The Economics of Kenya

Here’s my attempt at being an economist… let me know if this is completely unintelligible.  So I’ve been thinking recently about poverty and wealth in Kenya.  Nairobi is the wealthiest, most metropolitan city in Kenya (And most of Africa for that matter), complete with shopping malls, nice restaurants, country clubs and pretty much anything else you could want.  It also houses the second largest slum in Africa (Kibera) and hundreds of thousands of people just barely scraping by.  Further, the wealth distribution is unbelievably skewed against black Kenyans – over 90% of businesses here are owned by Indians.  I’m not complaining about wealthy Indians, they are extremely industrious, smart people who have shaped the economy of this country.  And I don’t think we should start an “Occupy Nairobi” campaign to redistribute wealth to black Kenyans because they’ve been oppressed by “big business”.  But I do think it’s worth thinking about how to create wealth for Kenyans that often haven’t had great opportunities.  We need to create jobs, as well as figure out how to motivate and empower locals so that they have the resources to take themselves out of poverty.

I started thinking about this when I found out the daily wage of a houseworker in Nairobi… $5.  Now it’s easy to understand that $5 a day is not much to live on, even in a developing country like Kenya.  I’m not sure where our housekeeper lives but I guarantee it’s no luxury apartment.  So the question is, since we have money and it wouldn’t greatly affect our budget, should we raise her wage, knowing that $5 a day is not enough to live a comfortable life?  It sounds cruel but I believe the answer is no.

If we paid our housekeeper above the standard wage, to be quite blunt I think we would be rewarding mediocrity.  After all, the market has determined that her service is worth $5, and we would be artificially inflating her wage, not because a housekeeper is worth more than $5 but because we feel sorry for her.  Eventually she would become dependent on the extra “free” money, and when we moved away she would find herself in quite a pickle.  I also think paying someone more because you sympathize with their situation reinforces the wrong incentives with which NGOs and aid agencies have plagued Africa for decades.  Because NGOs and government aid programs only give money to people who need it most, they are removing incentives for people to work and improve their own lives.  If you can work to get yourself out of poverty or continue receiving free hound-outs, why would you get an education or find a job?  I think we’re seeing a similar dilemma in the U.S. by offering excessive employment benefits and social security because unemployed Americans people “deserve it”.

Now, before you come to the conclusion that I’m a heartless jerk or an abused child, I want to say that I  do have empathy for people who are unemployed or trapped in poverty.  I have to admit that I come from an upper-class, privileged lifestyle and I haven’t had to, nor will likely ever have to work for $5 a day.  However, most people would agree that governments and businesses can’t run on charity.  We have to think of creative solutions to create wealth rather than continue to fund Africa at great cost to all parties involved.

What are exactly are those solutions?  I’m glad you asked.  The #1 solution to poverty in Africa has to be job creation.  Jobs will provide sustainable, profitable livelihoods to people, train them in certain skills, and give them hope for a better future.  But there’s another reason to create jobs: supply and demand.  As long as 40% of Kenya remains unemployed (CIA World Factbook), there will be millions of workers willing to take our housekeeper’s place, even at a measly wage of $5 per day.  However, the more people are employed, the harder it becomes to find a good housekeeper, and the more we will be wiling to pay them for their services.  As you can see, job creation is good as a means in and of itself, but also raises average incomes in developing nations by decreasing the supply of cheap labor.

I have to admit that this is very theoretical and sounds good on paper.  Actually starting businesses and creating jobs is a much harder, longer task that will take decades to accomplish.  And if you’re coming from the context of the U.S., multiply the challenges of creating a company by ten and you’ll have a good picture of how difficult it is to begin a profitable, efficient, and ethical business in Africa.  Nevertheless it’s worth the challenge because the potential benefits are enormous.

I have to admit that a lot of my thinking derived from a book titled “The Undercover Economist“.  It’s a great application of economics to everyday life and an interesting read.

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Thoughts from Tanzania

Some things don’t seem like a big deal until you live without them.  Electricity is one.  There are so many little things that make life without power difficult.  Without electricity you can’t plan a regular schedule.  You can’t sleep at night because you don’t have AC or a fan to keep you cool.  You can’t shower when you want to because the water heater won’t work.  Kids can’t do their homework because there is no light.  I haven’t found any statistics, but I’m sure Tanzania loses billions of dollars a year to lost productivity.  I went to a factory the other day that simply shuts down when the power goes out: running the generator is too expensive.  They lose up to 12 productive hours a day because the government can’t get its act together.  In my senior thesis (Conveniently posted in the “Other Writings” section of this blog) I wrote about the need to increase infrastructure rather than aid to developing countries.  I didn’t even mention electricity because I had no idea.  If I were writing the paper now I would put this essential element of development towards the top of the list.

Another thing on my mind has been the relationship between NGOs and businesses in developing countries.  There are so many NGOs in Arusha it’s crazy.  Whether they are actually having much impact is up for debate.  I had a thought the other day that I’ve been considering carefully.  I think non-profit organizations were created for wealthy rather than poor countries.  They were designed to fulfill needs that free-market economies missed.  So if a poor community in Compton had terrible schools and the government wasn’t doing it’s job, NGOs would step in and provide after-school programs, free lunches etc.  The problem is that we’ve taken NGOs which were designed to address very specific needs in small communities, and used them to replace entire economies, resulting in mega-NGOs that become huge bureacracies.  Their intentions may be good but they are killing countries.  Again, I don’t have statistics but I wouldn’t be surprised if 10-20% of Tanzania’s struggling economy came from donations.  That is dangerous ground where systems of dependency become permanently ingrained in peoples’ mindsets.  Twice today people have introduced themselves to me, promptly asking for money.  Something is wrong with that mentality.

I have one more strange story before I finish.  Today I was walking back from my meeting with World Vision and met an albino guy on the road.  He didn’t speak much English but we must have walked for a couple of miles together before I got into a taxi.  It was strange walking with another “white” person in such different circumstances.

Land of Opportunity

Despite poverty, I’m continuously amazed by how much opportunity Africa presents.  It seems like every day I meet someone who is pursing another idea I’ve never heard of.  I’ve met people starting businesses in fields from internet marketing to agriculture to African artifacts and finding a lot of success.  In a place where responsible business is relatively new, there is little competition and tons of opportunity for those who are willing to put in the extra work.

With all the infrastructure development happening and the implementation of a new constitution that is supposed to reduce corruption and provide greater accountability, I really think this place is one the verge of something huge.  In fact, Kenya has a pretty ambitious development plan called Kenya Vision 2030.  The plan is based on economic, social and political pillars of development and looks really interesting.  I’ve provided a link and will let you read more if you would like.  Poverty will undoubtedly remain and absolutely needs to be addressed but Kenya seems to be moving in the right direction.

And what drives innovation here?  In my humble opinion it’s responsible business.  I once heard someone say telephone companies across Africa have done more to help individual Africans than all NGOs combined.  I couldn’t agree more.  Because profitable businesses like Safaricom in Kenya provide essential services and train future leaders.  These people carry their business acumen into other fields, providing jobs and adding long-term value.  In addition, communication connects people to opportunities.  Talent is universal, opportunity is not and providing phone accessibility connects that talent to opportunities.  I’ve said this before and I will say it again: NGOs in Africa have failed to implement lasting change because they reallocate value instead of creating it.  Meaning we dump money on Africa instead of helping them help themselves.  Ultimately they fund cycles of dependency instead of encouraging innovation and progress, working against their own goals.  It’s seems ridiculous but this mentality is ingrained in Western minds and old habits die hard.

I’m sorry to rant, I just feel like African business is going to boom very soon.  We need to be educated about how to support this development and not continue to “help” Africa by donating money.  Please comment if you disagree and we can have a civilized discussion 🙂