Empirical aspects of capital flight in Kenya, 1970-2009

Working Paper No. 08/2011 - Navarra Center for International DevelopmentCapital flight remains a fundamental academic and policy issue for developing countries. During the early 1990s the debt crisis appeared to have been contained and attention to the capital flight phenomenon waned. However, capital flight still remains a serious problem for many developing countries. The outbreak of several major financial crises in the international financial system from the mid-1990s, notably in Latin America and Asia, brought renewed attention to the phenomenon of capital flight. These crises led to large outflows of capital from developing countries and the issue of capital flight regained its importance. In many developing countries capital flight constitutes an important proportion of the very resources that are critical for financing economic growth and reversing adverse economic trends (Hermes, Lensink and Murinde 2002: 1). The magnitude of capital flight from Africa has increased considerably in recent years accompanied by widespread fluctuations and volatility (Salisu 2005: 1). Despite the progress being made by some African economies towards economic and political reforms much more reform deepening is necessary to create a conducive environment for private sector participation generally and capital flight reversal. Kenya is a typical small developing economy and has experienced challenges of trying to contain capital flight.Capital flight remains a fundamental academic and policy issue for developing countries. During the early 1990s the debt crisis appeared to have been contained and attention to the capital flight phenomenon waned. However, capital flight still remains a serious problem for many developing countries. The outbreak of several major financial crises in the international financial system from the mid-1990s, notably in Latin America and Asia, brought renewed attention to the phenomenon of capital flight. These crises led to large outflows of capital from developing countries and the issue of capital flight regained its importance. In many developing countries capital flight constitutes an important proportion of the very resources that are critical for financing economic growth and reversing adverse economic trends (Hermes, Lensink and Murinde 2002: 1). The magnitude of capital flight from Africa has increased considerably in recent years accompanied by widespread fluctuations and volatility (Salisu 2005: 1). Despite the progress being made by some African economies towards economic and political reforms much more reform deepening is necessary to create a conducive environment for private sector participation generally and capital flight reversal. Kenya is a typical small developing economy and has experienced challenges of trying to contain capital flight

Strategic options of economic integration and global trade for Africa in the 21st century

Paper presented at 2nd Alumni Reunion and Conference 21–23 November 2008, Berlin, Germany German Council on Foreign Relations (DGAP) Berlin 2009Despite huge strides in economic development made in many parts of the world over the last few decades, many people in Africa still remain in dire poverty. According to the 2007/2008 United Nations Human Development Report, the twenty countries with the lowest human development are all located in Sub-Saharan Africa. Trade has often been identified as a vital engine of economic growth and development to facilitate an African renaissance in the 21st Century. However, economic integration schemes in Africa continue to suffer from many limitations and Africa’s participation in the global economy remains miniscule. Regional integration arrangements in Africa, for example, continue to be characterized by overlapping membership and weak institutions. At the turn of the new century Africa’s share of world trade plummeted to levels below those in the 1960s when it had accounted for 2 percent of world trade. The erosion of Africa’s world trade share represents a staggering income loss of billions of dollars annually. The acceleration of globalization seems to have placed Africa at the threshold of further marginalization. With the formation of the African Union in 2002 and associated institutions such as the New Partnership for Africa’s Development (NEPAD), it appeared that there was a renewed impetus for development on the continent. A new and better calibre of African leaders emerged in some countries in the 21st century, although with some notable exceptions. This paper will explore what needs to be achieved for economic integration to be more effective in Africa and for Africa to participate more effectively in global trade. The relationship between different economic integration initiatives in Africa to global trade liberalization in the framework of the WTO will be explored. It will be argued that in order for African states to become more fully integrated in the global economy they will need to adopt a more pro-active rather than reactive approach. Such an approach will center on building more effective institutions at the national and regional levels so as to give Africa a greater voice in the 21st century. Africa’s development challenges are essentially about a crisis of institutions at the political, economic and social levels. Weak regional institutions reflect internal weaknesses of member states. The paper will explore competing conceptual constructs of regional integration in Africa with a view to arriving at a set of strategic options for enhanced effectiveness.For example, open regionalism based on neo-classical assumptions will be contrasted with the concept of “regionalism from below” which emphasizes the importance of civil society and informal organizations in regionalism. Concerns of African states arising from the existing multilateral framework and current trade round of the WTO will also be examined as will be strategic options for integrating Africa more fully into the global economy.Despite huge strides in economic development made in many parts of the world over the last few decades, many people in Africa still remain in dire poverty. According to the 2007/2008 United Nations Human Development Report, the twenty countries with the lowest human development are all located in Sub-Saharan Africa. Trade has often been identified as a vital engine of economic growth and development to facilitate an African renaissance in the 21st Century. However, economic integration schemes in Africa continue to suffer from many limitations and Africa’s participation in the global economy remains miniscule. Regional integration arrangements in Africa, for example, continue to be characterized by overlapping membership and weak institutions. At the turn of the new century Africa’s share of world trade plummeted to levels below those in the 1960s when it had accounted for 2 percent of world trade. The erosion of Africa’s world trade share represents a staggering income loss of billions of dollars annually. The acceleration of globalization seems to have placed Africa at the threshold of further marginalization. With the formation of the African Union in 2002 and associated institutions such as the New Partnership for Africa’s Development (NEPAD), it appeared that there was a renewed impetus for development on the continent. A new and better calibre of African leaders emerged in some countries in the 21st century, although with some notable exceptions. This paper will explore what needs to be achieved for economic integration to be more effective in Africa and for Africa to participate more effectively in global trade. The relationship between different economic integration initiatives in Africa to global trade liberalization in the framework of the WTO will be explored. It will be argued that in order for African states to become more fully integrated in the global economy they will need to adopt a more pro-active rather than reactive approach. Such an approach will center on building more effective institutions at the national and regional levels so as to give Africa a greater voice in the 21st century. Africa’s development challenges are essentially about a crisis of institutions at the political, economic and social levels. Weak regional institutions reflect internal weaknesses of member states. The paper will explore competing conceptual constructs of regional integration in Africa with a view to arriving at a set of strategic options for enhanced effectiveness.For example, open regionalism based on neo-classical assumptions will be contrasted with the concept of “regionalism from below” which emphasizes the importance of civil society and informal organizations in regionalism. Concerns of African states arising from the existing multilateral framework and current trade round of the WTO will also be examined as will be strategic options for integrating Africa more fully into the global economy

The security-development nexus: a structural violence and human needs approach

Paper presented at New Faces Conference 2007 Toledo International Centre for Peace (CITpax) Fundación para las Relaciones Internacionales y el Diálogo Exterior (FRIDE) Development Assistance Research Associates (DARA) 5–7 November 2007, Madrid, Spain German Council on Foreign Relations (DGAP) Berlin 2008.The security-development nexus is increasingly vital because of the realization that there can be no long-term security without development and vice versa. The linkages between the two concepts have evolved over the last few decades to eventually exhibit a certain convergence. The rise of the concept of human security has also, by its very nature, implied closer links to development. Examining structural violence and human needs, linkages between these two concepts can be explored and policy implications suggested for the security-development nexusThe security-development nexus is increasingly vital because of the realization that there can be no long-term security without development and vice versa. The linkages between the two concepts have evolved over the last few decades to eventually exhibit a certain convergence. The rise of the concept of human security has also, by its very nature, implied closer links to development. Examining structural violence and human needs, linkages between these two concepts can be explored and policy implications suggested for the security-development nexus

Testing the marshall-lerner condition in Kenya

Navarra Center for International Development WP-09/2012In this paper we examine the Marshall-Lerner (ML) condition for the Kenyan economy. In particular, we use quarterly data on the log of real exchange rates, export-import ratio and relative (US) income for the time period 1996q1 – 2011q4, and employ techniques based on the concept of long memory or long range dependence. Specifically, we use fractional integration and cointegration methods, which are more general than standard approaches based exclusively on integer degrees of differentiation. The results indicate that there exists a well-defined cointegrating relationship linking the balance of payments to the real exchange rate and relative income, and that the ML condition is satisfied in the long run although the convergence process is relatively slow. They also imply that a moderate depreciation of the Kenyan shilling may have a stabilizing influence on the balance of payments through the current account without the need for high interest ratesIn this paper we examine the Marshall-Lerner (ML) condition for the Kenyan economy. In particular, we use quarterly data on the log of real exchange rates, export-import ratio and relative (US) income for the time period 1996q1 – 2011q4, and employ techniques based on the concept of long memory or long-range dependence. Specifically, we use fractional integration and cointegration methods, which are more general than standard approaches based exclusively on integer degrees of differentiation. The results indicate that there exists a well-defined cointegrating relationship linking the balance of payments to the real exchange rate and relative income, and that the ML condition is satisfied in the long run although the convergence process is relatively slow. They also imply that a moderate depreciation of the Kenyan shilling may have a stabilizing influence on the balance of payments through the current account without the need for high interest rates

Emerging trends and concerns in the economic diplomacy of African states

Increased globalisation has played a key role in shaping recent trends and concerns in the economic diplomacy of African states. African states are increasingly interested in becoming more relevant actors in the global economy. The economic diplomacy of African states is primarily a diplomacy of development aimed at improving the quality of life of African citizens. Economic diplomacy at both bilateral and multilateral levels is helping to articulate the key concerns of African states. This diplomacy in recent years has been defined by the engagement of African states with non-traditional partners such as China, India and Brazil and also a strong impetus towards greater economic integration within Africa. The renewed economic growth of African states spurred a much bigger middle class and the discovery of new natural resources has helped to create a great economic interest in Africa by both Western and non-Western states that have sought to engage African governments so as to further their own interests in economic diplomacy. In order to enhance the articulation of their economic interests, African states need to overcome key trade and investment barriers that still exis

Asserting and transcending ethnic homophily: how entrepreneurs develop social ties to access resources and opportunities in socially contested environments

Research Summary In socially contested settings, it is often difficult to connect with (diverse) others, and it is unclear how entrepreneurs in these contexts may develop the social ties that previous research has shown to be valuable. We studied this subject matter in Kenya, an ethnically fractionalized society that recently experienced the decentralization of government, which required entrepreneurs to deal with both in-group and out-group ethnicities. We conducted an inductive case study of four Nairobi-based companies and captured the creative tactics that they used to transcend ethnic homophily (by defocusing from ethnicity and reframing the in-group) while also asserting ethnic homophily (by signaling tribal affiliation and leveraging others' ethnicity). We contribute to a deeper understanding of how and why entrepreneurs in socially contested settings develop social ties. Managerial Summary Entrepreneurs in socially contested settings rely on social networks to access resources and opportunities. However, it is unclear how entrepreneurs in these settings develop and use these networks. We studied this question in an ethnically fractionalized setting that recently experienced the decentralization of government: Kenya. Entrepreneurs who previously provided information technology (IT) services to the central government had to deal with both own-tribe and other-tribe contacts to receive new contracts. We studied four Nairobi-based IT firms that operated across a variety of counties and analyzed the creative tactics that entrepreneurs in this context use to cross ethnic divides while also working with own-tribe contacts. This contributes to our collective understanding of how and why entrepreneurs in socially contested settings develop diverse social ties to access resources and opportunities

The Philosophy of non-violence and its application in the management of Kenya's constitutional conflicts

The author proceeds on the basis that peace is more than the absence of war. The philosophy of non-violence as a way to achieve vital social change is evaluated.The application of non-violence in addressing Kenya’s constitutional conflicts over the last two decades is then considered in the context of key debates in conflict theory. The eventual triumph of the non-violence movement in Kenya in contributing to the adoption of a new constitution in 2010 also strengthens the case for the use of non-violence in achieving social transformation. The author concludes by briefly considering some case studies from other African countries, so as to provide an assessment of non-violence as a means of achieving needed social change

Providing context and inspiring hope: using the case method to teach public policy in developing countries

This article asks: What makes for good cases when teaching public policy in a developing country? How important is geographic proximity relative to other factors in determining relevance? Building on literature about the unique public policy needs in developing countries and the case method as a pedagogical tool, and using a survey from a program that serves midcareer professionals in Nairobi, Kenya, the authors find the following to be key criteria for case selection: being set in a comparable developing country context; representing a similar array of public problems as the local context; demonstrating alternative public policy approaches to achieve progress; and inspiring optimism and hope by virtue of overcoming barriers. The authors share information on two cases that students identified as best meeting these criteria, one set in Asia (Singapore) and the other in Latin America (Colombia)

Effect of market concentration and competition on the technical efficiency of commercial banks in Kenya

Paper presented at at the 11th Africa Finance Journal Conference, Durban, South Africa.Market structure as represented by market concentration and competition affects the technical efficiency of the banking industry. However, the direction of the relationship between market structure and technical efficiency is mixed given the existence of two opposing schools of thought, specifically the structure-conduct-performance paradigm and the efficient market hypothesis. The purpose of this research study is to determine which of these schools of thought holds in the Kenyan banking industry by studying the impact of bank competition and concentration on the technical efficiency of commercial banks in the country. The study uses interest revenue as a measure of technical efficiency while considering other factors such as bank specific risk and the macroeconomic factors. It seeks to answer the question whether a high market concentration and low market competition leads to excessively high interest revenue. The study is based on a panel dataset of the entire banking population in Kenya ranging from the years 2007-2012. It incorporates the Panzar-Rosse model to obtain the determinants of the interest revenue earned by banks and includes the Herfindahl index as one of the possible determinants. A fixed effects estimation method is employed to determine the significance of market concentration on bank interest revenue. The estimation method also gives rise to the H statistic- a key variable in the Panzar-Rosse model that serves as a measure of market competition. The results reveal that market concentration is not significant in determining the interest revenue earned by banks possibly as a result of the smaller focus that the Panzar-Rosse model directs to the effects of market concentration as represented by the Herfindahl index. They also reveal that the Kenyan banking industry faces a mildly oligopolistic structure with a H statistic of 0.23 which is statistically insignificant from zero. The low level of competition is attributed to market fragmentation as observed by the varying levels of competition from one segment to another. This market fragmentation may be based on size or on the ownership structure of the commercial banks.Market structure as represented by market concentration and competition affects the technical efficiency of the banking industry. However, the direction of the relationship between market structure and technical efficiency is mixed given the existence of two opposing schools of thought, specifically the structure-conduct-performance paradigm and the efficient market hypothesis. The purpose of this research study is to determine which of these schools of thought holds in the Kenyan banking industry by studying the impact of bank competition and concentration on the technical efficiency of commercial banks in the country. The study uses interest revenue as a measure of technical efficiency while considering other factors such as bank specific risk and the macroeconomic factors. It seeks to answer the question whether a high market concentration and low market competition leads to excessively high interest revenue. The study is based on a panel dataset of the entire banking population in Kenya ranging from the years 2007-2012. It incorporates the Panzar-Rosse model to obtain the determinants of the interest revenue earned by banks and includes the Herfindahl index as one of the possible determinants. A fixed effects estimation method is employed to determine the significance of market concentration on bank interest revenue. The estimation method also gives rise to the H statistic- a key variable in the Panzar-Rosse model that serves as a measure of market competition. The results reveal that market concentration is not significant in determining the interest revenue earned by banks possibly as a result of the smaller focus that the Panzar-Rosse model directs to the effects of market concentration as represented by the Herfindahl index. They also reveal that the Kenyan banking industry faces a mildly oligopolistic structure with a H statistic of 0.23 which is statistically insignificant from zero. The low level of competition is attributed to market fragmentation as observed by the varying levels of competition from one segment to another. This market fragmentation may be based on size or on the ownership structure of the commercial banks

Comparative analysis of economic growth in Nigeria and Kenya: A fractional integration approach

This paper is a comparative analysis of Nigeria and Kenya, the largest economies in West and East Africa respectively, on the basis of the time series properties of their economic activities through the Gross Domestic Product (GDP) and growth rate series. It further analyses how differing policy and political economy processes contributed to the two countries' economic growth trajectories despite becoming independent republics at almost the same time. We study the two economies using a long‐memory‐fractionally integrated approach. The results show a high degree of persistence in both cases. When non‐linearities are taken into account, evidence of mean reversion is found in the GDP series in the two countries. This is indicative of how the two countries in very distinct African contexts followed broadly different but, in some ways, similar paths toward economic growth since independence.pre-print277 K