How we risk being caught up in the middle-income trap

Comedian Chipukeezy joins fans for a selfie during the official unveiling of Infinix Zero 3 smartphone to the Kenyan market in Nairobi. [David Njaaga, Standard]

There is no denying that Kenya is ready for economic take off. Our human capital base is fairly decent. The Kibaki-inspired infrastructure boom serves us well.

We are finally unlocking agricultural productivity. And our innovation record suggests that we are generally open to new economic ideas and processes.

Yet despite this enormous potential, we run the risk of falling into the middle-income trap - a situation whereby economies stagnate at a certain level of income on account of a lack of innovation, rigging of economic rules by entrenched big businesses, and endemic inequality that stifles innovation and entrepreneurial activities.

Infamous examples of countries that stuck in the middle-income trap are Brazil and South Africa, two countries with dual economies - one marked by high productivity and innovation, and another by low wages and structural inefficiencies.

In the field of political economy, we have long established that the middle-income trap is principally a political problem. Countries stuck in the trap typically exhibit political decay, whereby politicians fail to translate initial high rates of economic growth into future improvements of the human capital base (through better education and healthcare) and investments in research and innovation.

Instead, elites in such countries collude to protect inefficient incumbent dominant players in favoured sectors; or set about destroying their opponents' economic investments in the name of politics.

Furthermore, these countries also fail to invest in institutions - like fair courts, legislatures that make rational laws, and predictable and reasonable regulatory environments - to facilitate faster growth.

Our current political crisis is a classic symptom of the danger we face. Beyond the legitimate protests over the cost of living and other grievances against the Kenya Kwanza administration, we have an intra-elite struggle for economic power.

Elites in the new administration wants to cut the economic powers of their opponents to size, while also amassing their own economic power using available policy levers. This approach to politics is inefficient for two reasons. First, it means the government never focuses on innovations in new sectors or improving the human capital base. It is easier to cannibalise existing sectors with shady schemes.

Second, the inherent lack of secure property rights means all major enterprises engage in defensive investments and inefficient forms of property rights protections. Combined, it is no wonder that many countries in our position find themselves stuck in the middle-income trap.

The writer is an Associate Professor at Georgetown University