Kenya, Oil and Populism: Learning from Germany

In March Kenya discovered oil. Even before it has proved to be commercial, and years before the money will flow, oil has already had an impact: by April public servants were demanding a large wage increase. Oil discoveries are psychological earthquakes: people imagine that good times have arrived. Such a narrative is the default option for public opinion, but it is not inevitable. Across Africa people are well aware that natural resources have been plundered and squandered: there is a widespread sense of ‘never again’. The challenge is to steer that inchoate anger into practical steps that learn from history instead of repeating it: but what practical steps?

Unlikely as it may seem, Africa can learn from Germany: Germany is the best managed economy in Europe. Of course, it does not have natural resources, and so its economic management addresses entirely different issues. However, the political foundations for Germany’s success can be generalized beyond the particularities of economic policies. Germany is today the best-run economy in Europe because it used to be the worst. Three generations ago, Germany collapsed into hyperinflation. From that searing experience Germans too emerged with that inchoate sense of ‘never again’. The German genius was to harness those sentiments into practical measures.

Generically, German policy-makers took three steps to avoid repeating their earlier mistakes. First, they established rules about economic policy: notably, fiscal rules. Some African governments are now putting in place constitutional rules for managing oil revenues: for example, last year the government of Ghana adopted a rule that 30 percent of oil revenues should be saved. Rules are important as guidance, but shocking as it might seem, some governments do not always follow their own rules. Indeed, we do not need to look to Africa to find examples. The Euro has two fiscal rules: its seventeen member governments, some joining late, have had to follow these rules for a maximum of only eleven years. Yet already sixteen of the seventeen have broken one or other of the rules: only Finland has stuck to them both (which may account for the emergence of the True Finns). So, rules are advisable, but they are not enough.

The second step was to establish dedicated institutions to implement the rules: specifically, in Germany this was an independent central bank, the first such bank in Europe. Evidently, since Africa’s economic decisions for harnessing natural resources are different, independent central banks are not the required institutions. But the principle remains the same: some institution within the public sector needs to have specific responsibility for implementing and consequently for attempting to enforce the rules. Some African governments are already putting new institutions in place, such as investment funds designed to manage the savings from resource revenues. But just as rules can be ignored, so can institutions: indeed, Africa is littered with institutions which have become mere imitations of the functional institutions on which they were modelled. Rules and institutions are important, but not enough.

The most important and remarkable step taken by Germany was the third. The sentiment of ‘never again’ was turned into a critical mass of ordinary citizens who understood the economic issues underlying hyperinflation sufficiently to support the new rules and institutions. Collectively, these citizens provided the political defences that made the rules and institutions robust to the pressures for dysfunctional policy choices: this has persisted for three generations.

The populist Kenyan response to the new oil discovery suggests that at present Kenya, and by extension most of Africa, does not have that critical mass of citizens who understand the nature of the opportunity. For a resource discovery to achieve a sustainable ascent to national prosperity depends upon whether enough of the revenues are used to finance investment: natural assets should be converted into productive assets. So how could Africa build such a critical mass? There are three approaches.

One is through good leadership. Political leaders self-flatteringly see their role as that of taking decisions. In fact, in large part they should leave decisions to their technocrats who are better informed. But only leaders, not their technocrats, can communicate with citizens, presenting a narrative of responsibility towards the next generation in managing good fortune. A second is bottom-up: the wisdom of the street. After the Arab Spring, the scope for youth to force responsible management on the older generation of decision-takers should not be underestimated. The final approach is for mediating organizations, such as think-tanks and journalists, to lead the society to understanding: that is, indeed, their job. It’s not a choice: Africa needs all of the above.

  • al

    Typical white person trash article belittling Africans. I am from kenya, born and raised in Kenya. I understand the magnitude of the discovery and what we need to do to utilize the resource if its commercially viable.
    You are bellitling us for being excited and counting our eggs before the chicken lays, and here you are yourself building castles and theories for us before we know how much oil there is. So how are we the only silly ones and not yourself too.

  • Josh Mosca

    Germany doesnt have any natural resources? Doesn’t Germany have an abundance of coal and steal (Rhineland)…At least, they used to, hence their ability to unify and become a superpower – was all surplus from resources

  • Katherine Huthmacher

    I’m sorry, isn’t Germany the country that’s currently destroying Europe by trying to force internal devaluation on everybody all at once? Didn’t it undercut wage growth targets and undermine the balance of trade in the southern countries? Isn’t it the main force behind the refusal to issue eurobonds and ease up on inflation targets to allow the troubled economies to grow out of their current crisis? Isn’t it the country that massively expanded insecure labour and undermined its own citizens to beggar its neighbours?

    I suppose Kenya could find a way to scramble out of poverty by throttling its neighbours, but I’m not sure this is something anyone ought to be suggesting…