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Debt-funded projects are poverty traps, they are not development

Monday July 13 2020
SGR

A train arrives in Mombasa SGR terminus on May 30, 2019. PHOTO | KEVIN ODIT | NATION MEDIA GROUP

By KENNEDY CHESOLI

African governments often fail to demonstrate basic understanding of economic growth and development, yet this forms much of foundational economic courses.

Their fascination with large, costly infrastructure projects is not development but debt traps that would further impoverish the continent.

Debts accelerate capital flight, weaken a country’s balance sheet and undermine the capacity of the government to make investments for growth. Economic progress happens when countries make investments that improve the quality and quantity of productive resources.

Nations seek higher productivity through investments, invention, innovation and technological progress. Capital accumulation and human resources is critical in expanding output.

ECONOMIC INFRASTRUCTURE

Ideally, countries accumulate their capital not by borrowing but by saving a portion of their income and investing it in physical stock and social and economic infrastructure such as roads and electricity to facilitate, consolidate and integrate economic activities.

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Population growth is also desirable; it supports aggregate demand and augments potential labour force. There is a need for a sustained technological progress.

Capital-saving technologies that result in more efficient labour-intensive production methods are suitable for capital-poor countries.

International trade surplus can provide the inflow of foreign capital that could boost investments. This is why countries like China and the United States compete for investment and construction projects in our region.

While many of these may appear useful, they represent a direct, permanent and debilitating drain to our net worth.

Costs for flagship projects such as the SGR are thought to have be grossly inflated, making them economically unviable. Indeed, public disclosure of contracts would likely reveal just how indebted and potentially impoverished we are.

Regardless, Beijing has arguably succeeded in turning Kenya into a cash cow that would fuel its growth for many years to come.

TRADE DEFICIT

We are also losing our competitive edge in cross-border trade. A review of the country’s trade figures reveals a rapid worsening of trade deficit. Our export base remains narrow and thin — principally cut flowers, tea and coffee — and foreigners have a significant stake in the sector, which is highly susceptible to volatility in global prices and demand as well as climate change impact.

Tourism, which also earns foreign exchange, may not recover soon. With the impact and effectiveness of aid questionable, the diaspora may be the only bright source of forex that is not exploitive.

Instead of making savings to support capital accumulation, the Jubilee administration has accelerated capital flight. Rather than grow the local capacity to meet say sugar and maize demand, more resources are wasted on imports, further undermining the agricultural and manufacturing sectors. We also bleed our resources on benchmarking, workshops and conference trips overseas.

Countries fight intensely to host international events. These are important opportunities for foreign capital to be directly injected in the local economies. But we are oblivious to such opportunities.

It is imperative that counties focus on capital accumulation and technology progress to achieve economic growth. County assemblies must cut back on consumption, save more and invest in what could help expand, consolidate and integrate their output.

It is imperative to prevent capital flight by developing local capacities, rationalise imports and scale down international travel by state officials.

TRUE DEVELOPMENT

Since true development only comes from investing what we have saved, the taking out of new loans to retire old debt only makes a people poorer. We must resist the use of debt to pursue projects for political and ethnic reasons.

Furthermore, projects with undisclosed contract details are likely fraudulent, exploitive and poverty traps. These are new avenues for the continued sucking of Africa’s wealth and our corrupt governments are the enablers and collaborators.

Mr Chesoli is a New York-based development econOmist and global policy expert. [email protected] @kenchesoli

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