Cartels are Kenya’s enemy number one

By all accounts, Kenya is a country with much economic potential. Its workforce is relatively well educated. It has a long tradition of a market-based economy. Its industries were historically the most advanced in the region. Its infrastructure has improved significantly in recent years. Macroeconomic policies have been generally sound. 

Yet, its growth performance has been lacklustre. In an earlier piece, I described how an elite-favouring, rent-centred political-economic system is the fundamental cause of slow growth. There is another way to think about it that may have more resonance with the daily experience of Kenyans.

Adam Smith famously articulated that simply by trading what you produce well (be it maize, clothes or some service) for what you do not have (fertiliser, consumer goods or healthcare), all actors in a market system can be better off and accumulate wealth. That is how advanced economies have become rich.

But, this does not work for a majority of Kenyans.

For instance, when small farmers buy fertiliser and seeds, the prices are often unfairly high and the quality uncertain because the supply chain is manipulated by cartels.

After their toil, when they try to sell their produce, farmers are forced to sell them cheap. They are typically unable to wait for the price to rise, or they may even have pre-sold their produce to get financing for inputs. The middlemen make huge profits. Actual producers get a pittance. In effect, the market system has become a weapon of exploitation.

Kenyans tell me that the economy is thoroughly cartelised. In every sector, the ‘middlemen’ types or the ‘big players’ distort the market to earn maximum ‘rents’ (or excess profits) at the expense of average producers and consumers. Sugar, maize, milk, you name it. 

Of course, government procurement is a favourite target of cartels because there is so much money involved.  Their unscrupulous actions rob honest businesses of opportunities to make fair profits by winning tenders properly. This is another way in which cartels undermine the market system.

It is important to invest in good infrastructure, quality education, good healthcare, and create a business-friendly environment.

And Kenya can do more to improve these further. But, the county’s real problem is not those. Kenya’s market system suffers from a cancer of cartel. Without removing it, the market cannot do what it is meant to: make life better for everyone. 

So, how should Kenya fight this cancer that has spread everywhere? 

The government’s “fight against corruption” has tended to focus on prosecuting corrupt officials and their private-sector accomplices.

This is important; everyone should see that committing a corrupt act will not go unpunished. But, this effort has had only limited impact, as the Judiciary process is painfully slow and is often suspected of corrupt influences.

Even the government’s intention itself has been questioned as “politically motivated”. I believe the government should complement the prosecutorial approach with an effort to break down the cartels. It is not easy, but it will have more immediate benefits for the small players.

There is no sweeping solution to deal with the cartel problem in all sectors. I suspect an answer needs to be found sector by sector, and perhaps locality by locality. The famed mango processing plant in Makueni was importantly a way to help small mango growers gain market power against the middlemen who used to pay only Sh3 per kilo.

No one has been put behind bars for abusing the market power. But, farmers now get Sh15 per kilo from the mango processing plant. It took a reform to bring the voice of the citizens to policymaking and the governor’s courage to push back the interference from the middlemen, who obviously did not want such a thing built. Still, it does point a way toward breaking down cartels.

In my Wednesday article, I related an episode of a growing domestic industry to manufacture small milk cooling tanks being killed by an inexplicable change in the tariff regime. Little doubt a cartel had a hand in it. 

Preventing such anti-industry policies is another way to fight cartels. I am sure the national and county governments can find many other ways to free small farmers, SMEs and consumers from the power of the cartels. 

I believe this is an important way to fight the rent-seeking culture.

Prosecution of those who engage in more “traditional” corruption must continue so that everyone becomes convinced that such an act will have consequences. But, the pernicious effects of cartelisation that degrade the fair functioning of markets should not be overlooked.

Indeed, because the impact of combating cartels is more immediate, it can serve to build public support for establishing new norms in market behaviour. Most importantly, a well-functioning market can work wonders and improve everyone’s wellbeing.

Mr Ohashi is a senior economic advisor to the Presidency of Kenya. kenohashi2@gmail.com