions, especially parastatals were transformed into conduits of patronage. It is no wonder the government was not in a hurry to undertake parastatal reforms. Although economic performance in the second half of the 1980s was better than the first half, economic growth started deteriorating continuously from the early 1990s. The average real GDP increased from 3.4% for 1980-84 period to 5.2% during 1985-89, but dropped to 2.3% in 1991. There was also a notable improvement in BOP and current account deficit (see Appendix Table 2). The notable improvement in 1986 was occasioned by a mini-coffee boom, resulting into a BOP surplus. However, in spite of export promotion measures, export orientation in the 1980s remained weak, largely due to very high effective rates of protection accorded to domestic industries, exchange rate bias against exports, high cost of imported inputs, foreign exchange controls accompanied by administrative delays, high 27 transactions costs that militated against the profitability of exports, among others (Were et al., 2002). One of the remarkable things about the first generation of reform in the 1980s is the dramatic build up in nominal aid flows (both gross and net) during the 1980s (see Appendix Table 3). The government’s pro-west stance during the Cold War period also ensured a continuous inflow of bilateral aid from the West. Perhaps that is why the government could afford to get away with piecemeal reforms. It was not until the 1990s that a comprehensive reform programme was implemented. 5 Reform in the 1990s: 5.1 Driving Forces of the Reform The 1990s saw a greater degree of economic liberalization and reform implementation, mainly on a sectoral basis. Even then, the development partners exerted a lot of pressure on the government to demonstrate commitment and implement reforms. Tight conditionalities and technical assistance became the major factor in defining the flow of funds to support the reform process. Hence, the government-donor relationship became critical more than ever before. Nonetheless, that did not entirely prevent vested political interests. Reforms were initiated/progressed in virtually all the key sectors (see Appendix Table 1). The reform period was shaped by the supremacy of the Washington Consensus ideology, deeply rooted in the belief of markets and limited government intervention; the rapid wave of globalization and the so called ‘second generation reform’. The latter incorporated good governance, democratization and need for building institutional infrastructure besides market liberalization policies. Hence, unlike the prior periods, economic reforms had to be simultaneously undertaken with political reforms. Unlike the 1980s, there was increased democratic space and freedom of expression, leading to a more active role of civil society and the media. Whether such a move accounted for more comprehensive economic reforms is debatable but it certainly played a role, particularly in exposing corruption and some of the economic scandals. 28 Domestically, the economic reform period coincided with a growing discontentment about the monopoly powers created by the one party political establishment (the then ruling party KANU). The political establishment had become dictatorial. Kenya’s image in international circles was dented in terms of rising corruption and human rights abuse as exemplified by detention and oppression of political activists agitating for multi-partyism. Besides the civil society, pressure for more democracy and good governance became a key agenda for donor community—multilateral and bilateral funding institutions alike. It was the donor pressure culminating in the suspension of BOP support in 1991 and domestic agitation for multipartyism that forced the government to relent and repeal Section 2A of the constitution in December 1991, allowing for multi-party political system. The curtailment of aid flows for failure to meet some of the conditionalities was one of the greatest challenges the country faced. While in the 1970s and 1980s the government responded to external shocks by increased borrowing and aid inflows, expansionary fiscal policy and instituting controls, in the 1990s, it no longer had the luxury of using these options. Unlike in the 1980s, in the later periods, there was slackened donor support, resulting in a sharp decline in inflows since the peak in 1990 (see Appendix Table 3). With the disintegration of the Soviet Union and the end of Cold War, which had provided the bulwark against democratization, Kenya was transformed from a country that was once seen as an island of political stability and economic success in a turbulent region to being viewed as just another African state mired in a familiar pattern of decay. The end of Cold War basically eliminated the geopolitical motivation for aid. With the declining aid flow, external debt arrears problem emerged for the first time. Net resource flow remained negative for the better part of the 1990s (Appendix Table 4). The debt burden became so acute that Kenya had to reschedule its debt in 1994 for the first time. Net foreign exchange reserves were negative in the early 1990s, and the GDP growth rate was quite low, falling from 5% in 1989 to 2.1% and 0.5% in 1991 and 1992, respectively (see Appendix Table 2). As the economic performance adversely deteriorated, budgetary crisis deepened and access to financial resources was curtailed, the IFIs had an upper leverage and thus used the opportunity to push for reform implementation. Citing Grindle and Thomas (1990), Rius and Walle (2003) note that policy reform has typically occurred during periods of intense 29 economic crisis, as states delay difficult economic policy reform decisions until the old economic policy regime has brought about a non-sustainable economic disequilibria. Liew et al., 2003, make similar observations by arguing that economic crises can tighten economic constraints to the extent that some countries are forced to reform notwithstanding the political interest of the ruling party. As hypothesized, this description fits the Kenyan case especially in the 1990s when the financial constraints became binding due to suspension of funding. The implementation of reforms not only intensified but the reform agenda was also broadened. Funds were only disbursed when there were signs that the government was back on track with the reforms. Donors (IFI and bilateral funding institutions) thus became key stakeholders in spearheading the reform process. Domestic forces, mainly the media, opposition and the civil society also played an instrumental role in pushing for political reforms. Nonetheless, the fact the donors had the resources or the money that the government badly needed gave them leverage in speeding the process and forcing the government to act. 5.2 Phase III: 1991-1996 5.2.1 Political reforms By mid-1991 the pressure for democratization was accelerating. The civil society and religious groups became vibrant and to some extent became the voice of the broader, unorganised segments of Kenyans. At same time, donors continued to steer up pressure. They had made it clear during the consultative group (CG) meeting in November 1990 that future aid levels particularly quick disbursing aid to cover budget and BOP support would depend on the implementation of political reforms. True to their word, in 1991, they suspended quick-disbursing assistance that had been planned for Kenya. Within a short time, the constitution was amended to allow for creation of multi political parties. However, the repeal left intact all other amendments that had concentrated power on the executive at the expense of the other branches of the government. Thus the enactment fell short of providing an enabling environment for pluralist politics since most of the provisions that had been effected by the one party state remained in place. KANU emerged the winner in the first multi-party elections in 1992. KANU’s victory was partly attributed to the weak 30 and divided opposition. The government took advantage of its position to destabilize the opposition by encouraging defections through financial and political inducements. Political patronage became more reinforced in terms of party loyalty. Meanwhile, the civil society attributed the loss to flawed constitution that gave the ruling party an advantage over its challengers. As a result, the civil society and the opposition parties made the constitutional reform their main agenda in the post-1992 elections. In March 1994, for instance, bishops of Roman Catholic Church released a pastoral letter, in which they called for, among other things, the complete revision of the constitution. However, there was no meaningful response from the government. Due to the mounting internal and external pressure, President Moi indicated in his 1995 New Year message that the constitution would be reviewed, and promised to invite foreign constitutional lawyers and experts. But nothing seemed to move, and in February 1995, a gathering of the protestant National Council of Churches of Kenya (NCCK) called for a two-phase programme over five years to rewrite the constitution with active participation of the government, political parties and interest groups. There was a turn of events when the president, in his Madaraka day speech in June 1995, announced that the national assembly had established a mechanism for making fundamental amendments to the constitution but ruled out a major overhaul. As if to affirm the president’s views, the attorney general indicated in June 1996 that although major constitutional reforms were overdue, they would have to wait until after December 1997, that is, after the general elections. Resistance to constitutional reform was expected as that would mean, among other things, trimming the excessive executive powers and the privileges that went with it. The government also feared that constitutional reform would level out the playing ground ahead of the 1997 general elections, denying the ruling party of the clear electoral advantage under in the old constitution. Externally, the multi-lateral development partners accused the state of reneging on its commitment to weed out corruption. Faced with the threat of an aid freeze, the attorney general published a new bill seeking to establish a commission to review the constitution. In July 1996, the government announced it would effect minimal reforms before the second 31 multi-party general elections. By the time of general elections, however, nothing had been achieved. 5.2.2. Economic Reforms Most of the economic reforms were implemented in the first half of the 1990s. The period saw bold measures in the reform process especially in trade, civil service, agriculture and social sectors. Trade reforms Trade liberalization had started with conversion of quantitative restrictions to tariffs equivalent in 1980s. By 1991, quantitative restrictions affected only 5% of imports compared with 12% in 1987 (Swamy 1994). The average unweighted tariff rate declined from 41.3% in 1989/90 to 34% in 1992/93. In June 1995, the maximum tariff rate was reduced to 40% and the bands to six. (Mwega 1999). A speedy progress was made in liberalizing the foreign exchange market. In October 1991 Foreign Exchange Bearer Certificates (Forex-Cs) were introduced, marking the first step toward liberalization of foreign exchange market (Were, et al., 2001). The Forex-Cs could be used for automatic import licensing. During the same year, currency declaration forms were abolished. A series of other measures followed. For instance, in April 1992, a secondary market for Forex-Cs was established and in August, retention schemes were introduced allowing 100% retention of foreign exchange earnings from the non-traditional exports. In February 1993, the retention scheme was extended to the service sector at 50% while foreign exchange allocation by the CBK was abolished. However, in March of the same year, the retention accounts were suspended and import licensing and exchange controls reinstated. Apparently, this led to unsuccessful negotiations between the government and IMF for the resumption of quick-disbursing loan. Consequently, in May 1993, import licensing was again abolished and retention accounts reintroduced for all exporters of goods and services at 50% rate. The government also abolished import licensing so that approval was now only required for goods on restricted list or for items within government monitored programmes such as crude oil. 32 Despite the efforts made in liberalizing international trade, the export incentive schemes that had been put in place to promote exports were not being utilized effectively. In particular, the ECS was highly abused as issues of political patronage and rent-seeking became critical in execution of the scheme. For instance, the scheme was used (by Goldenberg International Ltd and associated companies) to swindle the government billions of shillings in the form of export compensation for exports that allegedly did not take place, leading to one of the biggest financial scams.5 The company used a clique of people from the inner cabinet, creating a web of patron-client relationships with those in key positions of public office, who perhaps for fear of victimization due to political loyalty, ensured a smooth implementation and operation of the lucrative scheme despite the irregularities involved. In so far as the liberalisation reform effort is concerned, the mechanism or manner in which the ECS was executed left a lot to be desired. For one, what was the essence of retaining the ECS when trade liberalisation measures where in place, if not for rent-seeking purposes? This was a policy measure instituted under the controlled trade regime, and had failed to serve the purpose for which it was instituted. Secondly, the very fact of granting the company monopoly rights in gold trade was against the spirit of free competition that liberalisation is meant to foster. Thirdly, the manner in which the scheme was implemented and executed demonstrated the extent to which vested interest and the executive powers in appointment or promotion of bureaucrats could compromise professionalism and public service ethics in execution of duty. Despite the stringent donor conditionalities and donor aid freeze imposed in November 1991, the scheme was still abused, illustrating how powerful vested interests and political considerations can be. Fourthly, it had far reaching implications in the economy, especially in the financial sector. The prudent financial management that needed to accompany the liberalisation of the financial sector was compromised, thus significantly derailing the reform process.6 With a freeze on donor funding, the billions of shillings awarded under the scheme must have been sourced 5 When National Rainbow Coalition (NARC) took over from KANU in December 2002, a Judicial Commission of Inquiry was set up by president Mwai Kibaki (on 24 February 2003) to investigate irregular payment of billions of shillings in export compensation to Goldenberg International Ltd and associated companies in early 1990s, and whether any gold and diamond jewellery were actually exported and export remittances made to CBK. The company was formed by a young Kenyan businessman of Asian origin who was irregularly paid Kshs 5.8 billion. 6 See further discussions under financial sector reforms 33 domestically. Most likely, this partly explains the observed surge in domestic stock of debt (see Appendix Table 4), specifically in 1993. It was upon realising the extent of the resultant economic crisis that the government responded by quickly implementing some of the donor demands such as liberalising the foreign exchange market in an attempt to entice the donors. But unfortunately, with looming financial crisis and the sky rocketing inflation, that was wrong timing. The shilling depreciated to unprecedented levels against the dollar (see Figure 1). As one commentator once put it, “it was like lifting the lid off a pressure cooker without first opening the steam valve.”7 It was largely the alarm caused by these developments that made the president to reinstate the foreign exchange controls and import licensing in March 1993, in a bid to minimise the resultant short run cost of the reform. A hasty implementation without the necessary preconditions such as macroeconomic stability had worsened the situation, leading to policy reversal. The Government lost credibility not only in the eyes of donors but also domestic and foreign investors. From the turn of events, it is clear that rent seeking, clientelism and patronage informed resistance to complete trade liberalisation. Figure 1: Nom inal Exchange Rate (Ksh/US $), Jan 1991-Dec 1996 80 70 Kshs per US $ 60 50 40 30 20 10 Ja n9 M 1 ay -9 Se 1 p9 Ja 1 n9 M 2 ay -9 Se 2 p9 Ja 2 n9 M 3 ay -9 Se 3 p9 Ja 3 n9 M 4 ay -9 Se 4 p9 Ja 4 n9 M 5 ay -9 Se 5 p9 Ja 5 n9 M 6 ay -9 Se 6 p96 0 7 Sunday Nation, March 29, 1998 34 It was not until September 1993, that a decision was made by Minister of Finance to end the much abused ECS. Further liberalization of the foreign exchange market proceeded. In October 1993, the official exchange rate was abolished, paving way for freely floating exchange rate. Other controls on foreign exchange were eased in December 1993, so that interim dividends could now be remitted to non-resident shareholders. With the trade liberalization having moved a substantial step, capital controls were relaxed for offshore borrowing in February 1994 subject to quantitative limits. Over 1993-94, all current account and virtually all capital account restrictions were lifted. By 1995, all the foreign exchange restrictions had been eliminated—foreign exchange bureaux were permitted and the Exchange Control Act was repealed. In May 1995, CBK eliminated all restrictions on trade in Treasury bills and bonds and trade in other local money market instruments by foreign individuals and institutions. Domestically, petroleum market was liberalized in October 1994. However, price liberalisation of basic commodities like cereals, especially maize and maize flour was a highly sensitive one given that these were commodities consumed by the majority of the population. Politicians would want to act cautiously given the high political uncertainty of such a reform. Hence, some policy reversals were again witnessed. Financial sector reforms Several achievements were made during the period, including liberalization of interest rates, removal of credit controls, and tightening of the monetary policy operations by streamlining the money market trading system. Interest rates were liberalized in July 1991, a month after the introduction of open market operations. However, the reform efforts were thwarted by political patronage and interference, whereby the politically-connected were allowed to get unsecured loans from some banks, especially state-owned and politically-connected banks just before the first multiparty elections. Following the run up to the general elections in December 1992, there was a heightened activity of financial transactions, as money changed hands, to finance the then ruling party election campaigns. Part of the finances were linked to the Goldenberg scam—perhaps in exchange for favours that the company enjoyed— hence providing means and ways of buying political loyalty or rewarding those that were able 35 to deliver votes, especially with entry of multiparty system which was posing a threat to the ruling party KANU. Exchange Bank, owned by Goldenberg International, received Kshs 23.9 billion from CBK and other four political banks in a four-day period in early April 1993. These included Ksh 13.5 billion ($ 210 million) that was paid by CBK. In short, KANU devised several schemes to finance its election bid, which also translated into printing lots of money. As would be expected, inflation rose drastically to over 50 percent (see Figure 2). By April 1993, a financial crisis was imminent. This was a major drawback to the reform effort that IFIs were struggling to push through. Figure 2: Inflation rate (monthly), Jan 1991- Dec 1996 70.0 60.0 50.0 40.0 30.0 20.0 10.0 Ja n9 M 1 ay -9 Se 1 p9 Ja 1 n9 M 2 ay -9 Se 2 p9 Ja 2 n9 M 3 ay -9 Se 3 p9 Ja 3 n9 M 4 ay -9 Se 4 p9 Ja 4 n9 M 5 ay -9 Se 5 p9 Ja 5 n9 M 6 ay -9 Se 6 p96 0.0 -10.0 The donor community, particularly IMF, raised dissatisfaction pointing to the need to restore discipline, financial prudence, adequate enforcement and monitoring of the banking regulations. In particular, the situation created by Exchange bank and other political banks that were basically instrumental in financing the elections was of great concern. This, together with the huge unsecured loans amounting to billions of Kenya shillings triggered a financial crisis and eventual collapse of most of the political banks. Most of the troubled banks had to be put under liquidation.8 In December 1993, several banks and NBFIs were eventually closed down in a banking crisis. 8 These included Post Bank Credit, Exchange Bank and Trade Bank. 36 To deal with the resultant monetary overhang, the government, under pressure from IMF, decided to aggressively mop up the excess liquidity by issuance of Treasury bills. But this move only acted to create another problem—soaring Treasury bill rate, which also acts an anchor for other forms of interest rates. At one point, the Treasury bill rate was over 70 percent. This was one of the bases of the high interest rate structure that became almost a permanent feature of the economy. The lending interest rate has been overly high, reaching over 30 percent in some years (see Appendix Table 2). Critics of the IMF argue that they could have done a better job in advising the government to deal effectively with the crisis. In any case, it was wrong for IMF to have insisted on financial liberalization at a time when the banking legislation and bank supervision were inadequate (Stiglitz, 2002). Furthermore, until the amendment of the Central Bank Act in 1996, the independence of CBK, and therefore monetary policy had been grossly compromised. For example, before the amendment, the Act allowed the minister for finance to override the decisions of the Bank, and there was no maximum limit on CBK advances to the government. This encouraged fiscal indiscipline as well as high budget deficits. Rolling over the Treasury bills and selling more kept interest rates high and Kenya shilling strong. The situation evolved into what economists refer to as a “ponzi” game, with the government issuing attractive debt to repay old ones. The beneficiaries of the game became financial institutions, especially commercial banks, which held over 50 percent of total stock of treasury bills. Thus, although an auction market for government paper was created, financial institutions typically took up most of that paper by arrangement. The dramatic build in domestic debt and domestic interest rates was also precipitated by resort to domestic financing following the curtailment in donor funding . Public sector reforms9 Reforming the public sector was perhaps the most difficult task, as the government kept on employing delaying tactics. Other than mere job creation, public service employment was also a 9 For the purpose of this paper, public sector reforms include civil service and parastatal reforms. 37 means for political mileage and ethnic or tribal considerations. For instance, with powers to create and abolish ministries, the president created jobs by splitting existing Ministries, thus allowing more appointment of Ministers and Permanent Secretaries, among others. More often than not, this would be in a bid to reward loyalty, balance the tribal equation to ensure that constituents from key tribes did not feel left out so as to secure votes, and basically creating jobs for those from the president’s tribe. Due to a bloated public sector, the wage bill became unmanageable, accounting for about 10% of GDP and about 70% of the recurrent budget by the late 1980s. This left very little for operations and maintenance, as well as development expenditure. Part of the reform was to reduce the number of ministries as part of cost containment. Having postponed the civil service reform for quite sometime, the government had to finally launch the reform after much pressure from the development partners. During the November 1991 CG meeting, the government tabled its strategy for reforming the civil service. In 1992, civil service reform programme was launched. Various consultative meetings were held. All the key senior managers of line ministries attended the first workshop, during which the government outlined the civil service reform action, which was to be implemented in three stages or phases. The reform was to cover only those civil servants paid directly by exchequer excluding teachers. A high level steering committee, chaired by the head of civil service was set up and mandated to report to the Cabinet. Its key role was to set the overall direction; review and approve reform work plans; and inform the Cabinet on reform progress. The steering committee was to be facilitated by the Directorate of Personnel Management, which was charged with the day-to-day management of the reform. The key members of the steering committee were drawn from a number of ministries and Office of the President. Like most reform initiatives, there was not much consultation on the reform with the stakeholders, though parliament as well as the general public had been informed through the various budget speeches. The civil servants were not formally consulted. Moreover, the sequencing of the civil service reform was not properly done. Ideally, the government should have first defined its core business and key job description, and in this way, identify areas to 38 get rid-off and consequently, the officers and the percentage of staff to lay off. This was not done. The introductory phase of the retrenchment programme was on a voluntary basis. This was, however, highly contested especially by the development partners who argued that the best employees would leave the civil service. As it turned out, when Voluntary Retirement Scheme was introduced, many of the good subordinate staff left, especially the technical staff with prospects of getting jobs elsewhere. Others were also enticed by the money—the golden handshake—and went off on a spending spree only to find themselves deep in poverty afterwards. In his budget speech of 1993/94, the Minister for Finance pledged to prune 16,000 civil servants in a three-year period. In five months, 3,959 employees had been pruned through natural attrition (retirement) while 13,954 job vacancies that had been budgeted for were cancelled. The retrenchment programme was restricted to the civil servants, who, for lack of a formal labour union, would relatively be easier to deal with. Although teachers were a major contributor to the huge wage bill, they were untouched, largely because of their strong union (Kenya National Union of Teachers) and the fact that they formed a strong political base in terms of votes. It is also important to note that the retrenchment programme was not extended to parastatals. In fact, some of the retrenchees in the civil service could find their way to parastatals with even higher salaries, thus defeating the purpose of the reform. In regard to parastatal reforms, nothing much was achieved although some institutional structure was put in place. Parastatals had become avenues of perpetuating predatory behaviour by public officials and for a long time, the government was reluctant to divest from some of the enterprises. The stakes were high, as that would also jeopardize political support and power. The reforms basically entailed restructuring and privatization of public enterprises, with the aim of enhancing the role of the private sector, reducing the claims on the budget, rationalizing the public enterprise operations, improving regulatory environment and broadening the base of ownership (Republic of Kenya 1998). In 1990, Department of Government Investment and Public Enterprises (DGIPE) was created and charged with the responsibility of overseeing the parastatal reform programme. Parastatal Reform Programme Committee (PRPC), a high-level policy-making body, was set up under the chairmanship of the vice-president and Minister for Finance. A further arm, the Executive Secretariat and 39 Technical Unit (ESTU), was created to manage, coordinate and implement the programme while approvals were to be made by PRPC. After internal consultations at Cabinet level, the government drew a privatization programme whose strategies and objectives were spelt out in Policy Paper on Public Enterprises Reform and Privatization. However, privatization framework was inadequate as it lacked legislative principles to be followed—basically in the form of privatization law. The procedures and institutional framework in the policy paper were not entrenched in the law. The government categorised public enterprises into strategic (33) and non-strategic (207). The former were to be restructured to improve efficiency and profitability while nonstrategic parastatals would be privatized. The implementation encountered resistance and more often than not, laid down procedures were not observed by the implementing institutions. As Stiglitz (1999) rightly points out, if privatization is conducted in ways that are largely viewed as illegitimate and in an environment that lacks the necessary institutional infrastructure, the longer-run prospects of a market economy may be undermined. The privatisation process lacked both functional and legal autonomy from executive and as such, privatization did not weaken patronage, as one would expect (Gatheru and Shaw, 1998). Social Sector Reforms The major component of the social sector reforms in health and education was implementation of cost sharing, also known as user charges in the case of health10. Cost sharing in the public universities was introduced in 1991. Following public discussions and workshops on the merits and demerits of user charges, and the lessons learnt from the initial attempt, the government announced a phased re-introduction of user fees in April 1992, with details of fees, waivers and exemptions, and dates of introduction. This time, the outpatient fee was reintroduced as a fee to be paid only after receiving treatment. In addition, there was some effort devoted to developing the institutional capacity. Specifically, the MoH expanded the Health Financing Secretariat; new management systems were developed with staff from hospitals, District Health Management Teams and District Treasuries; a cost sharing operations manual was produced and new accounting and 10 This section focuses on the health sector reform. 40 reporting systems put in place. Revenue collection targets were also set. The revised policy was introduced in phases and on pilot basis (Collins et al., 1996). The re-introduction was sequenced, starting with the national referral hospital in April 1992, provincial hospitals in July 1992, district hospitals in January 1993 and at the health centres in July 1993. Like before, no fee was charged for services offered at the dispensaries. In addition, the groups of the population exempt from the fees had been expanded to include civil servants, the military and the unemployed (Owino and Were 1998). The new (revised) reform was accompanied by the other changes or reforms, notably the decentralization of management. The successful implementation of the revised policy compared to the initial attempt can be attributed to consultation and consensus building among stakeholders (e.g. senior medical and administrative staff); gradual and sequenced implementation, with the quick success at the higher level facilitating implementation at lower levels and enhancing acceptance; and relatively stronger institutional framework put in place. The broad range of automatic exemptions to compensate losers was apparently, also helpful in gaining political and public acceptability of the user fees, although the revenue foregone was high. Hence after achieving acceptance, the exemptions for civil servants and children between 6 and 15 years were removed, since there was no clear public health benefit (Collins et al., 1996). We can hence infer from the cost-sharing experience that successful implementation is enhanced when there is consensus building, the process is gradual, sequenced and the necessary institutional capacity is developed. However, the nature of the reform in question and how widely it affects the economy should be taken into consideration. Additionally, a reform can be reversed if its effects threaten the positions of the political system in power, especially when the side effects of the reform became apparent. 5.2.3 Government-donor relationship The 1990s were characterized by stop-go relationship with donors, leading to aid embargos and intense pressure from donor agencies to undertake various reforms. For instance, quick disbursements were suspended in 1991 due to what was described as rising levels of corruption, failure to correct macro-economic imbalances caused by fiscal indiscipline, slow reforms in the civil service and privatization of public enterprises, lack of accountability of public enterprises and a slow pace of political reforms. In December 1992, IDA cancelled 41 final tranche of agricultural sector adjustment operations credit (ASAOII) citing policy reversal in maize market liberalization, while disbursement of the second tranche of the export sector adjustment credit was held up until May 1993. The World Bank also postponed disbursement of the second tranche of the programmes due to poor implementation of several conditions attached to sectoral programmes. As a result, there was a large external financing gap. By then the instability in macroeconomic framework, partly instigated by the financial scam was becoming apparent. To help restore economic stability and facilitate the process, a shadow programme11 was agreed upon between the government and IMF in April 1992. However, the government quickly veered off-track as political concerns overwhelmed economic management issues. IMF/IDA mission in autumn 1992 and spring of 1993 found evidence of significant violation of monetary targets due to abuse of the pre-shipment export financing scheme12 and access of certain commercial banks to CBK overdraft and rediscount facilities, all of which had some links with the Goldenberg scandal. This created a strained relationship between the government and the donors. In attempt to gain lost confidence and facilitate access to donor-funded external financial flows, the president made changes by replacing key government officers who were in office when the Goldenberg scandal started. In January 1993, Musalia Mudavadi replaced Professor George Saitoti as the Minister for Finance, while Micah Cheserem replaced Eric Kotut who resigned as governor of CBK. The new officers gained good will from donors as reformists, and influenced a decision by World Bank to call for a CG meeting to discuss Kenya’s case in Paris in November 1993. They pushed through various reforms that were being sought by the IMF and World Bank. After some speedy reform implementation, Kenya applied for a one-year arrangement under ESAF in November 1993. With the usual conditionalities, IMF 11 A stabilization programme, which IMF monitors without providing the funds, until it is convinced that it is time to do so. 12 Pre-export finance scheme was a soft loan that was extended by the CBK in early 1990s to exporters through their commercial banks, but ended up being abused. In March 1993, commercial banks were advised not to enter into new commitments under the facility. 42 approved US$ 63 million credit under ESAF in December 1993, half of which was to be disbursed immediately. After IMF opened its doors, there was some good will from donors. For example, after the December 1994 meeting the World Bank released the final tranche of US $77M of its education sector credit while the IMF disbursed the remaining US$33M under its ESAF. Bilateral donors, who often use IMF and World Bank as a benchmark in regard to funding decisions, also followed suit. In January 1995, Japan announced a US$20M grant for BOP support. IDA also announced a US$21.4M credit to support Kenya’s civil service rationalization. In February 1995, an IMF team arrived in Nairobi to open talks on new three-year ESAF worth US$200M. However, there was still concern on the need for fiscal discipline. Hence, IMF announced it would monitor the budget monthly. But in September 1995, IMF announced that talks with the government on ESAF of US$200M had effectively stalled because the Fund needed to convince itself that the government was vigorously prosecuting public officials and others accused of the Goldenberg scam. It was proving difficult for the government to deal with the issue objectively, given the complicity of some members of the Cabinet and the inner Cabinet in the scam. In April 1996, the long awaited ESAF was finally approved after the government reiterated its commitment to reform in the Policy Framework Paper 1996-1998. The government pledged to recover the money lost in the Goldenberg scandal, allow greater autonomy of the CBK, operate the budget at cash basis, halt spending not covered by parliamentary approval and introduce commercial autonomy in some of the parastatals. Also targeted was the mismanagement and corruption at Mombasa port. The broad objective was to bring in fiscal and public sector transparency. However, the bilateral donors were more concerned with non-economic factors. Their concern was the then forth-coming general elections, including the role of electoral commission, the funding of parties, creating a level playing ground for all parties including licensing of meetings, the role of the provincial administration and access to the media. 43 However, four months after approval, nothing seemed to move as scheduled. A joint mission from IMF and World Bank that left Kenya in mid-August 1996 expressed concern about the level of government borrowing from the CBK. They also noted that certain strategic targets set out in the Policy Framework Paper had not been achieved on schedule. IMF thus, decided to withhold the release of the second tranche of the approved ESAF until these conditions were satisfied. Another IMF mission in December 1996 expressed concern about the government’s commitment to the reform process. By this time, corruption was raging and the government’s record on good governance was far from acceptable. Although the IFIs ensured a greater degree of reform implementation, they were overambitious in their reform agenda given the prevailing conditions and institutional framework. They at times pushed the reform agenda too far and too fast, and the fact that the government yielded to their demands did not necessarily mean they were ready and willing to fulfil the conditionalities. They took institutional capacity and political will to implement reforms for granted. Strict targets and schedules, including stipulating what laws the parliament should pass and when, undermined consensus building and local ownership of the reform process. If conditionalities are expected to overcome time inconsistency problems, in the Kenyan case, they did not. This is exemplified by the inherent policy reversals and stop-go pattern in reform implementation. 5.3 Phase IV: 1997-2001 5.3.1 Political arena The 1997 general elections were held with almost similar conditions to those that prevailed in 1992 general elections. Opposition parties were still divided, the government-owned Kenya Broadcasting Corporation still favoured KANU, and politically instigated tribal clashes cropped up again. The only minor change was amendments to some laws, aimed at reducing incidents where political rallies were violently broken up by the police. In addition, some constitutional and legal reforms were introduced to ensure independence of the Electoral Commission. These changes were, however, not adequate to level the playing field. This minimalist approach to constitutional reform was geared towards ensuring that President Moi wins his second and last term in office in keeping with the limit set forth by 44 the constitution. Moreover, the political elite, including the inner cabinet, most of whom had been associated with the Goldenberg scam and other improprieties, wanted the status quo to be maintained for their own personal interests. KANU emerged the winner. Campaign for constitutional change continued. The president finally approved the Constitutional Review Act in 1998, setting the agenda for a thorough review. But in early 1999, he again made a turn about, stating that the entire process was a waste of time and money and that the new constitution should be debated in parliament. However, the groups opposed to the fact that parliament was best suited to review the constitution initiated a parallel process at Ufungamano House, dubbed the Ufungamano Review Group (URG). This was largely spearheaded by religious leaders. In November 2000, the president finally appointed a respected constitutional lawyer, Professor Pal Yash Ghai, to chair the Constitutional of Kenya Review Commission (CKRC). Luckily, Ghai succeeded in merging the differing factions and soliciting views across a wide range of groups throughout the country. But as it were, by the time the third multiparty general elections were being held in 2002, a new constitution had not been put in place, despite a people-driven draft being ready. To date, the constitutional debate still rages on, even with new NARC government, which came to power on the platform of constitutional reform. But one may ask, what has constitutional reform got to do with economic reform? As observed earlier, a long era of centralization of unchecked powers in the executive was launched after independence. Constitutional reform was meant to introduce more transparency and accountability in the government structure and operations, thereby militating against the effects of vested interest groups and rent-seeking, which have had a profound effect on reform process in Kenya. 5.3.2 Economic Reforms Failure to make significant moves in fulfilling governance conditions led to suspension of ESAF in August 1997. By this time, emphasis in conditionalities was not merely on economic targets but also implementation flaws and poor governance. 45 For example, although all imports were in principle liberalized or automatically licensed, supervisory reports indicated that, in practice, there was lack of automaticity and transparency, and undue influence restricted imports that competed with domestic production. Moreover, although the banking laws and the supervision apparatus were strengthened, political considerations prevented effective prudential oversight. There were concerns about widespread corruption and poor human rights record as well as the politically instigated tribal or ethnic clashes witnessed in the run up to general elections in December 1997. Thus, much of the reform effort was geared towards fulfilling conditionalities that led to the suspension of funding, particularly governance (read corruption) issues. For example, the government established the Kenya Anti-Corruption Authority (KACA) in 1997 to address corruption in the economy. With donors still dissatisfied with the fight against corruption, the president put up a team in July 1999, with members mainly drawn from the private sector, to occupy key positions in government. The team was headed by Dr. Richard Leakey (a renown conservationist and one of the leading lights in the opposition at that time), who was appointed as head of civil service and Secretary to the Cabinet. He was mandated to remove inefficient and corrupt officials and to right-size the civil service. The team was dubbed ‘dream team’ in the public and media circles, as it was expected to put the country back to economic recovery path and root out the rampant corruption in government. Within a few weeks of his appointment, Leakey sacked a raft of parastatals chiefs and sent the fraud squad into a number of government departments. Four key senior officials in three parastatals were replaced. While there was no doubt that the reforms were having an impact on the working practices of public bodies, these actions were, however, thwarted by the senior political hardliners with power bases. Efforts to stamp out corruption were heightened when, in February 2000, the parliamentary Public Investment Committee (PIC) forwarded to the head of civil service, a list of individuals whom it accused of misappropriating public funds and, therefore, unfit to hold public office. But no prosecution took place and the issue was simply said to be cheap propaganda. Further efforts to stamp out corruption were thwarted when on 27th December 2000, in a move that was seen as largely viewed to be political, the High Court ruled that 46 KACA was a constitutionally illegal body, triggering a public outcry.13 In addition, the parliament rejected two bills in the fight against corruption i.e. the civil service code of conduct bill and the anti-corruption and economic crimes bill. It was argued that the bills were purely donor-initiated and the government was simply doing it to fulfil the conditionalities. These developments cast doubts on the government’s commitment to fighting corruption. Vested interests, particularly by the kitchen cabinet still obscured significant changes. It was apparent that the kitchen cabinet associated with past misdeeds was either re-asserting itself or the hiring of technocrats was a mere smokescreen to hoodwink donors into releasing withheld funds. That notwithstanding, the period saw progress in implementation of some economic reforms, particularly the public sector reforms that had lagged behind. Public Sector Reforms The second phase of the civil service reform was re-launched in 1998, largely driven by the government’s needs for new funding from donors, and the IFIs’ pressure for a leaner and efficient government. The target was to reduce the civil service by 30% and a target of 32,000 staff was agreed upon. Within a short while, committees were set up in Ministries to decide who was to leave, especially at the lower cadre levels. Although there was a criteria to be followed, this was never circulated to the civil servants. This left civil servants guessing who was to be next and created anxiety and suspicion among officers. However, the rightsizing was halted by parliament before the target had been achieved. Expectedly, it was argued that there was no enough consultations about the policy, which was viewed to have been implemented as directive from donors. The parliament argued that a Sessional paper should have been done before implementing the policy and, hence lobbied to stop the process. This further exemplifies how hurried implementation without adequate consultation and consensus building among key stakeholders affected successful implementation of reform. In September 1999, the president announced ministerial changes, which saw the number of ministries reduced from 27 to 15. This was viewed as the phase two of the much touted recovery strategy after the appointment of the technocrats into senior civil service positions. 13 KACA was later reconstituted as Kenya Anti-Corruption Commission, which is currently operational. 47 But this was just a change in portfolio as none of the ministers or assistant ministers was dismissed. Instead, they ended up sharing a ministry, thus defeating the purpose of the reform. That was not surprising given that the power base of the president was vested in offering posts to regional power breakers who could deliver him the support of their ethnic constituencies. With the appointment of Leakey it was expected that the process of cutting back the civil service would resume. It was expected that he would use as a start, the civil service reform medium term strategy 1998-2001, which called for the reduction of some 126,000 employees—60,000 teachers and 66,000 civil servants. The Poverty Reduction and Growth Facility (PRGF) was also committed to retrenching 32,000 public-sector employees in the 2000/2001 period. However, the reform suffered another setback when the sacking of 25,783 civil servants was halted, after the civil servants came together and sued the government. They accused the government of contravening the employment Act by terminating employment contracts without adequate notice. The court ruled that the civil service retrenchment plan should be suspended and new arrangements worked out. The matter was complicated by the fact that many civil servants had still not received their redundancy packages. Hence there were also squabbles in regard to the compensatory mechanism. At least 19,000 civil servants had received retirement letters since the programme started in September 2000. Fiscal reforms continued in early 2000 with the rationalization of the budget process. A major component of the reform was adoption of the Medium Term Expenditure Framework (MTEF) to budgeting, which replaced the previous forward-rolling budgeting system. The aim was to move revenue and expenditure more closely into balance and achieve fiscal discipline. The new budgeting approach was to be directly linked to the priorities contained in the Poverty Reduction Strategy Paper (PRSP). However, with no specific targets, sanctions and incentives where necessary, fiscal discipline remained elusive. This was exacerbated by weak institutional structures. For example, although budget execution is a prerogative of parliament, mechanisms to control discretionary spending within executive remain weak. Only the Office of the President can discipline the Permanent Secretaries, 48 who also act as accounting officers in their respective ministries (Kirira 2002). The office of the Controller and Auditor General does more of auditing and little of the control function (Gacheru and Shaw, 1998). Moreover, the high turnover of Permanent Secretaries to the Treasury intimidated holders of this office, who are also delegated with financial control and management, thus undermining their authority and firmness on financial matters and expenditure management (Kirira 2002). The government kept on dragging its feet in regard to parastatal reforms. By the end of 1998, the government had sold shares in only 25 enterprises in which it had direct ownership out of the 165 (Anyang’ Nyong’o 2000). Privatisation proceeded without a privatization law, thus leaving loopholes for manipulation.14 Moreover, the government avoided privatizing some of the parastatals that caused a major drain on the budget, thus bringing to fore the question of whether the objectives of parastatal reforms have all been met. During 1999/2000 fiscal year, a number of state-owned corporations were to be restructured and privatised.15 However, none of the planned privatisations were undertaken. Kenya Reinsurance, Chemilil and Mumias were all brought to the point of sale but their privatisation was postponed because of the lower than expected independent valuations for their assets. However, the government restructured the KPTC, by splitting it into three separate entities, namely the sector regulator (Communications Commission of Kenya), the public postal operator (Postal Corporation of Kenya) and the public telecom utility (Telkom Kenya). KPTC had accumulated a debt of about Kshs 6 billion, which was mainly due to corruption and inefficiency. In early December 2000 the president stated that 49% stake in the Telkom Kenya would not be sold unless foreign investors made what the government deemed to be reasonable bids. Although the cabinet finally approved the sale of 49% stake of Telkom Kenya (to Mount Kenya consortium) in January 2001, it was later suspended. Among the underlying reasons for terminating the sale was the fear that privatising the 14 There has been a privatization bill which is yet to be turned into law. These included the Kenya-Reinsurance Corporation, the then Kenya Posts and Telecommunication Corporation (KPTC), Chemilil and Mumias Sugar companies. Kenya Ports Authority and Kenya Railways were to be commercialized. 15 49 public utility would jeopardize the business interests of politically-connected individuals in government and close avenues for corruption and rent-seeking. Financial sector reforms In the financial sector, the aftermaths of unsecured loans and political banks continued to felt. Further instability was experienced when five banks were put under statutory management by the CBK in 1998, after failing to meet their financial obligations. The bank failures were attributed to high non-performing loans due to poor lending practises, conflict of interest, loans to non-viable projects, insider lending to directors and undercapitalisation. Some banks such as the state-owned National Bank of Kenya (NBK) had huge amount of non-performing loans. By late 1998, the financial problems at NBK became so acute that the government had to save the bank with a cash injection of Kshs 2 billion. To arrest the waning confidence in the banking sector, tougher regulations were put in place. CBK was given increased power to censure commercial banks that failed to comply. Penalties for noncompliance were also raised. There was increased capital base requirement together with strict enforcement of capital/lending ratios and the provision of credit within strict limit and with the appropriate security. Other regulations to be observed included the need for financial institutions to publicly display or publish their audited accounts promptly. There was some financial stability in 1999. Three out of five banks under statutory management were restructured and re-opened. During the 2000/2001 period, measures undertaken included amendment of the banking Act to restrict insider lending and enforcement of banking laws especially in regard to lending and provisioning for nonperforming loans. That notwithstanding, the experience with the banking crises and high interest rates attest to the fact something was not right in the reform process. Financial market liberalisation was based on the believe that competition among banks would lead to lower interest rates. But that has not been the case. Pradhan (1997) observes that the success of financial liberalisation process depends on the appropriateness of macroeconomic policy, institutional development and structural reforms. Leite (1993) add that strong banking regulatory and supervisory policies ensures viability and health of the industry and, enhances 50 effectiveness of interest rate liberalisation. The hurried financial market liberalisation saw a situation where the amendments to the banking legislation and tight regulatory and supervision policies were being put in place long after the implementation of the reform. Moreover a successful interest rate liberalisation also calls for the need to attain fiscal discipline, which was not the case. 5.3.3 Government-Donor relationship Donor dissatisfaction with reforms particularly in regard to corruption persisted. After KANU won the general elections in 1997, Mr. Simon Nyachae, who was appointed as the minister for finance, came to be regarded as one of the few members of parliament that made concerted effort to tackle rampant corruption in public sphere. But it was not long before the minister was relinquished of his post. He was replaced by Mr. Francis Masakhalia in February 1999. The IMF team visiting the country in early March 1999 was encouraged by the government’s performance in the economic sphere with respect to monetary and fiscal policies but not corruption. The new minister for finance was mandated to tackle the excessive government expenditure and deal with the huge unpaid government bills, also known as pending bills. The stock of pending bills, which stood at Kshs. 2227 million as at 30th June 1991, had significantly increased to Kshs. 10976 million by June 1999—an increase of about 392% (Kirira 2002). Pending bills was one of the loopholes used to gain access to public coffers by either paying contractors for substandard work, inflated bills or for services at times not delivered. It was, and indeed it is, a reflection of financial indiscipline and poor management in the public sector. For example, projects and programmes were initiated without taking into consideration their financial implications and at times without seeking parliamentary approval, which is illegal. In his 1999/2000 budget speech, the minister issued strict guidelines under which the outstanding government bills were to be paid off in a transparent and open procedure. But before he could make any meaningful progress, he was removed from office only after six months and replaced by Mr. Chris Okemo. 51 After the July 1999 visit, the IMF team was still dissatisfied with governance reforms and therefore, deferred any decision about re-establishing the ESAF. The mission noted that KACA had failed to take any action even with its limited mandate. The deferral of funding came as a bitter blow to the government, which had already factored the donor support in the budget. It was then that president Moi, in his usual tactful style, made a swift move and appointed the ‘dream team’, in a bid to improve credibility and Kenya’s badly dented image in the eyes of donors and international community. However, when the IMF team visited the country in early 2000, there was no indication of aid resumption. During the visit, the mission reviewed the progress made in improving governance and discussed an economic programme on which to base the new PRGF, which replaced the EASF. By this time, poverty had become widespread while the economy was in doldrums. In fact, it was in the year 2000 when the economy recorded a negative real GDP growth rate of –0.3% in Kenya’s economic history. With no money coming despite his initiatives, president Moi accused the donors of shifting goal posts. But as he was doing that, back home a coalition of opposition politicians, civic leaders and professionals appealed to the IMF and the wider donor community not to release financial assistance to Kenya because the government had not fulfilled its pledges to implement constitutional reforms. IMF set tough terms when it finally agreed to lend to Kenya. In August 2000, IMF approved a US$ 198M credit to support the three-year PRGF programme. As it often happens, the agreement with IMF opened up the door for funds from other donors such as World Bank, African Development Bank, European Union, United Kingdom and Japan. But the relationship between the government and the IFIs went sour again at the beginning of 2001. IMF’s major areas of concern included the stalled privatisation bill; failure of parliament to enact the pending civil service code of ethics and economic crimes bill. Consequently, in March 2001, IMF decided to withhold lending to Kenya again, citing insufficient progress in the proposed reforms. As had become routine, there was a heightened activity in terms of reform implementation in a bid to fulfil the conditionalities following the curtailment of funding. For instance the cabinet approved the re-establishment of the KACA as an autonomous body operating under the constitution. 52 The donor-government relationship depicts a carrot-and-stick approach to the reform process. It is this approach that largely ensured that major reforms were implemented. That notwithstanding, this approach raises issues of ownership of reforms since reforms became a donor agenda and were hurriedly implemented in a bid to appease donors to release funding. As it turned out, this often left little or no room for consultation with the relevant stakeholders in the design and implementation of reforms. Additionally, the manner in which discussions between IMF and government took place, in itself did not promote broad consensus, since it was often restricted to Ministry of Finance and Central Bank. Although donors eventually managed to push their agenda through, there are cases when such a move would be met by stiff domestic resistance especially on sensitive reform issues like civil service reform or where the proposed reforms threatened rent seeking and other economic and political interests of the ruling elite. The fact that implementation of reforms was reactive rather than proactive not only undermined local ownership but also affected sustainability of reforms. There has been lack of a clear long-term vision as IFIs have preoccupied themselves with setting and re-setting short-term targets, which the government strives to achieve if only to access funding. The problem is that, as Stiglitz (2002) contends, many of the reform policies became ends in themselves rather than means to more equitable and sustainable growth. 5.4 Economic Outcomes Economic reforms are often undertaken with the aim of promoting high growth and improved welfare in the long-run. For instance, trade liberalization measures are undertaken on the assumption that they will eventually improve the exports and economic growth (Mwega 1999). Trade liberalization was also expected to lead to a diversification of exports with the discovery of new markets and products. Following liberalization of the foreign exchange in 1993, there was an immediate positive response in terms of imports and exports. In particular, the export response seems to have been combined with a price effect due to a steep devaluation of the Kenya shilling in 1993. In totality, the effect was a rise in export earnings. Export earnings rose from 13% of GDP in 1992 to over 20% between 1993 and 1996. 53 However, in general, export growth has been highly erratic, based on fluctuations in earnings from a few traditional primary commodity exports and the tourism sector. Figure 3 shows the value of commodity exports and total value of exports of goods and services, both as a proportion of GDP. The trend of total export value of goods and services mimics that of commodity exports, underscoring the importance of the latter in total export value. While certain non-traditional exports such as horticultural products have experienced rapid growth in the last few decades, manufactured goods make only a small proportion of total exports— mainly targeting the EAC and Common Market for Eastern and Southern Africa (COMESA) markets. Kenya’s trade share (value of imports plus exports in GDP), which is a commonly used indicator of openness, shows no clear trend but has been over 50% since the 1970s, reaching the peak in the first half of 1990s, following liberalization of the foreign exchange market. The value of exports of goods and services as a percentage of GDP has been below 30 percent except for a few years, particularly 1993 following the steep depreciation of the shilling (see Figure 3 and Table 2). 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 value as a proportion of GDP Figure 3: Export value as a proportion of GDP total export value/GDP commodity export value/GDP Table 2: Key Macroeconomic Aggregates Variable 1975- 1980- 1985– 1990- 1997– 79 84 1989 1996 2001 (% Volume change) 54 Real GDP 5.6 3.4 5.2 2.3 1.2 Private investments 3.2 0.9 10.2 1.3 0.4 Government investments 5.9 0.5 9.3 5.4 -0.5 Exports of goods and services -1.9 0.6 6.2 7.1 2.0 Imports of goods and services 0.3 -5.5 8.4 9.5 1.8 (% 3.0 0.8 4.0 3.5 1.5 Wage employment (private & government) 0.9 1.1 1.3 1.5 1.7 Informal sector employment (millions) 0.3 0.35 1.6 3.8 Total investments (% of GDP) 24.3 20.2 16.4 24.3 Total Savings (% of GDP) 10.6 13.2 9.3 10.6 Wage employment—private sector change) (millions) Value of imports and exports as % of GDP 62.7 57.1 50.7 64.7 60.8 Value of Exports as % of GDP 30 26 23.5 32 26 Population (in millions) 14.1 17.1 20.3 24.0 29.5 Nominal exchange rate (Ksh/US $) 7.8 11.1 17.5 43.6 68.9 Short-term interest rate (TBR-91 days) 4.8 10.5 13.4 23.7 17.1 9.9 21.3 6.6 -3.8 -1.5 -3.2 Monetary variables Inflation Current account (% of GDP) -5.6 -6.4 Source: computed from KIPPRA-Treasury Macro Model (KTMM) In general, the real GDP growth rate has been highly erratic, but depicts a declining trend over time (see Figure 4 and Table 2). Growth performance has remained depressive in the 1990s and in the new millennium, with a declining growth in volume of investments (both private and public) and exports. The value of total investment to GDP ratio has remained below 25 percent while total savings as a proportion of GDP has been about 11 percent. Given the population growth rates of about 2 % per annum in recent decades, it is evident that real per capita income has been on decline since the mid-1990s. This partly accounts for the declining wage employment in the formal sector, leading to a surge in the informal sector employment. The Welfare Monitoring Survey II of 1994 estimated unemployment at 21.3% of the population aged 15 years and above excluding students. The formal sector 55 constitute only a small proportion of the economy and many activities are largely undertaken in the informal sector, which has expanded rapidly in recent years. Figure 4: Trend in Real GDP growth, 1966-2002 14 real GDP growth 12 10 8 6 4 2 real gdp 19 94 19 96 19 98 20 00 20 02 90 92 19 19 86 88 19 19 82 84 19 19 78 80 19 19 74 76 19 19 19 19 19 19 66 68 -2 70 72 0 Linear (real gdp) The monetary variables—exchange rate, short-term interest rate and inflation have remained fairly stable over time except in 1993 when they sky-rocketed (see Table 2 and Appendix Table 2). 1993 is a unique year in Kenya’s economic history, as this is the year when there was a major turbulence in many macroeconomic variables. This can be attributed to economic as well as political factors following the rise to multi-party democracy and the financial scams that were linked to the Goldenberg scandal. From the analysis, this is largely a political business cycle. The literature on political business cycle postulate that parties in power will manipulate policy in the short run in order to maximize their electoral chances (Haggard and Web 1993). KANU used the financial sector for such manipulation in order to finance its election bid. Poverty remains widespread, and by 2000, 56% of the population was estimated to be below the poverty line (Mwabu et al., 2002). With an estimated population of about 31 million, the population structure exhibits a high dependency ratio (107 dependents for every 100 active persons), with almost half of the population below age 15. Although Kenya holds key 56 potential in spearheading economic development in the region, the challenges that lay ahead cannot be overemphasized. 6. Winners and Losers Although its ultimate goal is a better-off society, reform has distributive consequences, resulting into winners and losers in the process (Fidrmuc and Noury, 2003). However, given the multiplicity and dynamism of reform, it is not that easy to precisely identify winners and losers. Moreover, reform might benefit one sector while hurting another sector. In general, the beneficiaries of economic liberalisation were largely the capitalists, traders, firms that were able to compete, and large-scale exporters. One of the most affected sectors following trade liberalization was the local textile industry, which collapsed due to cheap imports. Consequently, the cotton industry also collapsed.16 The resultant unemployment affected a wide range of people given the backward and forward linkages in the textile industry. These included farmers (cotton growers), employees in the cotton and textile factories, and middlemen and women. Small-scale traders proliferated the industry with sale of imported second hand clothes. Poor farmers and low-skilled income earners are likely to have been disproportionately affected, but arguably, they benefited to the extent that they could easily access cheaper imported second hand clothes and other domestic products. Business associations like KAM benefited to the extent that they were able to easily and cheaply access imported capital and intermediate goods. Trade liberalisation also opened avenues for non-traditional agricultural exports such as horticulture. On the losing front were small-scale farmers with lack of credit and technological skills to access the world markets. Others included Sanyo, a Japanese- Kenya joint venture in electronics. To the extent that the protective trade regime provided avenues for rent seeking, losers also included individuals who benefited from the system by rent-seeking. In the financial sector, there has been a concentration of banks in the urban areas, which target upper and middle-income earners, thus shutting out the majority of rural population as well as low-income earners and the working poor in urban areas. Additionally, the lending rates have been relatively high, thereby denying potential borrowers access to credit facilities. 16 Currently, there are plans to revive the cotton industry under the African Growth and Opportunity Act (AGOA). 57 These include small-scale firms, businesses and entrepreneurs. Reforms in other sectors such as health, education and civil service disproportionately affected the poor and the vulnerable groups. With the introduction of user charges in public health institutions, the losers were majority of the poor who have been unable to afford basic modern health care and the vulnerable groups such as mothers and children. Owino and Were (1998) found that compensatory system of waivers and exemptions was no longer operational in many public health facilities and potential beneficiaries were not even aware of such a system. Most poor families have also been unable to give their children basic education. Thanks to the programme of free primary education under president Kibaki’s new government, there has been a surge in primary school enrolment. The victims of retrenchment programme were mainly employees in the lower cadres in civil service, who, given the little compensation package and massive unemployment exacerbated by poor economic performance, often joined the pool of the poor. Overall, it can be argued that distributional consequences of reforms deepened the asymmetries in incomes and access to resources. 7. Conclusion Kenya’s path to reforms was largely driven by external pressure from donors, particularly the IFIs, as well as domestic economic crisis following the effects of the oil crises in the 1970s and economic mismanagement. Initially, the government was not willing to dismantle the protective economic regime, which was also attractive for rent-seeking opportunities and political patronage. This was exacerbated by the political uncertainty of large-scale reform implementation. Though reluctantly, Kenya embarked on the reform process under SAPs in the early 1980s, as borrowing from abroad was predicated on undertaking certain reforms in the form of conditionalities. However, it was not until the 1990s that comprehensive reforms were implemented. Even then, development partners exerted a lot of pressure, adopting carrot-and-stick approach to ensure reform implementation. Stringent conditions leading to suspension of funding kept the government on its toes. In particular, IFIs set the pace and the reform agenda through 58 out the reform process. Donor conditionalities were broadened to include political democracy and good governance besides the traditional economic policies. Thus, the reform period also coincided with political reforms, a major component of which was change to multi-partyism and agitation for constitutional reform. Besides the donors, civil society and religious groups played a critical role, particularly in pushing for political reforms Weak commitment to the reform process strained relationship between the donors and the government, leading to stop- go pattern in lending and reform implementation. Although the government announced policy reforms in National Development Plans and prepared policy papers to demonstrate its commitment, the implementation process was often characterised by delays, non-commitment and policy reversals, leading to lack of consistency. Weak commitment was rooted in the political structure that was not supportive of both political and economic reforms, especially because of the vested interest groups, which feared losing their political patronage and power bases. For example, it was difficult to reduce the size of the public sector since public institutions had become conduits of patronage, particularly by the executive. Even when the president appointed reformists or team of experts to drive the reform process, there was limited space for manoeuvre, as the political interest groups such as the inner cabinet were always a hindrance. The IFIs used aid and donor funding as a bargaining tool. Knowing this, the government, mainly with the president’s tactful intervention, would dance to the music by donors to access funding only to relax once the funds were obtained. The reform process hence became a stop-go affair, sometimes undertaken simply to hoodwink donors. The process was reactive rather than proactive. As a result, there was weak ownership of reforms.17 Moreover, there was no specific attempt to coordinate and prioritise reforms. Implementing Ministries looked at the reforms with suspicion as nobody got to know what the other was doing or what was next. Each Ministry could be given a paragraph to implement without any knowledge on how the whole idea was conceptualised and how it linked with other Ministries. Thus, the reform agenda failed to spell out a clear long-term path. The IFIs 17 As one government officer once commented, the reform agenda was viewed as the donors’ baby, such that every time the donor team left the country, reform agenda became orphaned. 59 themselves also lacked a clear focus, as they preoccupied themselves with short-term targets and failed to view reform a whole. It is thus, not entirely surprising that issues of timing and sequencing were often not taken into consideration. They also took institutional capacity and political constraints for granted. Given weak institutional framework and ownership of reforms, sustainability was and still remains a real challenge. Enforcing the right institutional infrastructure was itself a major challenge, given the influence of interest groups with political connections within government. Policy reversals and uncertainty about the reform can be attributed to lack of a clear analysis of the reform impact, poor preparation and limited consultation in the design and implementation, as reforms were often hastily implemented due to donor pressure. This was made worse by the closed decision-making system. In some cases, the reversals were made as a way of minimizing the short run cost of the reforms or inherent political uncertainty. That notwithstanding, the government made a bold move in implementing reforms such as trade liberalisation, which, it was feared, would cause many firms to lose. Other reforms, however, proved sensitive and difficult to implement, especially those with immediate welfare implications on wider population such as cost-sharing in health sector, liberalisation of basic commodities like cereals, and down-sizing of the civil service. These were associated with high political uncertainty given the majority of the losers were bound to be common citizens, who also form the majority of voters. Hence there were delays and reversals. Despite undertaking the market-oriented reforms, results show marginal gains with economic growth and investment. Economic growth has been dismal, especially in the 1990s. On the social front, poverty worsened, having been estimated to be 56% by 2000. Overall, reforms disproportionately affected the poor and other vulnerable groups—smallscale farmers with less ability and technological skills to access the world markets, employees in lower cadres in the civil service, and mothers and children in the case of health sector. The beneficiaries were largely the capitalists, traders, and firms with the ability to compete. In general, the distributional consequences of reforms deepened the asymmetries in income and access to resources. 60 61 References Anyang’ Nyong’o, P. 1989. “State and Society in Kenya: The Disintegration of the National Coalitions and the Rise of Presidential Authoritarianism.” African Affairs Vol. 88 No. 351. Anyang’ Nyong’o, P. (ed.) 2000. The Context of Privatization in Kenya. Nairobi: African Academy of Sciences. Aseto, O. and J. Okello. 1997. Privatization in Kenya. Nairobi: Basic Books. Barkan, J. (ed.) 1995. Beyond Capitalism Vs Socialism in Kenya and Tanzania. Nairobi: East African Educational Publishers Limited. Bates, R., A. Greif., M. Levi., and J.L. Rosenthal. 1998. Analytical Narratives. Princeton, N.J: Princeton University Press. Bates, R; A. Greif; M. Levi; J-L. Rosenthal; and B. Weingast. (2000), “Analytical Narratives Revisited.” Social Science History 24: 4, pp. 685-696. Baumol, W. 1990. “Entrepreneurship: productive, unproductive and destructive.” Journal of Political Economy, 98(5): 893-921. Coase, R. 1992. “The Institutional Structure of Production,” American Economic Review, pp 713-719. Collins, D., J.D. Quick., S. N. Musau., D. Kraushaar and Hussein, I.M. 1996. “The fall and rise of cost sharing in Kenya: impact of phased implementation”, Health Policy and Planning , vol. 11 No. 1, pp52-63. Deyo, F. 1989. Beneath the Miracle: Labour Subordination in the New Asian Industrialism. Berkely: University of California Press. Drazen, A. 2002. “Conditionality and Ownership in IMF Lending: A Political Economy Approach.” IMF Staff Papers, Vol. 49, Special Issue. Washington, D.C: IMF. Fanelli, J.M. 2003. “Understanding Reform: A Global GDN Research project.” A paper prepared for the GDN Workshop on Understanding Reform in Cairo on January, 1617. Fidrmuc, J. and Noury A, G. 2003. “Interest Groups, Stakeholders, and the Distribution of Benefits and Costs of Reform.” A paper presented at the GDN Workshop on Understanding Reform in Cairo on January, 16-17. 62 Gatheru, W. and Shaw, R. 1998. Our Problems, Our Solutions: An Economic and Public Policy Agenda for Kenya. Nairobi: Institute of Economic Affairs. Grindle, M. and J.W. Thomas. 1990. “After the decision: Implementing Policy Reform in Developing Countries,” World Development, 18(8): 1163-81. Haggard, S. 1990. Pathways from the Periphery: The Political Economy of Growth in Newly Industrializing Countries. Ithaca, N.Y.: Cornell University Press. Haggard, S. and S. B. Webb. 1993. “What do we know about the political economy of economic policy reform?” The World Bank Research Observer, Vol. 8, No. 2, pp.143168. Helleiner, G.K. 1992. “Structural Adjustment and Long-term Development in Sub-Saharan Africa,” in Stewart, F., Sanjaya, L., and Wangwe, S(eds.), Alternative Development Strategies in Sub-Saharan Africa. London: The Macmillan Press Ltd. Hempstone, S. 1997. Rogue Ambassador: An African Memoir. Tennessee: University of South Press. Husain, I and R. Faruqee,(eds.) 1994. Adjustment in Africa: Lessons from Country Case Studies. Washington, D.C: World Bank. Hyden, G. 1995. “Party, state and civil society: control versus openness,” in Barkan, J.D.(ed.), Beyond Capitalism Vs Socialism in Kenya and Tanzania. Nairobi: East African Educational Publishers Limited. Ikiara, G.K. 2000. “A Review of Kenya’s Public Sector,” in Nyong’o, P.A. (ed.,), The Context of Privatisation in Kenya. Nairobi: African Academy of Sciences. Kahler, M. 1992. “External Influence, conditionality, and the Politics of Adjustment,” in Haggard, S. and R. R. Kaufman (eds.), The Politics of Economic Adjustment: International Constraints, Distributive Politics and the State. Princeton University Press. Kenya Association of Manufacturers (KAM), 1988. Price Controls: Experiences and Opportunities in Kenya’s Manufacturing. Nairobi: English Press. Khan, M. H. 2002. “State Failure in Developing Countries and Strategies of Institutional Reform.” Draft paper for ABCDE Conference, Oslo 24-26 June. Kirira, N. 2002. “Report on Domestic Debt Study 1990-2000.” A Report prepared for the World Bank, Nairobi. 63 Leite, S. P. 1993. “Coordinating public debt and monetary management,” Finance and Development, March, pp. 30-33. Levi, Margaret (2001) “Modeling Complex Historical Processes with Analytic Narratives,” http://www.yale.edu/probmeth/papers.htm Levi, Margaret (2003), “Puzzles, Problems, and Political Economy: The Role of Analytic Narratives,” Paper prepared for Ian Shapiro, Rogers Smith, and Tarek Mosud, eds. Problems and Methods in the Study of Politics. Liew, L.H., L. Bruszt and L. He. 2003. “Causes, National Costs and Timing of Reforms.” A revised version of the paper prepared for the Global Development Network Workshop on Understanding Reform, Cairo, January 2003. Loayza, N.V. and Soto, R. 2003. “On the Measurement of Market-Oriented Reforms.” A paper presented at the GDN Workshop on Understanding Reform in Cairo on January, 16-17. Munene, M., J.D.O. Nyunya and K. Adar (eds.) 1995. The United States and Africa: From Independence to the end of Cold War. Nairobi: East African Educational Publishers Limited. Mwabu, G. 1995. “ Health care reform in Kenya: a review of the process” in Berman, P.(ed.), Health sector reform in developing countries: Making health development sustainable. Department of Population and International Health: Harvard School of Public Health. Boston: Harvard University Press. Mwabu, G; M.S. Kimenyi; P. Kimalu; N. Nafula; and D.K. Manda. 2002. “Predicting household poverty: A methodological note with a Kenyan Example.” KIPPRA Discussion Paper Series. Nairobi: KIPPRA. Mwega, F. 1999. “Trade Liberalisation, credibility and Impacts: A Case Study of Kenya, 1972-94”, in Oyejide, A., B. Ndulu and J. W. Gunning (eds.), Regional Integration and Trade Liberalisation in Sub-Saharan Africa. Volume 2: Country Case-Studies. London: Macmillan Press Ltd. Ndung’u, N. 1993. “Dynamics of the inflationary process in Kenya.” Gotenborg: Gotenborg University. Ng’ethe, H. and W. Owino.1998 (eds.), 1998. From Sessional Paper No. 10 to Structural Adjustments: Towards Indegenizing the Policy Debate. Nairobi: Institute of Policy Analysis and Research. 64 North, D. 1997. “The Contribution of the New Institutional Economics to an Understanding of the Transition Problem,” WIDER Annual Lectures, March 1997. O’Brien, F. S. and T. C. I. Ryan, (2001), “Mixed Reformers: Kenya,” in Devarajan, S., D.R. Dollar and T.Holmgren(eds.). Aid and Reform in Africa: Lessons from Ten Case Studies. The World Bank: Washington D.C. Odhiambo-Mbai, C. 1998. “The Nature of Public Policy-Making in Kenya: 1963-1996,” in Ng’ethe N and W. Owino (eds.), From Sessional Paper No. 10 to Structural Adjustments: Towards Indenizing the Policy Debate. Nairobi: Institute of Policy Analysis and Research. Okoth-Ogendo, H.W.O. 1972. “The Politics of Constitutional Change in Kenya since Independence 1963-1969,”African Affairs Vol. 71, No.282. Olson, M. 1965. “Some Social and Political Implications of Economic Development,” World Politics 17, April. Olson, M. 1990. “Autocracy, Democracy and Property.” University of Maryland, Department of Economics, College Park. Processed. Owino, W. and M. Were. 1998. “Enhancing Health Care Among the Vulnerable Groups: The Question of Waivers and exemptions”. IPAR Discussion Paper Series. DP No. 014/98. Nairobi: Institute of Policy Analysis and Research. Oyugi, W. O. 1994. “The uneasy alliance: party state relations in Kenya” in Oyugi, W. O. (ed.), Politics and Administration in East Africa. Nairobi: East African Educational Publishers. Pill, H. and M. Pradhan. 1997. “Financial liberalization in Africa and Asia,” Finance and Development, 34(2), June, pp. 7-10. Qian, Y. 2001. “How Reform Worked in China.” Department of Economics, University of California, Berkeley. Remmer, K.L. 1997. “Theoretical Decay and Theoretical Development: The Resurgence of Institutional Analysis,” World Politics 50.1, pp.34-61. Republic of Kenya, 1965. Sessional Paper No. 10 of 1965 on African Socialism and its Application to Planning in Kenya. Nairobi: Government Printer. Republic of Kenya, 1980. Sessional Paper No. 4 of 1980: Economic Prospects and Policies. Nairobi: Government Printer. Republic of Kenya, 1986. Sessional Paper No. 1 of 1986 on Economic Management for Renewed Growth. Nairobi: Government Printer. 65 Republic of Kenya, 1996. “Economic Reforms for 1996-1998: The Policy Framework Paper.” Prepared by the Government of Kenya in collaboration with the IMF and the World Bank. Republic of Kenya, 1996. Welfare Monitoring Survey 1994. Republic of Kenya, 1998. “Policy Paper on Public Enterprise Reform and Privatization.” Nairobi: Ministry of Finance. Republic of Kenya, 2001. Poverty Reduction Strategy Paper for the Period 2001-2004. Nairobi: Government Printers. Republic of Kenya, 2002. National Development Plan 2002-2008. Nairobi: Government Printers. Rius, A. and N. van de Walle. 2003. “Political Institutions and Economic Policy Reform.” A paper presented at the GDN Workshop on Understanding Reform in Cairo on January, 16-17. Romer, D. 2001. Advanced Macroeconomics. Second edition. New York: McGraw-Hill. Ryan, T.C.I. 2002. Policy Timeline and Time Series Data for Kenya: An Analytical Data Compendium. KIPPRA Special Report No. 3. Nairobi: KIPPRA. Stallings, B. 1992. “International Influence on Economic Policy: Debt, Stabilization and Structural Reform” in Haggard, S. and R. R. Kaufman (eds.), The Politics of Economic Adjustment: International Constraints, Distributive Politics and the State.. Princeton University Press. Stiglitz, J. 2002. Globalization and its Discontents. England: Penguin Books. Stiglitz, J. 1999. “Whither Reforms? Ten Years of the Transition.” A paper prepared for the Annual Bank Conference on Development Economics, Washington, D.C., April 2830. Swamy, G. (1994). “Kenya: Patchy, intermittent commitment,” in Husain, I and Faruqee, R (eds.), Adjustment in Africa: lessons from country case studies. Washington, D.C: World Bank. Tamarin, M. 1978. “The roots of political stability in Kenya,” African Affairs Vol.78, No. 308. Throup, D. and C. Hornsby.1998. Multi-Party Politics in Kenya. Oxford: James Currey. Wade, R. 1990. Governing the Market: Economic Theory and the Role of the Government in East Asian Industrialization. Princeton University Press. 66 Wagacha, M. 2000. “Analysis of liberalization of the trade and exchange regime in Kenya since 1980.” IPAR Discussion Paper Series: DP No. 023/2000. Nairobi: Institute of Policy Analysis and Research (IPAR) Were, M; A. Geda; S.N. Karingi; and N.S. Ndung’u. 2001. “Kenya’s exchange rate movement in a liberalized environment: An empirical analysis.” KIPPRA Discussion Paper No. 10. Nairobi: KIPPRA. Were, M; G. Alemayehu., N.S. Ndung’u., and S.N. Karingi. 2002. “Analysis of Kenya’s Export Performance: An Empirical Evaluation”. KIPPRA Discussion Paper Series, DP No. 22. Nairobi: The Kenya Institute for Public Policy Research and Analysis. White, H. 1997. “Aid and Economic Reform,” in Kayizzi-Mugerwa, S. (ed.,) The African Economy: Policy, Institutions and the Future. Routledge Studies in Development Economics. Williamson, O. 1994. “Institutions and Economic Organization: The Governance Perspective,” Annual Bank Conference on Development Economics, The World Bank. 67 Appendix Table 1: Summary of the Reform process Phase Dominant reforms Political environment 1980-1984 Attempts to import controls Macro and stabilization Constitutional reforms to consolidate political power 1985-1991 1991-1996 1997 - 2001 remove fiscal Import liberalization Export promotion schemes and incentives Tariff Reduction Political repression Political reform Trade liberalization Capital controls relaxed Financial liberalization Cost sharing in social sector Civil service reform (first phase) Shift to multiparty system Attempts to fulfill the conditions set by donors on governance/corruption Civil service reform Fiscal reforms (MTEF etc) Parastatal reforms Constitutional review committee is formed paving way for constitutional Public and donor demand for a democratic political system Call for constitutional reform Governmentdevelopment partner relationship Government compelled to implement economic reforms for continued assistance to macroeconomic stability Deterioration in donor-government relationship, as political reform became a condition for disbursing funds. Suspension of BOP support in 1991 Curtailment of donor funding Conditionalities broadened to include governance issues Resumption of donor funding in 1993 Donors hands-off Suspension of funding in 1997 and 2001 1 Implementation strategy Key actors or pushers of reform Issues of concern Broad approach Development partners Lack of government commitment to the reform process Sectoral approach adopted and programmes planned for different sectors Civil society, multilateral and bilateral donors, and business community Unfavorable political system Government officers who posed as reformist were given the responsibility. Speedy implementation of reforms especially before 1994 President appointed a team of experts to push the reforms and reduce corruption in government Multilateral and bilateral donors, Civil society Clergy/Churches KAM Limited move with public sector reforms based Donors and civil society Government commitment governance wanting to issues Experts given the responsibility found it difficult to penetrate the politics reform Appendix Table 2: Macroeconomic Indicators PERIOD 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 GDP 5.23 4.62 4.01 3.06 2.89 4.40 8.13 7.66 4.92 3.99 5.97 3.40 3.04 0.35 5.13 5.54 4.87 5.14 5.09 4.21 2.08 0.48 0.24 3.03 4.82 4.64 2.36 INVEST 25.3 23.2 21.2 30.8 20.5 23.0 27.0 34.3 26.1 35.4 33.3 26.4 25.0 25.5 25.5 21.8 24.3 25.0 24.7 24.3 21.3 16.9 17.6 19.3 21.8 20.4 18.5 NETRES 1,200 1,331 1,546 962 534 1,446 3,610 1,954 3,275 1,830 128 (2,167) (1,027) (374) (1,975) (411) (2,159) (3,651) (2,370) (5,450) (7,945) (5,975) 30,146 15,903 23,546 47,434 55,669 RES 1,230 1,416 1,603 1,347 1,427 2,301 4,259 2,732 4,780 3,784 2,577 2,957 5,459 6,444 6,807 7,115 4,753 5,558 7,310 6,630 5,339 6,315 34,527 28,227 25,683 47,266 44,499 BOP (43) 84 269 (220) 72 (317) (306) (160) 98 62 (52) 137 (25) (44) 122 (93) (44) (257) 412 62 (142) 39 120 CAB (220) (120) 35 (661) (495) (878) (563) (308) (50) (130) (118) (47) (503) (472) (590) (527) (213) (180) 71 98 (400) (74) (377) GCON 91.84 77.13 84.42 89.50 76.99 76.97 93.58 79.42 66.74 77.14 63.17 64.58 83.20 73.36 74.22 72.86 65.20 71.91 67.20 66.49 57.19 58.61 51.72 44.70 47.84 54.43 59.36 2 DEF -2.6 -5.7 -4.4 -3.0 -6.0 -6.1 -3.1 -2.4 -6.1 -2.5 -7.5 -7.7 -2.4 -3.7 -3.7 -4.8 -7.5 -3.7 -3.8 -4.3 -5.0 -1.3 -4.5 -5.8 -1.3 1.2 -2.2 GEXP 19.4 24.2 21.0 21.0 26.9 25.8 21.0 28.2 32.8 31.0 35.3 34.4 26.6 29.1 23.5 25.1 28.5 25.1 26.7 28.2 29.7 26.7 28.0 33.9 31.0 28.5 27.2 GREV 16.7 18.4 16.5 18.0 21.0 19.7 17.9 25.7 26.2 28.0 26.8 26.0 23.7 24.6 19.3 19.5 20.3 20.4 21.4 21.2 22.4 22.1 20.9 25.8 26.9 27.6 24.1 GDC 5.3 11.5 12.4 18.7 27.5 25.4 19.4 25.7 25.4 24.4 33.4 41.1 33.6 33.4 32.2 37.9 40.5 35.0 31.4 39.0 37.1 31.5 28.2 37.3 32.2 29.1 27.3 PSC 87.6 82.2 81.4 76.8 64.7 65.4 70.4 70.8 68.1 72.5 64.3 55.1 59.3 59.2 60.6 55.3 49.2 53.4 58.7 52.1 53.4 59.4 63.7 54.3 59.4 62.3 64.1 LEND 9 9 9 9.5 10 10 10 10 10 10.58 12.42 14.5 15.83 14.42 14 14 14 15 17.25 18.75 19 21.07 29.99 36.24 28.8 33.79 30.25 TBILL 1.42 3.45 1.92 4.63 6.08 5.54 2.13 4.29 6.01 5.26 7.61 12.58 14.15 13.24 13.9 13.23 12.86 13.48 13.86 14.78 16.59 16.53 49.8 23.32 18.29 22.25 22.87 EXR 7.143 7.143 6.9 7.143 8.26 8.31 7.947 7.404 7.328 7.569 10.286 12.725 13.796 15.781 16.284 16.042 16.515 18.599 21.601 24.084 28.074 36.216 68.163 44.839 55.939 55.021 62.678 INF 8.89 17.33 16.06 10.47 13.53 14.77 7.80 13.16 12.23 22.30 12.83 9.75 12.25 5.16 6.25 9.91 11.09 13.31 17.55 25.01 43.46 29.80 0.50 7.87 10.91 1998 1.77 17.3 53,787 47,103 74 (363) 61.60 -0.8 26.6 25.1 28.0 59.1 29.49 22.83 61.906 5.44 1999 1.42 16.1 55,121 57,816 87 (90) 61.56 -0.7 27.6 26.2 23.4 59.7 22.38 13.87 72.931 4.48 Source: IFS and KIPPRA Key: GDP is gross domestic product growth rate; INVEST is investment rate defined as the ratio of gross investment to GDP; NETRES is net foreign reserves; RES is foreign reserves; BOP is balance of payment (US$M); CAB is current account balance (US$M); GCON is ratio of government consumption to total government expenditure; DEF is the ratio of budget deficit to GDP; GEX is the ratio of government expenditure to GDP; GREV is the ratio of government revenue to GDP; GDC is public sector credit to net domestic credit; PSC is private sector credit to net domestic credit; LEND is nominal lending rate; TBILL is the nominal treasury bill rate; EXR is the exchange rate (Kshs/US$); INF is the inflation rate. Appendix Table 3: Donor Funding (in US $ Million) Year 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 Growth in Growth in Grant Net BOP TA Gross Net ODA ODA including Debt (%) Loans Forgiveness Gross ODA ODA Support Grant ODA (%) 35.5 30.6 66.1 57.5 27 42.2 37.8 80 67 21.0 16.5 55.7 85.8 141.5 72.3 76.9 7.9 87.1 54.1 141.2 95.8 -0.2 32.5 77.8 72.9 150.7 119.4 38 27 6.7 24.6 98.2 89.4 187.6 130.6 75.7 24.5 9.4 148.8 109.9 258.7 160 44.3 37.9 22.5 139.9 113.7 253.6 165.2 5 -2.0 3.2 168.8 174.6 343.4 252.5 35.4 52.8 213.1 218.9 432 350.6 25.8 38.9 232.1 248.8 480.9 396.5 162.4 128 11.3 13.1 237.1 298.7 535.8 449.3 37.7 128 11.4 13.3 317.8 260.2 578 485.1 249.7 115.8 7.9 8.0 242.6 277 519.6 400.5 139 122.1 -10.1 -17.4 3 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 373.5 215 287.9 352.5 387.3 538.3 405 461.2 329 329 256 566 359 171 194 120 308 282.1 311.5 349.2 400.1 567.1 553.6 1185.3 640.9 659.6 552.1 503.8 463.4 388 382 350 336 340 655.6 526.5 637.1 752.6 954.4 1091.9 1590.3 1102.1 988.6 881.1 759.8 1029.4 747 553 544 456 648 411.1 438.7 458 572 809 967 1053 873 894 911 677 732 606 458.9 473.9 290 147 125 30 271.5 320.6 281.2 172.6 1.2 192.6 46.6 124.1 115.8 109.6 116.9 156.3 154.5 178.4 174.7 208.3 222.9 281.5 260.3 191 220 192 180 151 140 138 26.2 -19.7 21.0 18.1 26.8 14.4 45.6 -30.7 -10.3 -10.9 -13.8 35.5 -27.4 -26.0 -1.6 -16.2 42.1 2.6 6.7 4.4 24.9 41.4 19.5 8.9 -17.1 2.4 1.9 -25.7 8.1 -17.2 -24.3 3.3 -38.8 Source: Policy Timeline and Time Series Data for Kenya: An Analytical Data Compendium Appendix Table 4: Analysis of Domestic and External Debt (Millions of Kenya Shillings) Fiscal years 1989/90 Total Domestic Debt 52,521 Domestic Interest 6,786.60 Growth in Domestic debt(%) Domestic debt/GDP 28.6 Total External External Debt* Interest 68,380.00 3,217.80 4 Total repayment (external debt)** Growth in Total Net Resource External disbursement Flow debt(%)* 16760.6 1990/1 10,462.40 21.09 63,597 1991/2 10,920.20 11.34 70,809 1992/3 23,775.80 58.59 112,295 1993/4 44,448.80 45.01 162,843 1994/5 25,897.00 -26.65 119,446 1995/6 29,320.80 0.76 120,356 1996/7 25,544.20 32.17 159,077 1997/8 32,037.14 7.95 171,730 1998/9 27,903.20 1.50 174,305 1999/00 21,409.40 18.26 206,127 2000/01 20,576.91 3.71 213,772 Sources: Treasury, CBK publications and Analytical Data Compendium 30.5 89,179.00 29.7 123,157 38.1 267,423 44.4 238,809 27.6 266,271 24.2 262,024 27.6 242,174 26.1 257,018 24.4 337,026 27.0 303,972 24.6 4,460.00 4,777.00 4,077.40 10,310.80 9,471.00 10,670.40 8,101.20 7,775.74 8,186.40 7,508.40 3,848.58 12,900.94 12,929.17 9,991.82 33,152.17 30,115.48 32,589.33 28,870.71 31,523.22 32,580.76 35,064.65 14,501.92 23027.9 8913.0 25007.9 45420.8 19515.1 23987.1 18903.7 23450.5 16645.9 16707.2 10,126.9 -4,016.1 15,016.0 12,268.6 -10,600.4 -8,602.2 -9,967.0 -8,072.7 -15,934.9 -18,357.4 -14,501.9 30.4 38.1 117.1 -10.7 11.5 -1.6 -7.6 6.1 31.1 -9.8 Table notes: *The increase in 1992/3 was principally due to the steep depreciation of the Kenya shilling against the dollar. **Total repayment includes interest and principle. Generally, the domestic debt has a tendency to vary depending on the source. wb52419 C:\Documents and Settings\wb52419\My Documents\Mcmahon\Understanding Reform\Third Drafts\Kenya 3rd Draft rev.doc 05/05/2005 12:07:00 PM 5