As we look at economic issues as they should be, today we continue with the bottom-up vs trickle-down model debate. As mentioned in the previous blog, the two are not economic solutions but vehicles to deliver a solution to a problem. The issue here is that we have leaders debating a vehicle (model) when they do not have a solution to deliver since they have not diagnosed the problem they seek to solve. Everyone – whether bottom-up or trickle-down – is trying to grow the economy, either from the bottom or from the top, and the question is why? In answering this question, the leaders will all say it is to create jobs. However, on further prodding on why there’s a need to create jobs, the answers start getting absurd.
Regardless of the camp one subscribes to, the idea that the measure for progress in growing the economy is output growth is a fallacy, which is where the foolishness in both camps comes from. Basing the success of policy on output numbers and growing job numbers only is spinning on a hamster wheel. Any economic model that does not have the improvement of health, education, living, and social standards as its main measurement tools and hides behind GDP numbers or blanket job numbers is bound to fail and its proponents are delusional.
One of the two problems identified in the last blog was that Kenya has an income poverty problem. This problem is not unique to Kenya as it is one faced globally. This problem has caused a huge inequality problem where the rich continue to become richer and the poor get poorer. The proponents of the bottom-up model continue to talk about putting money in people’s pockets, promising that they will bring down inequality. However, bottom-up proponents are just capitalists in socialist clothing deceiving the populace about providing more money at the bottom to grow the economy, which is hugely delusional.
Why do I say so? The proponents of the bottom-up model, whether in the US or Kenya, are all talking of investments in cottage industries. These are investments to make the operating environment conducive for SMEs to grow and hence employ more people. Noble as it is this is, it will not cure the elephant in the room: income poverty.
The main reason we have income poverty despite growth in GDP in the continent is that the income growth rates to the various owners of productive resources have not been even. They have been skewed towards the owners of capital. The productive assets people can hold to earn income are land, labor, or capital. All these earn an income, and the growth of that income determines whether there will be upward mobility. Land earns rent, labor earns wages, and capital earns interest or dividends. Only land and capital have capital gains. Unfortunately, if you look at the graph below, the annual growth for labor wages has been negative for the African continent for the last 7 or so years. Even when it was positive, it rarely went above 5%. For Kenya, this figure is -1.5% from 2008-2017.
However, if you look at the growth of land rent or values, yields on the continent range from 9% – 14% in most major cities in Africa. Whether this is productive or not, one can buy a piece of land which then gains in value depriving a country of resources to grow while the owners of land continue to earn. If you use the debt and stock markets as a proxy for rent accruing to the owners of capital, average interest rates in Africa also range from 9% – 35%. And you wonder why banks continue being the richest businesses around.
As mentioned in the last blog, Kenya is a labor-intensive economy. This means that the only major resource from which people must earn an income is their labor. But from the above, one can see that wages have been stagnant and not growing. What does that mean? It means that most Kenyans who are employed mainly in the agricultural sector become poorer every year
So, is bottom-up going to solve this problem? The answer is no. Investing in cottage industries and making ‘the business environment’ conducive for SMEs to grow is simply putting money in the hands of those who own capital already and the rich will become richer even under the bottom-up model. If any economic model does not address how to redistribute wealth or reward labor more than land and capital especially in Kenya and Africa at large, then poverty is going to be with us for way longer.