Explaining the economy, in mother tongue

I had the difficult but pleasant task of explaining the economy, current business conditions and taxes, on radio and television, last Monday morning.

In my mother tongue! Well, there are many concepts on the subject for which I could not find Kikuyu words. It is likely, therefore, that I performed dismally, leaving more questions than answers!

A social science, economics studies how societies manage limited resources to produce, distribute, and consume goods and services. It analyses the choices that individuals, businesses, and governments make in the face of scarcity. It looks at the behaviour of individuals and firms (microeconomics), and the economy as a whole (macroeconomics).

For moral and other reasons you cannot use laboratory experimentation like say in physics or chemistry. However, economists routinely design clever “experiments” to explain behaviour.

For instance, does tribalism have economic roots? The big ideas in economics are scarcity, supply and demand, costs, benefits, and incentives.

Scarcity arises because human beings have unlimited wants, but limited resources. This forces individuals, families, counties and nations, to make choices about how to allocate what they have. Since the entire county cannot fit in one decision-making meeting, we elect MCAs to make the county choices. Ditto the National Assembly.

Is Kenya living beyond its means?, the popular interviewer asked me. We seem unable to debate the expenditure side of the budget, I replied.

Our elected representatives pass budgets with ever-growing deficits. That means more borrowing. Oddly, they then turn around and criticise government borrowing.

Availability of products or services and our desires for them, is supply and demand. Their interaction determines market prices. Too much demand creates inflation.

The classic solution to inflation is to increase the cost of money - slowing down credit to persons and private sector - thus reduce demand, to create a balance with supply.

In big English, the government effort to create balance between supply and demand is called monetary policy. Upon succeeding in taming inflation, we make money cheaper, increasing demand. But as we have seen in recent times, commercial banks, who are the transmission mechanism for those efforts, do not always play ball.

Incentives motivate individuals and businesses to act in a certain way, influencing economic decisions. Costs and benefits is the idea of evaluating the trade-offs involved in any decision, weighing the advantages against the disadvantages.

If you are a bank manager, it is much easier to lend to government, which is relatively risk free, than to look for small businesses in Gikomba to lend to.

Inflation, economic growth, unemployment, and public policy affect the entire economy and not just an individual firm, hence the term macroeconomics.

The behaviour of individual economic agents such as households and firms, and their resource allocation decisions are often based on feelings particularly trust and confidence.

When individuals and firms believe that the future will be bright – consumer and business confidence - they will tend to increase consumption and investments, and borrow to do so. Conversely, when they are pessimistic about the future, they slow down.

This is true even when actual data, such as the level of inflation or the stability of the exchange rate, may suggest otherwise. So today, the macros are right, but sentiment has stubbornly refused to improve. As a result, we have no money in our pockets, and find difficult to believe that inflation is down.

Economics has wide application. It is centrestage in finance, business, engineering, politics, psychology, and health. Its ideas shape our understanding of choices, how markets function, and what factors influence the overall economic health of our republic.

Today, government is criticised for crowding out the private sector in the credit market, and inability to fix the failed credit transmission mechanism.

Are we overtaxed, the interviewer asked? Though pay-slips are feeling the weight, as a nation we are not.

The proportion of national income going to taxes is 14 percent, compared to Uganda where it is 13.6 percent. Some of the highest tax-to-GDP ratios in Africa are in Tunisia (33.5 percent), South Africa (26 percent), and Morocco (22 percent). The average for Africa is 16 percent, Asia-Pacific (19.8 percent) and OECD (34.1 percent).

Ndiritu Muriithi is an economist and partner at Ecocapp Capital.  He is also the chairman of KRA and former governor of Laikipia County. Email: [email protected]