State must never be involved in business

Joseph Schumpeter was an Austrian American economist who after reading Karl Marx’s works, adopted and popularised the expression “creative destruction”.

In Marxist economic theory, the expression refers to the linked processes of the accumulation and annihilation of wealth under capitalism. However, in Schumpeter’s vision of capitalism, innovative entry by entrepreneurs was the disruptive force that sustained economic growth, even as it destroyed the value of established companies and workers that enjoyed some degree of job security.

Several years later Kenny Rogers in his hit song ‘‘The Gambler,’’ said: “You got to know when to hold ‘em, know when to fold ‘em, know when to walk away and know when to run”. What is the relevance of Schumpeter and Roger’s words to modern day Kenya?

Kenya is littered with many failing organisations with unsustainable business models but she keeps pouring good money into bad projects that we got to run away from.

The success in the telecoms sector in Kenya was largely due to running away from a monopoly through liberalisation of the sector in spite of the fact that many people did not want to see the incumbent fail as a result of competition.

More jobs were created as a result as some of those who were retrenched found their way into new and creative telecom companies, effectively confirming Schumpeter’s vision.

The Senate last week expressed concern over the escalating cost of sugar production in Kenya, but what they did not know, is that the industry is virtually not competitive.

As a result, the farming community that supplies cane is getting poorer by the day through financing unproductive sugar companies with the hope that one day they will see the benefit of their sweat.

The business model is wrong. Whilst Brazil, Thailand, Australia, Guatemala and some Common Market for Eastern and Southern Africa (Comesa) countries have large plantations that enable economies of scale, their productivity too is higher and can viably produce by-products like ethanol. In Kenya we rely on erratic subsistence farmers to provide cane for sugar production only.

Whereas experts view the coastal region as the most viable location for sugar plantations, politics rather than economics has played large.

It takes six months shorter for cane to mature in the Coast and land is plenty to enable large-scale farming just like other producers.

For Kenya to be competitive in the sugar sector, we have three options: 1) Move sugar operations to coastal region, 2) displace people in Western Kenya to create large viable plantations or 3) allow small milling enterprises to adopt a “guerrilla model” (take up cane from contracted farmers that have not been paid by big millers) to effectively compete.

The latter fits in with Schumpeter’s vision. Technology has improved. Small producers can afford efficient and effective plant and equipment and be competitive. India is the classic case.

As in sugar industry, several other subsectors face a similar dilemma. Despite concerted efforts to revive the Kenya Meat Commission, we still hold on to it. The helter skelter around Kenya Co-operative Creameries is an indication of a folding enterprise. The failure at the oil refinery reminds us to walk or run away. Someone out there has a great idea on what the future holds for these enterprises.

If that someone has no chance to destroy and recreate, then our capitalism has a long way to go with respect to building inclusive institutions that allow creative destruction when failure is in the horizon.

The list of failures that have held back economic growth is long, but one thing is clear – the government should never be involved in business – this is largely the work of an entrepreneur.

The role of government should therefore be to facilitate through policy and regulate. But as we know, fear of creative destruction is often at the root of the opposition to inclusive political and economic institutions. Yet creative destruction is the preamble to innovation.

Schumpeter’s interest in the undercurrents of economic growth processes led him to develop a theory of entrepreneurship, and to argue that innovation is at the core of economic growth.

Innovation creates value, but through changes such as product differentiation, previous goods, services, and processes become obsolete and lose their value. Such is the unavoidable “perennial gale of creative destruction”.

The writer is a senior lecturer, University of Nairobi , and a former Permanent Secretary, Ministry of Information and Communication.