Market Incentives

The rules of the game in Kenya entrench distrust and a reputation of any goes. 

Attempts by Nongovernmental organizations and government to build social capital by way of trade associations, solidarity networks, and groups (micro-credit requires group membership) have failed because the legal enforcement mechanisms are still lacking, and the success of these groups is dependent on adequate information about creditworthiness that so far can only be captured by unreliable informal channels. 

The incentive for opportunism is too high even within groups because the sanctions are few; being socially ostracized in a place where few records exist and people don’t set up permanent roots in urban areas is not as traumatizing. As Thomas Hobbes warned in Leviathan, the absence of an enforcer implies a free-for-all: everybody knows that everybody else can behave in an opportunistic fashion, therefore everybody behaves opportunistically.

Data collection is not determined within the country. It is very often determined by outside donors who provide specific funding for a particular project, which they use to prove their policies outside the country. Therefore since data is not collected for the state itself, the data doesn't foster debate on policy quality or whether the government is meeting its plans including millennium goals or Vision 2030. 

Creating public records could create trust by creating a system that is accountable. For example, both government and Nongovernmental organizations could establish local units that hire local people to man them. Data collection could be regularly done on all basic factors like health, age, school attendance, security enforcement, income generating activities and the data should be made available locally in whatever manner is palatable to the locals. The devolved government would rely on such data to budget and plan, and the business and civil community can use the same information to add value.

A case for conglomerates

The efficient functioning of markets requires that some organization enforce contracts and property rights. To be credible, the organization that enforces contract and property rights must have the power to force people to adhere to its decisions. Large companies due to a larger bargaining power are better placed to enforce contract performance, but this means businesses need large amounts of capital to start or expand which dissuades nascent businesses.

There is in fact logic to Kenya’s way of organizing firms. It makes sense for businesses to sprawl across many sectors (e.g. Bidco, Haco/Tiger) because the Kenyan state is weak. Infrastructure is so awful that firms often construct premises in highly over-crowded and expensive areas. Courts are slow and often corrupt, so contracts are hard to enforce and banks and businesspeople are inclined to stick with companies they know and trust. Moreover, established business houses can use their muscle to expand into new areas, sometimes at the expense of newcomers. 

Fewer new firms ever grow big and those that do so have tended to be good at working the political machine.

In OECD economies a large share of funds is sourced from institutions; in Kenya only a small percentage is. Instead capitalism is skewed towards the government and a select clique of business people and families. Government looms large. Government-backed firms dominate energy, agriculture and finance/banking. A vast number of other public-sector entities, like the ports and railways are decrepit, and often create bottlenecks. 

This makes the case for large firms in Kenya - mergers and some form consolidation in many sectors would improve efficiency.

Business and Society

We need a change in power structures to realize the aspirations of the new constitution and human progress. A change in power relationships can result in new market institutions and new economic outcomes. The current power relationship was created by dependence due to a paternalistic and a deference approach; Africans were assumed not to know what’s best for them by colonialists. A continuation of this is the ethnic kingpins who decide on behalf of the community. Closely related are the economic elite (also ethnic tycoons) who through the ages have accumulated enough power to maintain their privileged status while offering handouts for loyalty and adoration.

In Africa, short of revolutions and civil wars, there has been little institutional change. Rwanda and Ghana only reshaped theirs after genocide and civil wars respectively. 

Ethnic violence pushed the drive for a new constitution that reshaped government structure but economic reforms in terms of liberalization and privatization don’t have similar support because it’s harder to agree on what is needed and the emphasis on politics foreshadows talk of economic freedom. Previous attempts at privatization have been mixed; transfer and sale of property has been mired by irregularities, transfer of shares to opaque offshore companies has not been uncommon. 

The little attempts to liberalize have created cartels and oligopolies because the policy interventions are intended to favor certain sectors or interest groups. The interventions have included low tariffs/zero rating, subsidies and preferred tenders. 

Unfortunately for Kenya, business leaders are no better. The business elites influence the competitiveness of the economy negatively by shaping underlying micro-economic environment. They signal to society consumerism - imports/trade deficit instead of investments. This distorts the sense of freedom whereby people come to believe having buying choices and many preferences equates to civic freedom.

Furthermore the private sector seems to take cues from the public sector; a confusing management and ownership structure in the private sector creates uncertainty, and a breeding ground for corruption and rent-seeking. This influences behavior and culture in many ways.

Kenya's version of Institutional independence

In the early 90s with the clamor for multiparty system, donor aid stopped, Moi government acquiesced to pressure. Parliament and senior civil servants got some autonomy. However, while in principle it was an improvement, it was susceptible to political manipulation and it created distortions in public sector pay. Members of parliament and ministers’ salaries were de-linked from civil service and have enjoyed the largest pay increase. 

With the reforms, parliament was empowered at the expense of other institutions. The result is a parliament that is not accountable though directly elected, members can vote down any law without risking any party censure, and defect without needing to seek mandate. Consequently, parliament has failed to capture the public’s imagination. 

Equally, public servants with political influence – such as top civil servants, the judiciary, and officials in charge of special commissions and semi-autonomous agencies – were granted large selective increases, while the bulk of employees continue to receive modest remuneration. These bodies are insulated from societal influence by virtue of their status and mandate, but it also limits the oversight and accountability functions that should be done by the legislature and civil society. A quid pro quo between the various institutions that are meant to monitor each other exists, judges are called to head commissions and inquiries with ample pay, senior civil servants liaise with ministers, agencies like anti-corruption unit and human rights watch are headed by lawyers sourced from civil society. 

Office holders started differentiating themselves from the rest of society with entitlements and special privileges, e.g. elected officials fly first class on public funds, they’ve sought to increase their per diems to $1,000 per day while traveling and when asked to pay tax on the allowances they pillage government funds to offset the tax bill with the tacit approval of tax commissioner. 

Institutional independence without underlying standards and managed expectations only perpetuates impunity.