Underground economy alive and well

Some of the headlines this week have kept me awake at night.

They may have looked disconnected, but you do not need to overthink to see some common threads.  

One of them was about a possible meth lab near the border town of Namanga and another about a Kenyan facing the hangman’s noose in Vietnam over drug possession.

And it got worse: The FBI has flagged down illicit financial flows from a neighbouring country known for political instability. Our troops crossed its borders more than 10 years ago following incessant terrorist attacks by some rebel group from there. 

Such cases may be the tip of the iceberg. Many others go unnoticed and unreported. Many parents are crying over their children wasting away from drugs.

Where do these drugs come from, and how do they get here? The drug trade is dangerous but with high returns. It is only talked about in hushed tones or codes. The three cases espouse an underground economy. Some call it the black economy. I prefer the former after I ran into problems using the term in an American classroom with African-American students. 

The underground economy is unrecorded and untaxed by the government. Not only does the government lose revenue, but such economic activities slowly erode confidence in authorities and tear down the moral fabric. 

You can see why it is popular—it comes without tax and records, and one makes lots of money.  Britannica claims that some drivers of the underground economy include excessive taxes, regulations, price controls, or state monopolies that interfere with market exchanges. 

Others argue weak states are likely to be home to underground economies. To demonstrate power, such weak states go to the extreme through taxes, harsh regulations, or monopolies that stifle competition. Let’s remember that it is not only bad guys who go underground; lots of innocent citizens go underground to stay afloat.  

Players in the underground economy find it “reasonable” to stay there. It is profitable despite the risks.

By co-opting legitimate authorities, they minimise the risks. Suppose someone offered you Sh500,000 per month to “protect” drugs when your monthly pay is Sh100,000. Would you take the offer? Do we value hard work or money, irrespective of how it is made? 

When citizens make money without taking risks, it demoralises honest, hard-working citizens. When we say the economy is not growing fast enough, do we factor in the effect of demoralised citizens? 

The underground economy distorts the market. Without paying taxes, the products are cheaper and not necessarily of the highest quality.  

The underground economy is not just about drugs and other illegal goods but legitimate goods and services too. Think of fake products in our market. How many accidents are caused by fake parts and smuggling? 

An underground economy undercuts the genuine investors who must cover their full costs. In the long run, the best investors leave the market to brokers, charlatans and conmen. Where does money made in the underground economy go?  

It eventually gets into the legitimate economy, raising inflation. If you easily made Sh100 million illegally, you can easily bid up the price of a piece of land whose market price is Sh50 million. The same applies to other properties and services. 

One of the biggest challenges facing the underground economy is how to get money from the underground economy to the legitimate economy.

That’s where cleaning money comes in. How would you get 100m into the bank without explaining its origin? 

Use existing businesses and do it in slow motion. Ever wondered why some low-value businesses are located in some unusual places? 

My biggest worry is if such huge amounts of money find their way into politics and specifically elections.  

Kenyan politics is expensive. Would such money be used to influence voters? Those who get into our offices through such “sponsorship” will bid for their sponsors.

They could even sponsor public participation. What sort of laws would they make?  

Have we forgotten our national image? Importers could be wary of fakes from our country, leading to lower demand and job losses. Investors and tourists would keep off too.  

An underground economy slows down economic growth and stifles innovation. Some have argued the underground economy affects the poor more than the affluent through slow economic growth resulting from low productivity.  A few make easy money, the majority suffer, and some die early. 

The citizens’ low morale and waste through drugs and even fakes reduce productivity. Have you ever seen drug addicts?

What economic activity can they engage in? The money in the underground economy rarely trickles down; remember, it’s not taxed.

And it’s not very motivating when some citizens see some people make money in unexplained ways as they struggle to make ends meet.  

What then is the solution? How tough are our laws on drugs or fake goods? We are fighting for the life of a Kenyan citizen in Vietnam; how could she have fared in Kenya? Are we too lax on the underground economy?  

Why would foreigners set up meth labs under our noses? How did they get here? What of illicit money flows? How does it get here, and who benefits from it? Legal and economic reforms are needed to bring the underground economy overboard. It is a fact: Kenya enjoys more economic and political freedom than its neighbours, and it seems the “bad guys” enjoy it too.  

Too much regulation and laws will encourage an underground economy. Learned friends, where do you strike the balance?  

Maybe we should start with politics and get leaders not based on their bribes but on principles and ideas.  

They would use their political will to clean up the sociopolitical system. We risk making the underground economy a formality. 

It is more complicated when already about 80 per cent of the economy is informal.  Does that complement the underground economy?  

Reducing the underground economy has some precedence. Kenya has always attracted underground economic players from the Happy Valley Set and their drugs.

We even had one of Al Capone’s bodyguards hiding in Kenya.  And why should we be worrying over the underground economy in such a religious country?