The fall of free enterprise looms as governments turn to controls

File | NATION
A KenolKobil petrol station attendant adjusts prices on a billboard after the Energy Regulatory Commission reviewed fuel prices.

What you need to know:

  • US President Donald Trump has openly criticised the trade imbalance with China.
  • China accounts for 60 per cent of the annual US trade deficit of $500 billion.
  • In Kenya, the government’s cap on interest rates is the latest onslaught on the laissez-faire dream that saw it abandon interest rate controls 25 years ago.
  • The other significant attack on the market forces of supply and demand is the regulation of petroleum prices.
  • Since December 2010, the Energy Regulatory Commission has stipulated monthly maximum wholesale and retail petroleum prices.

Free market economics typically tends to ruffle the feathers of political leaders.

US President Donald Trump has openly criticised the trade imbalance with China.

The bone of contention is the $300 billion annual trade deficit. China’s rapid penetration of the US market has unsettled the Trump government.

China accounts for 60 per cent of the annual US trade deficit of $500 billion. It is a major threat to Mr Trump’s promise to restore the glory of US industries and give Americans more jobs.

In Kenya, the government’s cap on interest rates is the latest onslaught on the laissez-faire dream that saw it abandon interest rate controls 25 years ago.

MARKET FORCES

The Banking (Amendment) Act 2015, which President Uhuru Kenyatta signed into law last August, overturned the freedom the financial sector enjoyed since interest rates were deregulated in July 1991.

The other significant attack on the market forces of supply and demand is the regulation of petroleum prices.

Since December 2010, the Energy Regulatory Commission has stipulated monthly maximum wholesale and retail petroleum prices.

The import of these interventions is that free markets aren’t efficiently allocating scarce resources and have failed to achieve the expectations of the government.

The risk of Chinese exports is more jobs being lost and more wealth being generated by Chinese as American firms struggle to survive.

PAY FOR LOANS

In Kenya, the interest rates regime that has determined how much borrowers pay for loans and earn for their savings is considered to have failed to serve the wider economic and social interests.

A good regime should support the government’s development priorities.

It is presumed that personal and business loans will be cheaper, while a better savings rate will encourage a savings culture.

It will be a wakeup call as Kenya’s domestic savings rate, which on average 10-12 per cent, is so low that it cannot stimulate investment.

A higher return is expected to improve the national savings rate, but there are many other factors that determine how much is available for saving.

DISPOSABLE INCOMES

They include the impact on disposable incomes of the high cost of essential consumer goods.

Banks have for long failed to address the priorities of the government to allocate more credit to agriculture and manufacturing, which are the backbone of economic growth.

A recent survey by the Kenya Bankers Association in response to the interest rate caps highlighted this problem: While the trade sector accounted for 30 per cent of total banking sector credit at the end of 2015, credit to manufacturing was only 11 per cent and to agriculture, six per cent.

Controls may also have unintended effects. Petroleum price controls have benefited marketing firms that have a more efficient value chain—from import through wholesale to retail operations.

They have also enabled the industry to attract relatively small oil firms that have eaten into the dominant position of the large marketers—Total, Vivo Energy (distributor of Shell products) and Kenol/kobil.

EMBRACE INNOVATION

In the financial market, the highest gainers will be banks that embrace innovation.

This will be critical to remain competitive, not just against other banks, but also other financial products, such as the fast-growing mobile money firms, and the new M-Akiba Treasury borrowing. Banks that find it difficult to navigate are likely to disengage from the market.

The big financial sector players such as Equity Bank, hit the ground running when the dominant banks kicked out small depositors in the 9os.

The government intervenes in markets seen to be inefficient and cutting off small players.

Supply of fertiliser and seed is largely a free market enterprise, but the government intervenes to ensure farmers get fair prices.

The government doesn’t have to impose market caps, but if the forces of supply and demand fail to bring change and transformation, protectionist measures will be inevitable.

It matters less how inefficient and costly they are in allocating scarce economic resources.

Mr Warutere is the principal associate at MA Consulting Group. [email protected]