OPEC’s Game Theory Dilemma

Hello readers, welcome back to my blog. Last time I discussed a concept proposed by Adam Smith: the diamond and water paradox. I hope that you found this interesting and can now start to see how economics permeates all aspects of our lives.

Having recently researched and read into game theory as well as having discussed one of the most famous examples of game theory in action, the prisoners dilemma, in an earlier post, I thought it would be useful to examine how it can be used to describe collusion within OPEC and the global economic effects of low oil prices.

Although I looked into OPEC and oil prices last year, I had not come across game theory at that stage and so in this post I aim to focus on the game theory aspect of OPEC. If you can’t remember much about the organisation or oil prices in general or need a reminder on game theory, then you might want to relate back to my previous posts to refresh your memory.

From reading Dixit and Nalebuff’s, ‘The Art of Strategy’, it becomes clear that most ‘games’ in life are cooperative, many are competitive and others are perverse. You will come to realise by the end of this post that the market for crude oil could be described as perverse.

OPEC is an oil cartel made up of 14 countries who collectively control about one-third of global oil production. They determine oil prices by agreeing to limit their oil production and therefore reducing oil supply in the global market. Both a freeze and a cut in production have the same goal – lower supply in order to raise prices-simple demand & supply laws of economics. In both cases, a situation very similar to the Prisoner’s Dilemma is created – if one country violates the agreement while the other abides, prices stay low and the country that violated the agreement benefits by selling more oil while the other has to sell the agreed amount of oil at a lower price. If both violate, output remains high and prices remain low. If both abide, prices climb and both players profit. The following chart portrays the possible outcomes. (You will notice it is very similar to the options that the prisoners were faced with in the prisoners dilemma game):

blog-post-1

According to Game Theory, each country will make the choice that is most beneficial for themselves independent of the other country’s strategy. In this case, both countries have a dominant strategy – violate the agreement – in which their own outcome is greater regardless of the strategy of the other country. Therefore, Game Theory implies that the countries in OPEC will make the choice that results in the lower outcome for both countries. Meanwhile, the most optimal outcome would occur if all of the countries abided by the agreement and limited production. Similarly in the prisoner’s dilemma, two parties that would benefit from cooperating together tend not to do so because of other incentives that if both follow, they will both end up in a worse place.

Two of the main problems that OPEC are currently facing:

  1. Saudia Arabians and Iranians do not want to take any action that would benefit the other, even if it would help themselves.
  2. It is almost impossible to keep member nations in OPEC, from cheating and producing more than their quota.

Game theory is based on having ‘rational-decision makers’. We have to remember that in reality people do not always make rational decisions and that the neoclassical model of man as a maximizer of utility or profits does not always follow.  People and nations are envious, and will make do with less if it means those that they dislike are worse off.  The Saudis may be burning through their financial reserves quickly, but virtually everyone else in OPEC is worse off.  The Saudis may think that they can drive a better deal inside OPEC when almost everyone else is desperate.

We must also consider a number of external factors that could come into play:

  • Weaker growth
  • Higher energy taxes
  • Further technological refinements that lower crude oil production costs further
  • Continued improvements in solar, wind, and energy storage (primarily battery) technology.

 

These factors would reduce the global demand for oil as suitable substitutes are developed and may result in countries oversupplying in an attempt to sell as much oil as they can before its too late-see my post, “What happens when we no longer need oil from the Middle East”.

Sources used:

https://www.bloomberg.com/view/articles/2017-08-02/opec-s-game-theory-dilemma

http://www.economist.com/node/17031126

https://blogs.cornell.edu/info2040/2016/09/18/game-theory-in-the-failure-of-opec/

http://alephblog.com/2016/04/19/opec-and-game-theory/

http://oilprice.com/Energy/Energy-General/Four-Possible-Outcomes-Of-The-OPEC-Meeting.html

Adam Smith’s Diamond and Water Paradox.

Hello readers, welcome back to my blog. I recently came across a concept known as the diamond and water paradox, proposed by the great classical economist, Adam smith in his most famous book, “The Wealth of Nations”. I was intrigued to know what this was all about and how exactly it links to economics. Having researched it further online and in textbooks, I was keen to explain it to you in order to cement my own knowledge and understanding as well as present what I have researched, so that anyone who may be interested can gain an understanding of this idea. Seeing as I gave you a lot to think about and consider in my last post, about oil from the Middle East, I will keep this post short and get directly to the point.

To begin, I think its probably best to give a very short history lesson about Adam Smith and his work in a quick 30 second elevator pitch:

Adam Smith was an economist and philosopher who wrote what is considered as the “bible of capitalism,” The Wealth of Nations, in which he details the first system of political economy. Smith’s ideas are a reflection on Economics in light of the beginning of the Industrial Revolution, and he states that free-market economies (i.e. capitalist ones) are the most productive and beneficial to their societies. He goes on to argue for an economic system based on individual self-interest led by an “invisible hand,” which would achieve the greatest good for all. The book was considered the foundation of classical economics, and is one of the most influential books ever written.

Probably a little more than 30 seconds but you get the idea. He revolutionised the study of economics and for that reason he is sometimes thought of as the father figure of economics. To read more about the invisible hand/refresh your memory of it see my post entitled: key economics concepts, where I look into the ‘invisible hand’ as well as the concept of ‘Homo Economicus’.

screen-shot-2017-09-10-at-15-04-28.png

In his book Smith wrote:

“Nothing is more useful than water: but; scarce anything can be had in exchange for it. A diamond, on the contrary, has scare any value in use; but a very great quantity of other goods may frequently be had in exchange for it.”

Essentially what he is referring to is a paradox of value.

In most countries, water has a low price, whereas a piece of diamond jewellery has a high price. Why is it that an economy puts such a low price on something vital to sustaining life compared to something that only has visual/aesthetic effects? Smith suggested that practical things that we use everyday have a ‘value in use’, but often have little or no ‘value in exchange’. On the flipside things that often have the greatest value in the market or in exchange such as a drawing by Picasso, have little or no practical use other than for decoration.

Understanding this paradox is achieved by understanding the economic terms ‘marginal utility’ and ‘scarcity’. Scarcity relates to how little of a good there is compared to what people are demanding. Marginal Utility is the additional welfare a person gains from using or purchasing an additional unit of the good. People are willing to pay a higher price for goods with a greater marginal utility.

Going back to water and diamonds. Water is not scarce in most parts of the world, which means people can consume it up until the point at which the marginal utility they gain from the last drop consumed is very low. In other words they are not willing to pay a lot of money for one more drink of water. Diamonds on the other hand are rare and are scarce. As a result of their limited supply, the marginal utility typically gained from adding one more diamond to a person’s collection is much higher than for one extra drink of water.

That being said, this paradox breaks down if someone is dying from thirst, since the marginal utility gained from another drink of water would be much higher then the additional satisfaction of owning an extra diamond.

screen-shot-2017-09-10-at-15-04-46.png

 

Sources used:

https://www.biography.com/people/adam-smith-9486480

Powell & Powell Economics Text book

http://www.investopedia.com/ask/answers/032615/how-can-marginal-utility-explain-diamondwater-paradox.asp

https://www.tutor2u.net/economics/reference/the-paradox-of-value

What happens when we no longer need oil from the middle east?

Hello readers, welcome back. In my last post I discussed how Tesla could be superseded by German car manufacturers and how Tesla needs more than Elon Musk to prevent others catching up or even overtaking them. I also discussed some wider issues having been inspired by the things discussed in the article by the economist-“The death of the internal combustion engine”, such as whether people could sleep while they commute to work or if Chile could become the new Saudi Arabia. I would be interested to hear your thoughts about Tesla and the future for electric cars so if you have anything to share please email me at: rajveersira@gmail.com.

It only follows that if we are headed to a new world in which the petrol engine has finally become obsolete and that technology such as lithium-ion batteries, or hydrogen fuel cells that are currently being researched take off, then we must consider what could happen to heavily oil dependent countries, especially Saudi Arabia and the UAE. Such countries are now starting to realise that their oil dependency could become an issue when either oil runs out or we develop technologies that means we no longer require it, whichever comes first, its clear that unless these counties change their setup they could be in for sharp economic decline. One obvious rebuttal is that states like Dubai have invested heavily in infrastructure and tourism and is home to some of the most famous and luxurious hotels in the world built exclusively for the elite and superrich. With little tax and a generally safe environment it attracts billionaires from all over the world. However it could be argued that this transformation is happening too late and what should have been done is what Denmark adopted. Denmark was previously an oil rich nation; however instead of using it to fund its economy and reduce taxes for its citizens it placed the money in a sovereign bond and used it to invest in the infrastructure of the economy. Also places countries in the middle east are extremely hot and especially with the increase in global warming they could face extreme temperatures such as 45-50 degrees celsius, thus forcing the tourism economy to contract.

Whilst at the Institute of Economics Affairs (IEA), and the debate chamber in London we looked into some of these issues and one alarming statistic that caught my eye was that without oil Saudi Arabia’s GDP could be below levels seen in 1950. (GDP-gross domestic product-a measure of the total value of goods and services produced in an economy over time). In this post I will outline and develop the implications for countries like Saudi Arabia. Unlike some of my other recent posts, there won’t be too much economics jargon which should hopefully make the most easier to understand and relate to.

The key point about oil is that it grants countries power. It enables them to build mile high sky scrapers in the dessert, construct some of the most impressive hotels in the world, abolish the idea of taxation and live a life of luxury and style. The problems start to occur when this magical substance starts to run out, or worse still if we no longer need it. As it stands the oil industry is divided about when to expect peak demand; Royal Dutch Shell says that it could be little more than a decade away. However prices are likely to be affected before then. Since nobody wants to be left with useless oil in the ground, there will be a lack of new investment, especially in high-cost areas such as the Arctic. By contrast, producers such as Saudi Arabia, with vast reserves that can be tapped cheaply, will be under pressure to get pumping before it is too late: the Middle East will still matter, but a lot less than it did.

Despite the fact that there will still be a market for natural gas to generate electricity for electric cars, the volatile nature of oil prices will strain countries that depend on hydrocarbon revenues to sustain their GDP. Saudi Arabia derives more than 80% of its total revenues from the sale of “black gold”, according to official government figures.

Now is the time for the Kingdom to adopt change. Saudi Arabia already has a good start by having the lowest debt to GDP ratio of any G20 country. The country should really be thinking about diversify its economy, creating more jobs, embarking on a programme of privatisation and tackling the high level of domestic energy consumption.

I will now discuss a concept known as ‘rentierism’ that I was introduced to at the debate chamber:

In oil states people don’t pay tax/income tax is incredibly low. The large state almost communist like control provides most public services such as healthcare and education as well as paying its citizens a monthly income. This is essentially like buying people’s silence and the name is derived from the fact that the state are renting people’s consent with money, food and services. Economic Growth in the middle east on paper is very good. However this is unsustainable. This is because they are depreciating their capital and when oil runs out they will run into problems. At the moment it could be termed by an economist that middle eastern countries are just liquidating their assets.

However the gulf states as discussed above are investing in other industries. The question is, it it too late and will it be too hot for tourism. Its almost ironic that burning fossil fuels like oil which has partly been supplied by the middle east, has accelerated global warming and the enhanced greenhouse effect, leading to the rise in global temperatures. Gulf states who are desperately developing tourism may need to reconsider and start diversifying in other sectors if it becomes too hot.

In conclusion we could say that the middle east is experiencing an economic time bomb or a ‘Resource Curse”:

  1. Their Balance of Payments is very good at the moment; however, their farming is very poor due to the climate and poor soils. As the population increases, the balance of payments will become a deficit. (Refer back to the post on trade if you can’t remember these terms).
  2. Number of jobs in the economy of these countries is inflated. In the long term the state sector will decline meaning jobs will decline, unless they undergo a programme of privatisation.

 

Sources Used:

https://www.economist.com/news/leaders/21726071-it-had-good-run-end-sight-machine-changed-world-death

http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/12012347/Saudi-Arabias-pockets-are-deep-enough-to-weather-oil-price-slump.html

Tesla needs more than Elon Musk to survive.

Hello readers, welcome back to my blog. In my last post I looked at a complex branch of economics, concerned with rationality and mathematics known formally as Game Theory. I hope that you understood the ideas being discussed and now know what economists are on about when they talk about the prisoners dilemma in action.

In this post I will be returning to what I usually do, looking at current, interesting economics news stories and adding my judgement. Being a car fanatic and with the recent release of the Tesla Model 3 in the US, I thought it would be a good idea to look into the electric car market and explore the current leaders in this technology, Tesla.

The electric car market:

The internal combustion engine has revolutionised our lives. It is hard to imagine life without it. However its days are numbered. Discoveries and significant gains in battery technology are starting to drive the rise of electric cars on the road. Powered by efficient lithium ion batteries, cars such as the Tesla model S have already managed to squeeze 1000km on a single charge. The cost per kilowatt-hour has fallen from $1,000 in 2010 to $130-200 today. Governments are getting stricter, albeit President Trump and his “I don’t care about the planet” ideology. It was only a few months ago that Britain joined a lengthening list of electric-only countries, saying that all new cars will be zero-emission by 2050.

A few ideas that stood out for me, in an article by the economist are: compared with existing vehicles, electric cars are much simpler and have fewer parts; they are more like computers on wheels. Therefore they need fewer people to assemble them and fewer subsidiary systems from specialist suppliers. With less to go wrong, the market for maintenance and spare parts will shrink. Styling and performance may enable some brands to stand out however other brands could be in trouble unless they can promise low prices. Self driving capability is a very intelligent idea and together with companies such as Uber it could revolutionise our lives:-Lots of shared, self-driving electric cars would let cities replace car parks (up to 24% of the area in some places) with new housing, and let people commute from far away as they sleep—suburbanisation in reverse.

The main strive for developing electric cars is to reduce the dependence on fossil fuels (mainly oil) and develop sustainable transport for future generations. Charging car batteries from central power stations is more efficient than burning fuel in separate engines. Existing electric cars reduce carbon emissions by 54% compared with petrol-powered ones, and that figure will only rise as electric cars become more efficient and grid-generation becomes greener or better still as renewable energy kicks off. According to a study by the The World Health Organisation car emissions kill 53,000 Americans each year, against 34,000 who die in traffic accidents.

If you had bought shares in Lithium in 2011, you would be a very rich person now. The compound lithium carbonate has more than tripled, from $4000 to over $14,000. Lithium is also useful for power stations and for storing energy in giant batteries meaning the demand will surge. As the economist article discusses, “will all this make lithium-rich Chile the new Saudi Arabia?” The answer is, its unlikely since the batteries can be recycled, unlike oil where once it is burnt there’s no recycling. Extrapolating this trend further, we could see electric planes and boats power by solar panels and wind turbines at some point during our lives, although for now the combustion engine is still likely to dominate shipping and aviation for many years.

The governments role in the future will also be important. They will have to regulate markets to prevent monopolists from acting and creating market failures, they will have to ensure that electricity companies are equipped to keep up with the demands of increased power and most importantly they will have to account for the mass unemployment that could arise if factories/markets for spare parts close and adjust to the new market.

Screen Shot 2017-09-01 at 17.22.38.png

A short history lesson about Tesla:

  • founded in 2003 by a group of engineers in Silicon Valley who wanted to prove that electric cars could be better than petrol-powered cars-with instant torque, incredible power, and zero emissions.
  • its mission: to accelerate the world’s transition to sustainable energy.
  • In 2012, Tesla launched Model S, the world’s first premium electric saloon. Built from the ground up to be 100 percent electric, Model S has redefined the very concept of a four-door car. Its flat battery pack is integrated into the chassis and sits below the occupant cabin, giving the car a low center of gravity that enables outstanding road holding and handling while driving over 280 miles per charge.
  • Tesla owners enjoy the benefit of charging at home so they never have to visit a petrol station or spend on petrol. For long distance journeys, Tesla’s Supercharger network provides convenient access to high speed charging, replenishing half a charge in as little as 20 minutes.
  • To reduce the costs of lithium ion battery packs, Tesla and key strategic partners including Panasonic have begun construction of a gigafactory in Nevada that will facilitate the production of a mass-market affordable vehicle, Model 3.
  • By 2018, the gigafactory will produce more lithium ion cells than all of the world’s combined output in 2013. The gigafactory will also produce battery packs intended for use in stationary storage, helping to improve robustness of the electrical grid, reduce energy costs for businesses and residences, and provide a backup supply of power.
  • Tesla is not just car maker, but also a technology and design company with a focus on energy innovation and a number of space ventures/concepts.
Screen Shot 2017-09-01 at 18.03.46.png
Tesla’s Gigafactory

 

What do I think about the future of Tesla and can Elon Musk pull it off?:

Elon Musk certainly warrants the label of an eccentric, tech savvy tycoon. However there have been questions about whether Tesla will actually work. As it stands the company has not made a profit on its cars due to the amount of research & development that Tesla is doing. There are concerns that if Tesla does all the hard work, what is stopping BMW, Mercedes, Audi or Porsche, the 4 main German car manufactures from not only copying the same technology but improving it and making it 10 times more luxurious with rigorous german quality checks and superior styling. If you ask most people a Tesla could easily be mistaken for a Toyota and inside all it has is one giant iPad controlling the car. Although I think electric cars are the future, I don’t see Tesla making a profit anytime soon despite the fact that they are ahead of the game, are building a gigafactory and have thousands of orders for the model 3. It is only a matter of time before the Germans or the French catch up and retrofit their longstanding car factories.

Furthermore, about 63,000 people have canceled preorders for the model 3 over the course of the past year due to quality concern issues and it has just been announced that Tesla’s most expense models have seen a price slash due to a reduction in battery costs. This may be beneficial for the long term but what about the people that have a PCP loan/have spent their own cash on cars which are devaluating exponentially. This is likely to leave them with some serious negative equity and a worthless machine; however, this problem is not just exclusive to Tesla and is likely to play a role across the electric car market.

At one point, the company was valued at $45 billion, worth more than Nissan Motor Co. and only a few billion shy of Ford. However, to estimate future earnings reasonably, one has to make projections based on historical data. No one should believe that a company is suddenly going to make $1 billion in net profits if it barely broke even the year before.

Finally without Elon Musk Tesla really only has a big battery and a giant screen controlling it. Musk keeps share prices up with his ambition, enthusiasm, charisma and his ability to convince others that the model 3 really is the way forward. I believe its only a matter of time before he is ‘overtaken’.

Sources Used:

https://www.economist.com/news/leaders/21726071-it-had-good-run-end-sight-machine-changed-world-death

http://www.express.co.uk/life-style/cars/848277/Tesla-Model-S-Model-X-cars-price-cut

https://www.forbes.com/sites/brookecrothers/2017/08/05/tesla-week-model-3-cancellation-hamburgers-model-y-reeled-back-from-insanity/#58f5019f7732

https://www.wired.com/2017/05/tesla-quality/

Game Theory: The Prisoners Dilemma and the concept of Nash Equilibrium.

Hello readers, welcome back to rsira-economics.com.

In my last post I decided to focus upon the recent announcement the cancelling of Kenya’s 2017 election. I discussed what reporters know so far and some of the immediate impacts that have taken place since the announcement. The full explanation for this could take up to 21 days and the re-election will take place within the next 60 days.

In this post I thought I would introduce something you might have heard before, something which has become synonymous to economists and a concept which has led to a number of academics winning Nobel prizes. Game Theory. Having just finished “The art of strategy” by Dixit and Nalebuff, which by the way is a very interesting and engaging book, I was eager to share some of my knowledge about concepts like the Prisoners Dilemma and Nash Equilibrium. These concepts can be a little confusing especially if you are not used to the economic jargon, although I will try to explain them in a simplified way as well as illustrating this post with a number of examples. Feel free to comment below if you have any questions are are still unsure about certain aspects by the end of the post. I will keep this post relatively short so that you don’t have too much of an ‘economics overload’. If you were hoping for more current affairs stuff like Brexit or the future of electric cars in this post, stay tuned as these are some of the topics coming up next.

Before we begin, in game theory and in a number of models in economics, a number of assumptions are often made and it is crucial that we understand and consider these assumptions so that when we come to apply our findings to the real world, we can factor these in.

Game theory is the process of modeling the strategic interaction between two or more players in a situation containing set rules and outcomes.

 

Assumptions in game theory:

  1. Perhaps the most important assumption is that in most games each player is Rational and therefore always makes the best possible choice. The term you might often here is Homo Economicus. Homo economicus attempts to maximize utility as a consumer and economic profit as a producer. Homo economicus, or economic man, is the figurative human being characterized by the infinite ability to make rational decisions. Certain economic models have traditionally relied on the assumption that humans are rational and will attempt to maximize their utility for both monetary and non-monetary gains. However, modern behavioral economists and neuroeconomists, have demonstrated that human beings are in fact, not rational in their decision making, and argue a “more human” subject (that makes somewhat predictable irrational decisions) would provide a more accurate tool for modeling human behaviour.
  2. Each player is aware that all other players are also rational and that they know that he is rational too.

Common Terms used in game theory:

 

  1. Game: Any set of circumstances that has a result dependent on the actions of two of more decision makers (“players”).
  2. Players: A strategic decision maker within the context of the game.
  3. Strategy: A complete plan of action a player will take given the set of circumstances that might arise within the game.
  4. Payoff: The payout a player receives from arriving at a particular outcome. The payout can be in any quantifiable form, from dollars to utility.
  5. Equilibrium: The point in a game where both players have made their decisions and an outcome is reached.

The concept of Nash Equilibrium was named after the economist John Nash, who focused his research into different types of scenarios and games, where he developed some revolutionary theories upon them. Nash Equilibrium occurs when an equilibrium is reached in a game from which neither player has an incentive to deviate to some other strategy and would rather stick to the current. This concept helps economists work out things such as how competing companies set their prices and how governments should design auctions to squeeze the most from bidders.

The most famous example used to explain this concept is the Prisoners Dilemma which I will now try to explain.

There are two criminals who have both committed a murder and they are placed in two separate cells in a police station. If they both confess that they committed the murder then they each face 10 years in jail. If one keeps quiet whilst the other confesses, then the one who confesses gets to go free while the other spends a lifetime in jail and vice versa. If they both keep quiet they will face a minor charge and will both go to jail for one year. If the two criminals could collaborate or discuss this together then the optimal solution would be for them both to keep quiet. However by using the concept of Nash-Equillibirum it makes sense to always confess.

The table below, is from an article in the economist and it helps to visualise this situation. Screen Shot 2017-09-01 at 16.17.59.png

If you think you’ve sussed it out as to why this is the case then congratulations! You have just assimilated and understood a very famous concept in game theory. For those of you who don’t know or to re-enforce your knowledge, let’s take this idea further.

To understand this, lets go back to what Nash Equilibrium means-every person in a group makes the best decision for themselves, based on what they think the others will do. And no-one can do better by changing strategy: every member of the group is doing as well as they possibly can.

Ih the prisoners dilemma you should never keep quiet whatever the other person chooses, since one suspect may have confessed. If the other then confesses it avoids the prospect of a life sentence, and if the other does keep quiet then confessing sets the other free.

The Nash equilibrium helps economists understand how decisions that are good for the individual can be terrible for the group. This “tragedy of the commons” explains why we overfish the seas, and why we emit too much carbon into the atmosphere. Everyone would be better off if only we could agree to show some restraint. But given what everyone else is doing, fishing or polluting with impunity makes individual sense.

So how does knowing about two murders in a jail cell help us:

Game theory helps policymakers come up with solutions to tricky problems. Armed with the Nash equilibrium concept, economists claim to have raised billions for the public purse. In the Art of Strategy the authors describe how in 2000 the British government used economists to help design a special auction that sold off its 3G mobile-telecoms operating licences for £22.5 billion ($35.4 billion). Their trick was to treat the auction as a game, and tweak the rules so that the best strategy for bidders was to make confident and aggressive bids.

Sources Used:

The art of strategy by Dixit and Nalebuff

https://www.economist.com/blogs/economist-explains/2016/09/economist-explains-economics

http://basicsofgametheory.blogspot.co.uk/p/nash-equilibrium.html

http://www.investopedia.com/terms/h/homoeconomicus.asp

http://www.investopedia.com/articles/financial-theory/08/game-theory-basics.asp

 

Kenya Presidential Election Cancelled by Supreme Court.

Hello readers, welcome back to my blog.

If you managed to read my post yesterday about trade policy and the ideas of absolute and comparative advantage, I hope you found this worthwhile and now understand the economics behind international trade, as well as how economies function.

In this post I thought I would discuss the announcement that was made, just today, that Kenya’s Supreme Court has nullified and cancelled the country’s 8th August election in a landmark decision, calling for a rerun within 60 days. If you have been reading some of my other posts on development and corruption, or have read my EPQ, you will have noticed that many of my case studies and examples are of Kenya. If you are wondering why I place such a big interest and emphasis on Kenya as opposed to other similar African nations, it’s because I have active family connections there and I like to discuss the country’s current affairs and relevant economic issues, having visited the country a number of times and witnessing first hand the issues of corruption, poverty and instability. I will briefly outline the nature of Kenyan elections and will explain exactly why this has happened. Although I had planned to discuss something very different in this post, I could not refrain from posting about such a shocking issue. That’s one of the reasons why I find economics interesting; things are always dynamic, new and unexpected issues arise every day, and it’s down to economists to look further and understand why, how and what should be done to control the economy and regain stability.

Screen Shot 2017-09-01 at 14.27.01

For those of you who are unaware of how the elections are done in Kenya, I can assure you that it’s not like England, where everyone agrees to have controlled debates, well not everyone (Theresa May?!), discusses issues in a stable environment with a clear cut polling system. In Kenya there is usually violence, corruption on an extreme level with many allegations that the outcomes are fixed, as well as riots, muggings and murders, whereby many citizens attempt to show their frustrations with the current set up.

So what actually happened?

The ruling comes after opposition candidate Raila Odinga filed a petition to the court, claiming President Uhuru Kenyatta’s election win was fraudulent. Supreme Court Chief Justice David Maraga said today that the election “was not conducted in accordance with constitution”, and declared it “invalid, null and void”. He said the commission had committed irregularities “in the transmission of results”, adding that the court would provide details in a full judgment within 21 days. On a side note, I couldn’t help but notice that the supreme court chief is called Justice. Lets hope he does get Justice for what has been revealed. He said the verdict was backed by four of the six Supreme Court judges. The announcement drew cheers from opposition supporters both inside and outside the courtroom. The court ruling did not attribute any blame to President Kenyatta’s party or campaign. 400 international election observers monitored the election, including former US Secretary of State John Kerry.

East Africa’s biggest economy has a history of disputed elections. A row over the 2007 poll, which Odinga challenged after being declared loser, was followed by weeks of ethnic bloodshed in which more than 1,200 were killed. Mr Odinga said the ruling marked “a historic day for the people of Kenya and by extension for the people of the continent of Africa”. He added that he had “no faith at all in the electoral commission as currently constituted” and called for the prosecution of its members. President Kenyatta, in a televised address, said that it was “important to respect the rule of law even if you disagree with the Supreme Court ruling”. He called for unity, saying: “Your neighbour will still be your neighbour, regardless of what has happened… My primary message today to every single Kenyan is peace. Let us be people of peace. President Kenyatta who thought he had defeated his challenger by 1.4m votes (9.5%) will now be dragged through the courts.

Mr Odinga had initially refused to challenging the results, arguing that the supreme court had proved itself to support the current president and after it rejected his petition five years ago to contest Kenyatta’s first election victory. It appears he changed his mind,  due to international pressures and after at least 28 of his supporters were killed by police during violent protests.

Already the Kenyan shilling has weakened by 0.44% against the dollar and whatever the consequences of the decisions it is clear that the supreme court has made legal and political history in Africa by making a ruling once believed to be unthinkable, one that could embolden other courts on the continent to follow suit.

 

Sources Used:

http://www.bbc.co.uk/news/world-africa-41123329

http://edition.cnn.com/2017/09/01/africa/kenya-election-rerun/index.html

http://www.telegraph.co.uk/news/2017/09/01/kenyan-judge-orders-re-run-presidential-election-due-irregularities/