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Top-down, bottom-up economy theories will not work in Kenya

OPINION
By Fred Ogola | June 9th 2021

An illustration of the Bottom-up approach economy.[Courtesy]

“We cannot solve our problems with the same thinking we used when we created them”, said Albert Einstein.  

As we reflect on the challenges towards our national and local economy, and in light of the Covid-19 pandemic, let us keep this wisdom in mind.

Trickle-down economics theory, promoted by Republicans in the US, holds that by giving incentives, tax breaks and other financial benefits to corporations, investors, large businesses, entrepreneurs and the wealthy, many people get employment thus leading to economic growth. That has been tested and works somewhat.

This approach cannot work in Kenya since the top is too thin to feed the bottom. Look at this way; one per cent of Kenyan corporates controls 99 per cent of the National GDP ($110 billion).

In trying to seek an alternative to the top-down approach, Deputy President William Ruto has been preaching the opposite — a bottom-up approach or the hustlernomics in a case that has attracted economist David Ndii. But Dr Ndii is insincere. He knows that a bottom-up approach as it is known in economics cannot work in the Kenyan economic context. Here’s why: a bottom-up model needs a predominantly formal economy.

The US and most European economies are predominantly formal, 80 per cent of the economic transactions are visible to the state that the government can collect taxes on. And that is why it works there.

In simple terms; when the government gives money to those in the bottom of the economy say, through stimulus, that money is spent in the formal economy and the government then gets to collect taxes from their economic activity and the money goes back to the Exchequer. Fair game.

This model has proven workable like during economic crisis like during the 2008 global financial crisis. Then, several European countries were in distress. The PIGS - Portugal, Italy, Greece and Spain were rescued (through an economic stimulus) except Greece. Reason? Over 50 per cent of the Greece economy is informal (black economy).

The thesis is that money put at the bottom of the pyramid could not come back to Treasury as taxes. How can you tax the black economy? That is why Greece defaulted on the loan they received from European Central Bank as economic stimulus. Greece remains in distress and far worse, left behind. Since the Kenyan economy is largely informal — about 80 per cent — any money put in the bottom, stays there.

For instance, if you gave Sh1 billion to those at the bottom, like my village mates in Siaya, if they buy chang’aa with it, which is untaxed, there is no way the National Treasury will get a return on investment in the form of taxes from spending. These people live on kadogo economy. Most of them are heavily indebted to the mobile loans and even shopkeepers take stock on loan and sell on credit to the indebted residents.

In the final analysis, since these economic policies do not address the demand side of the economy, the result is poor livelihood and low-purchasing power. As demand is the willingness and ability to purchase, the populace — in this case-has the willingness but no ability to purchase.

Without creating jobs for the youth, the demand side remains low and economic stimulus to businesses cannot work as the citizens remain on the informal economy. That is not sustainable as they have no ability to repay the debts.

No ‘middle class behaviour’

Secondly, this bottom-up approach may work in the US but it cannot guarantee effective and sustainable economic development in Kenya. This is because we do not have a clear middle class and if there is, they have not yet acquired middle class behaviour.

Experts usually define the middle class by income or by lifestyle. In Kenya, we ought to perceive middle class by state of mind. Unfortunately, we still have tribal mindsets instead, and view most things using tribal lenses.

Any form of decision-making is made with tribal consideration, be it voting, policy analysis, economic blue prints, budgeting, referendum or government appointments among others. Middle class behaviour in Kenya can’t be used to predict spending since two people who earn Sh200,000 each will live in different estates, take their children to different category of schools, drive different types of cars among others.

Hence, we need a paradigm shift from using the Western models to using our own homegrown models of looking at the economy. This new paradigm is the use of demography. For example, youth and women-focused economy to create jobs.

Now, six out of 10 Kenyans are below 25. To guarantee effective economic growth in this category, we have to deliberately focus on creating jobs by building factories in the grassroot economies so that these youths can start earning after they finish schooling. And thereby reversing the notion that education has changed from being key to success to a source of frustration.

In as much as we have not heard exactly how Ruto wants to execute the bottom-up approach for us to objectively critique it, his detractors now joke that he created the hustlers by opening up too many universities and colleges to provide too many degrees without having created equivalent ways of creating jobs.

To them, it is this frustration that has created the hustler nation which is what he is trying to solve with the bottom-up economic model.

  
Dr Ogola is Academic Director- MBA programmes - Institute of Strategy and Competitiveness at Strathmore University Business School

 

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