Kenya should adopt true capitalism to prosper

Think of yourself in your early 20's. Reading the fiery socialist books of Ngugi Wa Thiong'o like I Will Marry When I Want or The River Between, or Detained. What Socialist fever did they evoke?

Why would such a seemingly altruistic system of economics like Socialism fail?

As time went by, and noticing how socialist states were regressing in terms of development, one starts to doubt its key tenets. Countries like Cuba. Or the collapse of USSR. Or the democratisation of Eastern Europe and its pivot towards capitalism.

Or even China and its subsequent success on development as a capitalistic economic giant.

But to understand China's (or other newly capitalistic nations) economic success after its new pivot, one must understand how true market capitalism works in ways that uplift economies and cut poverty.

The starting point in understanding how capitalism works is in the classical book of Adam Smith, The Wealth of Nations.

Adams states: "It is not from the benevolence of the butcher, the brewer, or the baker we expect our dinner but from the regard of their own interests."

This introduced the concept of the invisible hand of the free market - where individuals pursuing their own interests can unintentionally benefit the whole economy.

Division of labour

The second important concept of capitalism is the notion of specialisation and division of labour. Adam stated: "It is the maxim of every prudent master of a family, never to attempt to make a home that it will cost him more to make than to buy... what is prudence to every private family can be scarce folly in that of a great Kingdom."

In other words, the clocks, spoons, plates, and beds that are in your house, were bought from someone else. How come you did not make them yourself ostensibly to save costs? Because it would have been more expensive to do so - as you do not have time and technology to make them efficiently.

If that made sense to you as a private individual, it also makes sense to countries. That countries cannot be fully self-sufficient in themselves. They have to buy from other countries those things they can not rationally manufacture at home.

But where does an individual get money to buy the clocks, spoons, plates and beds made by someone else? He must have offered some of his own goods or services, and he in turn uses the money gotten to buy goods from other people.

That means he must have sellable goods and services otherwise he will lack money to enable him to buy his desired spoons and clocks.

Same logic for countries. Productive countries produce goods and services with high demand from other nations. Those productive countries thus get money obtained in selling their goods and services (read exports). They use that money to buy goods desired in their countries (read imports).

What is the role of government in this whole chain of exchanges? Strictly nothing at the core point of exchanges. This is because the government is not a producer of any sellable goods and services. If a government attempts to produce tradeable goods and services in the market, it will most likely fail (as it did in several socialist states) for several reasons. First, the goods or services will not be produced efficiently. An item produced by the government might cost ten times more than one done by a private company. Second, bureaucracy and inferior technology might delay production.

But the government has facilitative roles. Setting rules that ensure an equal playing field. Providing core services like education and health to keep human capital well prepared for competition in the marketplace. Its taxes should therefore be minimal to ensure they do not become barriers to trade.

So, how should Kenya align itself to the above classical rules of capitalism as set out by Adam Smith?

First, it should reduce the overbearing presence of government in the marketplace. That can be achieved through the reduction of taxes that encumber productive sectors of the economy. It can also deregulate and cut bottlenecks that add hidden costs to true market performance. But most importantly government should eliminate crony capitalism. This is a system where businesses that are close to government prosper in comparison to others. True capitalistic nations' best companies have no relationship whatsoever with governments.

Second, a robust export market should be encouraged in Kenya otherwise we will lack money for buying imports. Look around yourself and see who is participating in exporting anything out of Kenya. The farmer growing tea or coffee or avocado or horticulture. Or exporting beef. Or exporters of manufactured goods. Or those exporting services like banking. Or even labour. Those are true heroes of the Kenyan economy. Without them, inflation would skyrocket.

The strategy should therefore be to rope in as many people as possible into exporting things. State deliberately nudging sectors to do exports and removing all barriers of exporting. Argentina has had absurd taxes on its exports to fund Government budgets. It's wise current president is now cutting them down.

Export and investment promotion levy introduced in Finance Act of 2023 should never have been considered.

Finally, the government should sharpen its facilitative role. A particularly wise investment in education. The clocks, beds, spoons in your house all required science to be produced. The countries that produced them to reach your home had invested in sciences. Same logic. Kenya needs more scientists to make similar goods. And factories to power these productions.

Dr Irungu Kangata is the Governor for Muranga County. [email protected]