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Story by DIANA PATEL
Prof Stephen Parente and Nobel Prize winning economist Edward C. Prescott, in their seminal book Barriers to Riches, demonstrated in a remarkable mathematical model why incomes do not equalise across countries as classical economic theory predicts.
In a novel and insightful supporting study, Parente and Prescott showed that cross country differences in Total Factor Productivity (TFP) were a significant factor in the failure of the expected equalisation to occur.
The reason TFP and thus incomes differ among countries is attributed to government policies that protect industry insiders by imposing restrictions on work practices and choice of technology. Vested interests use their influence and insider status to gain monopoly protection that leads to inefficiencies and less than optimal use of resources. TFP in such environments is lower and thus resources flow at a proportionally lower rate.
Monopoly, oligopoly and government protection are well known in Kenya, and not only explain much of the country’s poverty, but also much of the disparity in incomes between the rich and poor. The rich sometimes get richer by using their access to government machinery to award themselves an unfair advantage over their less influential competitors.
Prof Stephen Parente and Nobel Prize winning economist Edward C. Prescott, in their seminal book Barriers to Riches, demonstrated in a remarkable mathematical model why incomes do not equalise across countries as classical economic theory predicts.
In a novel and insightful supporting study, Parente and Prescott showed that cross country differences in Total Factor Productivity (TFP) were a significant factor in the failure of the expected equalisation to occur.
The reason TFP and thus incomes differ among countries is attributed to government policies that protect industry insiders by imposing restrictions on work practices and choice of technology. Vested interests use their influence and insider status to gain monopoly protection that leads to inefficiencies and less than optimal use of resources. TFP in such environments is lower and thus resources flow at a proportionally lower rate.
Monopoly, oligopoly and government protection are well known in Kenya, and not only explain much of the country’s poverty, but also much of the disparity in incomes between the rich and poor. The rich sometimes get richer by using their access to government machinery to award themselves an unfair advantage over their less influential competitors.
While no claims have been made that influence was a factor in the recent 14-seater matatu saga, it’s striking that there was no public debate and minimal discussion before Legal Notice 111/2006 was quietly gazetted on August 18 last year. Whether through influence or omission, clearly a mistake was made, and in February this year, in an admirable display of intellectual honesty, the mistake was corrected by Transport minister for Chirau Ali Mwakwere.
It may be regrettable that some businesses invested in new buses on the strength of the notorious gazette notice, but it would be far worse if this travesty of justice and affront to the spirit of free competition were to take effect, leaving the average Kenyan at the mercy of an oligarchic transport industry with its inevitable increase in fares.
HOW DOES THE LITTLE GUY PULL himself out of poverty when certain industries become the sole preserve of the rich by government fiat? Income differentials will increase if free competition is restricted.
If it is true, as claimed by one city commuter transporter, that 25-seater buses make economic sense, then the free market will push the 14-seater matatus out. But it is difficult to believe there is no role for smaller vehicles, particularly in low density areas of town. What would happen to areas in which it is difficult to fill a 25-seater? People will wait, and people will walk. And it is even more difficult to believe that 14-seaters are unpopular if it requires a law to eliminate them! These matatus exist because they provide an affordable service.
Claims of deterioration in matatu behaviour since the Michuki rules were overturned are neither here nor there. Regulations are still in place governing road worthiness, as are traffic rules and speed limits.
Other arguments citing congestion in the city centre are equally misplaced. Most countries penalise single-passenger vehicles, building new roads, giving right of way to buses, and providing adequate parking to reduce the endless driving around looking for space. It is inequitable to make the poor suffer to keep roads clear for sleek cars and limousines and it’s inefficient in terms of moving large numbers of people.
Mr Mwakwere saw the point and reversed a hastily made and poorly considered decision. He should be commended.
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Ms Patel, an economist, is the managing director of Avenue Healthcare
Sources; Daily Nation
Saturday, April 14, 2007
http://www.nationmedia.com/dailynation/nmgcontententry.asp?category_id=25&newsid=95860
It may be regrettable that some businesses invested in new buses on the strength of the notorious gazette notice, but it would be far worse if this travesty of justice and affront to the spirit of free competition were to take effect, leaving the average Kenyan at the mercy of an oligarchic transport industry with its inevitable increase in fares.
HOW DOES THE LITTLE GUY PULL himself out of poverty when certain industries become the sole preserve of the rich by government fiat? Income differentials will increase if free competition is restricted.
If it is true, as claimed by one city commuter transporter, that 25-seater buses make economic sense, then the free market will push the 14-seater matatus out. But it is difficult to believe there is no role for smaller vehicles, particularly in low density areas of town. What would happen to areas in which it is difficult to fill a 25-seater? People will wait, and people will walk. And it is even more difficult to believe that 14-seaters are unpopular if it requires a law to eliminate them! These matatus exist because they provide an affordable service.
Claims of deterioration in matatu behaviour since the Michuki rules were overturned are neither here nor there. Regulations are still in place governing road worthiness, as are traffic rules and speed limits.
Other arguments citing congestion in the city centre are equally misplaced. Most countries penalise single-passenger vehicles, building new roads, giving right of way to buses, and providing adequate parking to reduce the endless driving around looking for space. It is inequitable to make the poor suffer to keep roads clear for sleek cars and limousines and it’s inefficient in terms of moving large numbers of people.
Mr Mwakwere saw the point and reversed a hastily made and poorly considered decision. He should be commended.
_______________________
Ms Patel, an economist, is the managing director of Avenue Healthcare
Sources; Daily Nation
Saturday, April 14, 2007
http://www.nationmedia.com/dailynation/nmgcontententry.asp?category_id=25&newsid=95860
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