We need to come up with theories of African capitalism

In Summary

• Kenyans rich and poor are shopping as though they were only meant to be consumers.
• These stores must be stopped from vertically integrating (an arrangement in which the supply chain of a company is owned by that company). 
• Nairobi Java House saw the opportunity and set up in some counties.  The Java in Kisumu that is the talk of the town has become a central meeting point. 

By BITANGE NDEMO
More by this Author

Our economy is growing in a strange way.  After several years of agonizing about slow economic growth, it emerged that we were growing better anyway.

This perhaps is the reason why we pushed up our total economic output in what economists referred to as rebasing.  I now think that we could be growing even faster than previously. 

It is like a revolution that is taking place, but many of us do not quite understand this phenomenon. 

Well, it would be sad to be told ten years down the road that there was an economic revolution in Kenya between 2005 and 2025.  There are many reasons why we may never take advantage of this important era in our lives. 

First it is the fact that we are grossly miscalculating the Gross Domestic Product (GDP).  This is the measure of how well an economy is doing.  In practice, it is a measure of the rate of change that a nation's economy goes through from one year to another.  

This important indicator is a measure of 'value added' rather than sales; it adds each firm's added value (that value of its output (products) minus the value of inputs (raw materials) that are used up in producing it).

For example, a firm buys timber and adds value to it by producing furniture; double counting would occur if GDP added together the value of the timber and of the furniture. 

POVERTY INCREASING WITH GDP

Since GDP is based on value added, it therefore increases when a firm reduces its use of materials or other resources ('intermediate consumption') to produce the same output or, in other words, when the firm increases its productivity.

In a simpler way, GDP equals to the aggregate of total consumer spending, money spent on capital investments, government spending and net exports (the currency difference between money spent on the economy's goods by foreign economies and the money spent by the domestic economy on a foreign economy's goods).

READ:  MAINA: By attaching perceived value to imports KRA prevents further lowering of prices

READ: KISUMU: Ban imports to save rice sector, urge farmers

READ: Sugar, maize imports to test Uhuru’s EAC integration plan

If the imports are more than exports, then you will have a negative growth if all the other variables mentioned here remain constant.  It is quite possible that poverty can increase at the same time that GDP increases. 

This is when only a few in an economy benefit from the growth, leading to a widening gap between the rich and the poor.

Over the past three weeks I set out on a mission to find out what is fuelling our economic growth to the extent that we even underestimate it. 

I focused on consumer spending from mostly retail outlets,  partly because the 2013 economic survey shows that wholesale and retail was the second biggest contributor to GDP growth, accounting for 15.2 per cent of the overall growth after agriculture and ahead of transport and communication. 

‘SUPERMARKET SYNDROME’

Further, World Trade Organization (WTO) data shows that we are a net importer, even with agriculture that we pride ourselves in.  We are now importing some of the most basic commodities, such as eggs from South Africa, but we still have strong GDP growth. 

I wanted to find out exactly what is driving consumer spending to such high levels. My data-gathering took me through Ngong Road, Karen, Ngong Town, Kiserian, Ongata Rongai, Langata and back to the city. 

Then I set on another journey through Muthaiga, Kasarani, Ruiru, Juja, Thika, round to Gatundu, Githunguri, Kiambu and back to the city.  Lastly, I took Mombasa road, Mlolongo, Athi River, Machakos round to Kangundo, Ruai, Umoja, Donoholm and back to the city through Jogoo Road. 

In my findings, which I will present in two parts, I conclude that we are under an invasion of the supermarket syndrome.  Kenyans rich and poor are shopping as though they were only meant to be consumers.

There is nothing wrong with a retail boom, but it is displacing the small mom-and-pop shops and mama mbogas.  Those who have attempted to supply mboga to these supermarkets are not being paid. Payments are delayed for up to one year, complicating their meagre cash flow. 

‘PECULIAR CONSUMPTION’

In the same category are small cottage industries in agricultural value addition.  They too are getting squeezed by the ‘big boys’. 

It should not be this way.  The government must protect micro-entrepreneurs.  For starters, these stores must be stopped from vertically integrating (an arrangement in which the supply chain of a company is owned by that company).  

In most countries, in any supply chain, consumers are protected through segregating those producing different products.  For example, a supermarket should not manufacture and sell furniture.

In my literature search, I discovered that even foreigners know our peculiar consumption characteristics.  They are taking advantage of it while we sleep.

Euromonitor International in their quarterly review said this:

Kenya’s retailing industry continued to experience considerable growth over the review period. This can be attributed to increased purchasing power among Kenya’s middle class and upper class populations. Other key factors include improved infrastructure, which has facilitated the movement of goods and meant higher quality at lower prices. In addition, the sustained property boom had allowed retailers to establish outlets in prime locations near residential neighbourhoods, offering more convenience to consumers. Retailing in Kenya is thus on an upward growth trajectory, especially supermarkets.

This considerable growth is most likely greater than what official statistics report.  Although our media lack good analysis of what is going on, they do report economic incidents that seem unrelated to our strange economic expansion. 

TRUSTED, INFORMAL PARTNERS

Some media outlets reported that major global food outlets are setting up in Kenya, specifically Kentucky Fried Chicken, Domino’s Pizza, Subway, etc.  These global chains are not set up by accident.  They do thorough research on consumer spending before investing. 

There is therefore a very high correlation between investment by global chains and economic growth of the country.

We do not see opportunities like that since we never mash up datasets to get the story behind what is happening around us.  For example, for the past two years we have been chanting devolution, but we failed to predict accompanying opportunities that we could exploit. 

Nairobi Java House saw the opportunity and set up in some counties.  The Java in Kisumu that is the talk of the town has become a central meeting point.  But where is the money coming from?

I suspect that the source of Kenyan finance is not just normal sources. Much of it comes from unearned sources.  Most incomes come from normal production processes, but not all make it to national statistics. 

Formal organisations have informal working relationships with their unique suppliers.  For example, the hospitality sector in most cases, deals with trusted informal enterprises simply because there are no standards and the standards body has failed to stem counterfeiting.

THE REAL ESTATE PROBLEM

This form of enterprise is similar to running an underground economy, yet the resource circulates within the economy.

There are also disruptive sources emerging.  Key among them is deal-making through well connected wheeler-dealers.  This is money that is not actually earned since most of it ends up in real estate, which does not make economic sense. 

A good example is purchasing property for Sh100 million that earns rent of below Sh300,000 a month, so that the payback period is way beyond ten years. 

There is also a growing rate of fool’s finance, where wheeler-dealers buy property or businesses for their lovers.  Some legislators have fallen into this trap. It creates an artificial demand for property and pushes the price beyond what most people can afford.

Remittance from the diaspora is a factor too, because it gets into investments that rarely make sense, with some of the resources ending up in consumption.

In a free market economy like ours, we assume that money will trickle down especially when we buy produce or hire services from those at the bottom of the pyramid.  These assumptions are wrong and very Western. 

OIL PRICE OPPORTUNITY

We need to come up with our own theories of African capitalism.  We must support local start-ups and develop lasting relationships. We must deliberately create rural enterprise clusters by seeking opportunity in these places and helping the locals to exploit them. 

For example, the Centum Coal Power Plant should not have been built at the Coast as a risk mitigation measure.  It should have been built within the Mui Basin and government should have taken the risk of ensuring that the coal from Mui meets the required standards.  The Coastal region has itself many unexploited opportunities, including fishing, to fire the local economy.

With the decreasing oil prices, there is an opportunity to lower our input cost and fuel our economy to grow sustainably at double digits, exploit local opportunities to widen the inclusivity net, enhance the regulatory framework in the retail sector to create more opportunities at the bottom of the pyramid and above all be part of the economic revolution that is underway. 

Indeed there is growth, but it cannot be sustainable in the long run. There is greater benefit in capturing all our economic data in order to understand our growth pattern and change our economies in a positive way.

The writer is an Associate Professor at University of Nairobi’s Business School and a former Permanent Secretary in the Ministry of Information and Communications. Twitter: @bantigito