Does secrecy make economic sense?

NAIROBI: Swahili was never my strongest subject, but I am told the word serikali came from siri kali (great secret).

That governments have secrets is not in question. Some information on key government decisions only go public years later. Such secrets are published, or declassified, after 20 years (in the UK) or longer when the key actors are either dead or irrelevant.

From 2006, the US began declassifying secrets after 25 years, but extensions can be given. India has a 25-year rule on declassification, which can also be extended for national security reasons. Kenya probably follows the old British 30-year rule.

The reason given for keeping information secret from an economic perspective is that it will disturb the market.

Economics Nobel Laureate Joseph Stiglitz (and a former don at the University of Nairobi) noted in a lecture in Japan in 1998 while reacting to the Asian economic crisis that, “secrecy or restricted information is often used by government officials to restrict outside participation in decision making”.

He added, poignantly for Kenyans: “The resulting exclusivity in decision-making increases both the influence and rents to government officials.” Rent is economics-speak for bribes.

He summarises by observing that limitations in information restrict competition in decision making.

The private sector also has its secrets. We do not know the recipe for Coca-Cola, for instance. Few know the real costs of the products or services we buy and the profit per unit.

Restrictions on information reduce the chances of making a good decision. Can you now explain why some decisions made in the public sector are surprising and hold our economy hostage?

The Constitution tries to reduce this restriction by demanding public participation in key processes, including budgeting.

CORPORATE BOARDS

This restriction takes another form in the country: the same people make decisions on most critical issues.

Look who gets into task forces, commissions of inquiry, and so on. Our representatives in Parliament hardly change. Until the Capital Markets Authority came up with new rules, the same people populated corporate boards.

Can you now explain why corruption has been thriving lately? Why not enact a freedom of information law to reduce restrictions on public information? After all, it is the public that pays for the generation of that information.

Stiglitz explained the concept of information asymmetry, which won him a Nobel. When one party has more information than the other (is that not what secrets are all about?), this information asymmetry can reduce the efficiency of markets and an economy. We need information to make good decisions.

Ever wondered why democracies tend to enjoy economic growth and higher standards of living?

Amartya Sen, another Nobel prize winner, noted that democracies seem not to experience famines despite the vagaries of weather. Democracies create competition because of inclusion, leading to better decisions, which are an asset in economic growth.

Looking at Kenya today, one may doubt that democracy makes our lives better. But the country experienced the longest period of sustained economic growth after the fall of Kanu. The political noise that characterises our nation today (because of democracy) will soon die as noise makers get tired or are ignored by the market.

We used to have two superpowers. Any surprise that the surviving one is a democracy?

There are other sectors affected by information asymmetry. In the spare parts market, for example, genuine spare parts dealers are being driven out of the market by fakes. The customers may not be able to differentiate a fake from a genuine part, but the sellers know. They have more information.

Does the National Transport and Safety Authority (NTSA) test car parts like brakes after an accident, or is the driver always the culprit? Interestingly, fake parts’ packaging contains very little information.

Service provision is not safe from information asymmetry and secrets either. The so-called Panama Papers show how shell firms are registered in tax havens to keep their details secret. Marketers know publicity is an asset.

Fake online universities reveal little on their location, owners, accreditation or history. They also target developing countries like Kenya, where keeping secrets is easy. Think of the quality of decisions made by fake academics in positions of responsibility.

Competitive recruitment was introduced to reduce secrecy in hiring in the public sector.

SERVICE PROVISION

We could give more examples, such as medicine where a doctor has more information about drugs than the patient and could easily take advantage of him or her. No wonder we rarely bargain with doctors or pharmacists. Remember what secrets did to Volkswagen and some Kenyan banks?

And you probably married the wrong person because you did not get all the information about him or her (one person kept secrets). You were swept by her beauty or his wallet.

Whether in the public or private sector, secrets make economic sense to a few. The vast majority suffer when there is secrecy.

It is time we enacted a freedom of information law to reduce secrecy, reduce corruption and make our economy more vibrant.

Finally, is it not paradoxical we are debating secrecy in the age of the Internet? Do Wikileaks and Panama Papers indicate the age of secrecy is finally over?

The writer is senior lecturer, University of Nairobi.

[email protected]