Human capital, not mega-projects, will turbo-charge economy

A couple of years ago, following the release of the 2009 census, Kibera lost it’s global standing as the largest slum in Africa.

Hitherto, it was an article of faith among the poverty aficionados that Kibera had a population of a million people.

The census put the population of Kibera at a disappointingly modest 170,000 souls.

The funny thing is, the actual population could have been obtained from the previous censuses. It would also not have been too difficult to estimate it from number of registered voters. Moreover, the notion that close to a third of Nairobi’s population lived in Kibera should in itself have been sufficient cause to question the authenticity of the figure.

It is philosopher and mathematician Bertrand Russell who observed: “If a man is offered a fact that goes against his instincts, he will scrutinise it closely, and unless the evidence is overwhelming, he will refuse to believe it. If on the other hand, he is offered something which affords a reason for acting in accordance to his instincts, he will accept it even on the slightest evidence.”

There is another number, just as fantastic, that is increasingly bandied about - that Nairobi accounts for 60 per cent of Kenya’s GDP. Let us examine it. Agriculture accounts for 30 per cent of GDP directly and close to 40 per cent including indirect contribution such as agro-processing (tea factories, sugar millers, milk processing etc.). Very little if any, of this economic activity is in Nairobi. If Nairobi were to account for 60 per cent of GDP, and agriculture is 40 per cent, there is nothing left for the non-agricultural economy outside Nairobi to contribute!

So how much does Nairobi actually contribute to the economy? We do not know because the Government does not compute sub-national economic accounts.

SAME ORDER OF MAGNITUDE

There is however a simple way of arriving at a “back-of-the-envelope” estimate. If capital, both physical and human, was evenly distributed across the country, the contribution of GDP of a region should be of the same order of magnitude as its share of the labour force. Nairobi’s share of the national labour force is 10 per cent.

But we do know that Nairobi has a higher share of capital than the rest of the country, which means that output per worker will be higher than the national average. What we do not know is by how much. But even if it were double the national average, this would make Nairobi’s share of GDP only 20 per cent. It is unlikely to be as high as that, however.

We can safely put Nairobi’s share of GDP at between 15 and 20 per cent.

The latest purveyor of this urban legend is Dr Bitange Ndemo. This was in an article titled “Where economists go wrong on growth”, in which he sought to defend mega-infrastructure projects against my various critiques of them, the most recent being one in which I likened the obsession with mega-projects to cargo cults (‘Of bullet trains and delusions of mega techno-cities’). Dr Ndemo’s dodgy economic accounting is not the only deficiency in his argument, I’m afraid. His understanding of economic growth is even more suspect.

Dr Ndemo’s defence of mega-infrastructure projects rests on the contention that economic growth is not necessarily a linear process. He writes: “Dr Ndii tends to think that economic growth will always be linear. And that economic growth trajectory can be used to predict other aspects for economy because each of these aspects is either a constant or the product of a constant and a single variable.”

NEWS FOR YOU

What this unnecessarily impenetrable argument is trying to say is that economic output is not necessarily proportional to inputs. Some inputs, say a techno-city, or 5000 megawatts of power, can do magic, catapulting the economy so dramatically that, in the blink of an eye, we have caught up or even overtaken South Korea for instance. If you are one of those who’ve bought into this, I have news for you.

Economics has a very robust LINEAR model of economic growth that is able to account for all the systematic wealth differences between countries using only three inputs - labour, capital and knowledge. Human capital alone accounts for two thirds of the differences in incomes between countries.

For evidence, let us examine another urban legend. It is said, widely believed and much lamented that sometimes in the 60s and 70s, we were at the same level of development as the “Asian Tiger” economies and somewhere along the line, they left us behind. There are many pop theories as to why we lagged behind including corruption, tribalism and lack of benevolent dictators. Can the linear model of growth that Dr Ndemo is contesting explain why the Asian Tigers took off and we did not?

The two charts compare education attainment of selected countries over time. The first chart compares the Asian tigers with the big industrialised nations in 1950 and fifty years later in 2000.

The second chart compares the Asian Tigers with East Africa in 1965 and in 2000. In 1950, the US had the most educated workforce, followed by Japan, the UK, Germany and France.

None of the Asian Tigers was ahead of the western countries. Fifty years later, South Korea had a more educated labour force than all but the US; Taiwan had overtaken UK, Germany and France, and Malaysia had overtaken the UK. The overall development trajectory of the Asian Tigers closely mirrors their human capital formation.

INDUSTRIALISED ALONGSIDE ASIAN TIGERS

In the second chart, we see that in 1965 our workforce had on average, 1.7 years of education. Malaysia’s workforce had twice as much, Singapore’s had two and a half times and South Korea’s had more than three times. In fact, our human resource base in 1965 was less than what the Asian Tigers had in 1950.

The only African country with a comparable human resource to the Asian Tigers in 1965 was Mauritius. Not surprisingly, it is the only African country that industrialised alongside the Asian tigers. There never was a time that we were at par with the Asian Tigers!

We also see that we started out with a better human resource base than our East African peers, and have done better than them since. Not surprisingly, we also have done better economically by any measure. There is no mystery why we have preceded them in joining the ranks of middle-income countries.

It all fits with the linear economic model that Dr Ndemo wants to wish away. Outputs are proportional to inputs. The model is able to explain why for instance, resource poor Singapore’s income per person (US$55,000) is more than twice that of Saudi Arabia (US$25,000), even though Saudi Arabia has the money to invest and has indeed invested in all the mega-projects you could dream of.

In the words of two Asian economists Mahbub ul Haq and Khadija Haq: “The East Asian economic miracle is attributable, among other things, to the region’s sustained levels of investment in human capital over a long period. One can identify an education miracle behind the economic miracle.”

I can now restate my case. We are investing Sh300 billion or thereabouts in the standard gauge railway. A year of tertiary education costs about Sh300,000. The opportunity cost of the SGR is a million person years of tertiary education (250,000 degrees, or 500,000 diplomas). Which mega-project, the SGR or an additional million person years of tertiary education would have a bigger impact on long term economic growth rate?

CHALLENGE DR NDEMO

I would challenge Dr Ndemo and the mega-project brigade to demonstrate that any one of these mega-infrastructure projects has a higher rate of return than the equivalent investment in human capital. But the challenge is pointless. Dr Ndemo justifies the mega projects not with scientific evidence but perhaps aptly by quoting a Hollywood blockbuster Field of Dreams: “If you build, they will come.”

Unsurprisingly, Dr Ndemo’s strongest defence is of the Konza techno-city. This he justifies by anecdote, pointing out that Facebook is moving from Boston to Silicon Valley. But Silicon Valley did not drop from the sky into the wilderness. It has grown out of an industrial part started by Stanford University in the 1950s.

If Dr Ndemo had taken an evidence-driven approach, or plain common sense, he would have arrived at the conclusion that spreading the money being spent on Konza on many technology parks around our universities would be a better investment.

Unwittingly Dr Ndemo affirms my critique of the mega-infrastructure projects. He writes: “[Economists] would tell you to put the money where you would have the greatest number of people benefit from the investment. This argument would make sense if rural areas were productive enough and contributed the most towards the GDP”

We can now see why Dr Ndemo is quick to believe than Nairobi contributes 60 per cent of GDP. The figure accords with his prejudices. He already believes that most of us are low potential people, incapable of being the agents of our own development.

Development will have to be brought to us by more advanced people. That is why Dr Ndemo has no qualms spending the same poor people’s tax money to build gleaming new cities in the unspoiled wilderness to afford the purveyors of development the creature comforts they are accustomed to, so that they can come.

This seems to me, to quote Achebe, to be precisely “the cargo-cult mentality that anthropologists sometimes speak about.” Dr Ndemo is by his own admission not in the business of developing the people. He and his ilk are in the business of summoning cargo.

David Ndii is the managing director of Africa Economics

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