Political factors key in market performance

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This article was first published in the Business Daily on January 18, 2015

In his book The End of the Free Market, Ian Bremmer makes the point that “in emerging markets, political factors still matter— at least as much as economic fundamentals for the performance of markets.”Certain retrogressive practices if left unchanged can harm economic growth by dampening development prospects.The first political factor is tribalism. As a result of divisive ethnic-based politics, the economy continues to suffer consequences of negative ethnicity.The costs of tribalism are numerous.

(source: https://bigambo.files.wordpress.com/2013/11/tribalism.gif)

For example, it leads to sub-optimal allocation in public sector appointments. Because the President is now expected to factor in tribes during decision-making, he does not have the luxury of choosing the best person for the job. Instead he appoints individuals who would be accepted with the least acrimony.This is not to suggest the appointees are incompetent but rather to illustrate how tribal lens affect capacity to ensure the best always manage agencies.Recently it was revealed three tribes hold at least half of all public sector jobs, with some overrepresented compared to their total population.Whether this over representation was deliberate is an issue that disturbs many Kenyans. So strong is tribalism that the Public Service Commission chair said ethnicity is an appointment criterion to ensure all tribes need to be represented fairly.Political and public sectors are at a point where tribe trumps demonstrable skills, professionalism or competence.How can a government run efficiently if tribe rather than aptitude is a key qualification to manage the ministries, Central Bank, parastatals and other agencies that inform growth?

(source:https://mahustlerszone.files.wordpress.com/2014/05/kenya-ethnic-groups.jpg)

Another issue closely linked to ethnicity can be seen in how individuals decide whether to invest in certain regions while shunning others.During the post-election violence in 2008, many flourishing businesses were shut down as owners fled hostile regions.The losses are still being felt by the economy because some entrepreneurs are yet to return. Such tensions have economic costs because ethnicity rather than economic viability informs location.

The second political factor is corruption. The public sector is rife with corruption, brunting the capacity of capital to be employed efficiently to spur growth and development.Transparency International ranks Kenya 136 out of 175 in public sector corruption. Graft is costly as it affects resource allocation in two ways.Firstly, it can change private investors’ assessment of the relative merits of various investments as graft informs changes in comparable prices of goods and services, resources and factors of production.The International Monetary Fund believes if bribery comes into play in enterprise, this lowers investment and retards growth. Ernst and Young reported a third of companies it surveyed paid bribes to win contracts and half of Kenyan CEOs justified the practice.How can resources be allocated efficiently with such shadowy activity?

(source: http://i.bnet.com/blogs/mayers_corruption.jpg)

Secondly, an economic journal shows corruption misallocates resources through decisions on how public funds are invested, or choice of private investments allowed by corrupt agencies.Misallocation comes from possibility of a corrupt decision-maker considering rent-seeking as a key decider.Corruption leads to reduced domestic and foreign direct investment, overblown government expenditure as well as diverting state expenditure away from education, health, and infrastructure towards white elephants.

The third political factor is the public wage bill reportedly now at 53 per cent of the budget, using up 55 per cent of public revenue.This is likely to remain for decades as there is no political will to effect change. Thus, instead of allocating resources to investment or development, we will be busy funding a public sector yet to shun corruption or embrace a culture of efficiency.These political factors cost the economy dearly and their impact must be addressed.

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