Opinion: Bottom-up economics is the future but the bureaucrats gaining from cronyism oppose
By Billow Kerrow
| August 3rd 2021
Early 20th century economists pitched for ‘trickle-down’ economics, fronting large scale infrastructural projects as central to employment generation. States favoured financing industrial and urban development, and incentivized capital investment.
Former US President Ronald Reagan’s administration made it a centerpiece of their economic strategy in the 1980s, providing tax breaks and other benefits for corporations and the wealthy to stimulate the economy, a model replicated by George Bush and Donald Trump.
However, US President Joe Biden told Congress in April that trickle-down economics never worked and expressed his administration’s strategy of a bottom-up approach.
A 2020 study by the London School of Economics of 50 years of data from 18 countries too showed that the only significant effect of significant tax cuts to the rich was to increase income inequality with little benefit to unemployment or economic growth. After 2008 Wall Street collapse, former World Bank economist Joseph Stiglitz published Freefall in which he stated “the poor suffered under market capitalism. Trickle-down economics didn’t work due to unfettered capitalism.”
Bottom-up approach advocates small-scale projects involving rural and urban poor in income generating stimulus, complementing the top-down approach by easing the impact of the state’s macroeconomic policies on vulnerable population sectors. The proponents argue that growth must be bottom-up to be equitable and sustainable, with wealth redistribution seen as an essential check on capitalism since the market isn’t perfect.
Bottom-up also refers to devolution that considers development to be based primarily on maximum mobilisation of a geographical area’s natural, human, and institutional resources to improve wellbeing of its people. In early 2000, several states such as Colorado and Nevada in the US had already embraced bottom-up as the new approach in state economic development and recognised regions as the real locus of growth and change.
In the East, it is about empowering entrepreneurs from below, dispersing economic influence. In 2010, Prof Victor Nee, Director of the Centre for the Study of Economy and Society at Cornell University wrote in his research work: ‘Bottom-Up Economic Development and the Role of the State: A Focus on China’: “I assert that the defining feature of transformative economic development in China is the “bottom-up” construction of informal economic institutions.”
My argument is that informal economic institution enabled entrepreneurs to surmount formidable barriers to market entry and discriminatory policies of the state. From outside the established economic order dominated by state-owned enterprises, entrepreneurs developed economic institutions that enabled them to compete and cooperate in spite of disadvantageous or simply absent formal rules.
He noted that this bottom-up process resembled “earlier accounts of the rise of capitalism in the West.” As in 19th England and Germany, the first entrepreneurs were not part of the political or economic elite, but came from modest social background. As Li Shufu, the founder and CEO of Geely Automobile, the Chinese multinational automobile company, notes, his generation of capitalists were “just a bunch of simple farm boys,” many coming from impoverished farming households.”
In November 2020, India opted out of the Regional Comprehensive Economic Partnership of the ASEAN countries until the needs of the country’s small enterprises, farmers, and poorest citizens are properly addressed. It stood up to pressure from a rump of Washington Consensus trickle-down economists advocating that more free trade was the solution to India’s economic problems.
Perhaps one of the most known bottom-up economic model in the Third World is the Grameen Bank in Bangladesh in the 1980s. As a means to fight poverty, the microfinance bank provided credit to poor citizens without collateral, and even in-kind credit and it proved a huge success.
In 2006, Grameen Bank and its founder Muhammad Yunus won the Nobel Peace prize “for their efforts to create economic and social development from below”. Similarly, Iqbal Quadir founded the Grameen Phone through an innovative scheme that has allowed local entrepreneurs—mostly women—to buy cellular handsets with loans from microcredit pioneer Grameen Bank and then rent the phones, with airtime, to neighbors. Today, Grameen Phone in Bangladesh has nearly 82 million direct subscribers and controls nearly half the market share. Former senior editor at Harvard Business Review, Gardiner Morse, wrote in august 2003 that “the real problem is where the capital goes.” Capital given to entrepreneurs creates jobs, economic growth, and, ultimately, improved governance. Capital given to predatory government bureaucracies only reinforces centralised authority and strengthens vested interests.
Consider the difference between giving $500 million (Sh54 billion) in aid to the government of Kenya versus buying apparel from Kenya that allows 500 different entrepreneurs to make profits of $1 million (Sh108million) each. While building identical foreign-exchange reserves, the latter creates many more jobs, produces bigger economic ripple effects, aligns the government’s interests with the country’s prosperity through taxation, and disperses power to a large number of businesses—all of which promotes democracy and growth.
The raging debate on bottom-up economics in Kenya is perhaps long overdue. Government policy advisors focus more on the modern sector at the expense of the informal sector that accounts for 80 per cent of the livelihoods of citizens. The financial sector has also taken cue and shunned this sector largely as a credit risk. Our SMEs are only mentioned in lofty documents as essential and often receive little or no support to incentivize them.
Bottom-up approach requires a paradigm shift in the medium term, a change in mindset by our policy wonks in government and donors/lenders. It won’t be a walk in the park.
Wheeler-dealers in Government prefer mega infrastructural projects with larger payoffs, a phenomenon taking root in the counties. The tax regime also does not discriminate between SMEs and the corporate world. With the ballooning public debt, restructuring the tax regime to cushion small businesses will be a tall order. Perhaps more significant will be credit access by the informal sector. Although government can influence banks to channel funding to specific sectors, the regulator has focused on regulatory aspects rather than facilitate businesses by enforcing favourable policies.
Mr Kerrow, an economist, is a former Mandera Senator.
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