Over regulation rolling back gains of liberalised market

JKIA after Kenya Airports Authority (KAA) staff down their tools over the proposed merger of KQ and KAA in March 2019. [Jonah Onyango, Standard]
Kenyans are more conversant with political transitions from colonialism to uhuru and from a single party to multipartyism.

And now no partyism. The economic transition from controlled prices to the market economy called soko huru in the countryside is less publicised.

In the past, the price of essential commodities such as sugar and petrol were controlled. And so were the prices of beer and cigarettes. As expected, price controls led to shortages because the suppliers lacked incentives to supply more.

We saw the same effect on loans with the interest cap. Price controls went hand in hand with monopolies. Lots of services and goods were supplied by monopolies.

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We had one telephone company, one airline, one taxi company, one broadcaster, one milk processor, one university and many other ones. And we had one political party, KANU.

The shift to a market economy driven by multilateral institutions such as the International Monetary Fund (IMF) brought in competition and reduced shortages. Customers now had choices, which is at the core of economics. Even the famous KANU got competitors in politics.

But as expected, prices rose much like in Russia after the end of the Cold War. The Kenyan economy slumped after liberalisation partly due to political upheavals starting from 1992. Remember the tribal clashes? The real fruits of liberalisation were reaped during the Kibaki era after KANU reign ended.

Uhuru Kenyatta continued with the market system which has made Kenya very attractive to investors but to corruption too. Further liberalisation came after the new constitution which liberalised politics.

Now Kenya is a really liberal country; more liberal both economically and politically than lots of advanced economies.

Lots of things we do and say in Kenya can’t happen even in most mature democracies. Lately, the gains of liberalisation are being rolled back in lots of sectors. The rollback is in the guise of regulation.

The fact that most regulations have to go through parliament means it is highly politicised and unlikely to spur competition and benefit ordinary citizens.

The regulatory issue is couched in political language, ostensibly to protect the vulnerable members of the society. Competition Authority of Kenya needs more teeth.

The first sector to be rolled back is politics where multipartyism has been neutered.

We are almost back to a single party where toeing the line including bootlicking meant contacts and jobs. My hunch tells me that once there is a monopoly in politics it’s easy to roll it out that monopolistic thinking to other sectors. Let us look at a few sectors. The interest rate cap in banking was an experiment only reversed by courts.

It has been speculated that the State wanted controlled interest rates to easily borrow through Treasury bills and bonds. Courts involvement in purely economic matters is another question.

Can courts make optimal decisions on such economic matter? Was any economist called in as an expert witness in the case involving interest cap?

Another sector is second-hand cars. Why is the age of imported cars being capped to five years and zero by 2023?

Last laugh

The most recent draft policy on auto industry even proposes to do away with tax hailing services like Uber, 14 seater matatus and tuk tuks.

Who will have the last laugh in the car sector? In the milk industry, an attempt to have processors monopolise the sector’s supply chain has been postponed.

As we write, the fertilser sector is on the verge of excluding animal manure leading to another monopoly. I thought we are going organic? Unusual areas have also been monopolised too.

Have you noted how our leaders now write articles in the newspapers? They are also monopolising honorary degrees.

Professional associations have pushed through regulations to ensure only those sanctioned by them can practice.

They cite ensuring standards are upheld as the reason behind new regulations. But the monopoly is not far. Why the return to over-regulation? It’s lucrative creating legal monopolies.

It makes it easier to make money by reducing competition. It’s almost a conspiracy against helpless consumers.

At times, we import regulations without contextualising them which make them difficult to implement or have unintended consequences.

The fact that most regulations are written in a crisis increases the chances of going overboard.

Think of new regulations after a major accident. The fact that regulators are quasi-government institutions politicises regulations. We have noted that though the constitution explicitly provides for consultations among stakeholders, lots of interested parties never turn up for consultation leading to unbalanced regulations.

Without some stakeholders’ involvement, regulatory capture results with vested interests holding sway. Regulations are often introduced when markets fail. What happens when regulations themselves fail?

The economy operates sub-optimally and special interests take over. One outcome of bad regulation is rent seeking or better corruption. Players in industries or sectors look for short cuts when they feel stifled by regulations.

Have we keenly looked at regulations as we fight corruption?

Good regulations unleash competition which often leads to innovations and economic growth. Unfortunately, regulation is not a science.

It works better when there is a diversity of perspectives from different subject areas like economics and law. Loyalty to specialisation makes regulation hard. Economists, lawyers, medics, accountants and other professionals think differently.

To spur economic growth, we must have good regulations to supplement the visible hand of the market. That should apply to all sectors of the economy because of their interconnectedness. We also must subject regulation to cost-benefit analysis.

-The writer teaches at the University of Nairobi  

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