Why the World is on Fire

Brenda Wambui
26 July ,2016

“When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.”

Thomas Piketty

Few books are as meticulous (and as boring, because of the great detail) as Thomas Piketty’s Capital in the Twenty First Century, from which the above quote is taken. The book studies inequality and wealth concentration, and their implications to economic growth across twenty countries, with data dating as far back as the 1700s. He establishes that faster economic growth will reduce the importance of wealth in a society, while slower growth will increase it. Only spurts of fast growth or government intervention can stop this increasing inequality. He recommends a global tax on wealth to prevent increasing inequality that has already begun to cause economic and political instability.

Enter Kenya, where it was recently reported that 8,500 people control two-thirds (KES 4.24 trillion) of our KES 6.2 trillion economy. The wealth of those classified as high net worth individuals grew by 75% from 2007 to 2015, while they only increased in number from 8,300 to 8,500 in that time. In the next decade, the number will almost double to 15,300. This happens while most Kenyans are poor, lacking access to quality and affordable education and healthcare, basic building blocks of a good society.

This reflects, according to another report, the effects of Kenya’s anti-poor policies. Pro-poor policies reduce poverty by accelerating economic growth and/or changing the distribution of wealth in favour of the poor. This type of growth is sustainable, and directly reduces wealth inequality and, as a result, poverty. Two potential engines of growth in Kenya, manufacturing and agriculture, are seen so be declining and stagnating respectively, however.

To solve for this, lower and middle income countries (Kenya included) would need to create ideal conditions for capital to flow from rich countries to theirs, driven by production (which is where manufacturing, agriculture, ICT and other sectors come in). Yet, in the world of economics, they are constantly researching why this doesn’t happen at the rate it should, a phenomenon called the Lucas Paradox. Robert Lucas Jr. asks: why doesn’t capital flow from rich to poor countries? One obvious answer is that economics relies on too many assumptions that do not hold true in the actual world, however a more nuanced answer would be the one that Lucas proposes: the flow of capital is impeded by differences in human capital, external benefits of human capital and capital markets imperfections.

As Robert Lucas finds, labour not only needs to exist, it needs to be effective as well. We need to invest in the upskilling of our workforce. We need to fix the imperfections in the capital markets that stem from our days under colonialism, where real wage levels in the “third world” were kept artificially low by stemming the flow of capital, all to the colonialist’s benefit. Key to doing this are the following fundamentals: (omitted) factors of production such as human capital and land, government policies and institutions. Building better and stronger institutions should be at the heart of any campaign to end poverty. This will then support the investment in human capital through education, healthcare, sanitation and social services. We also need to put our land to the most efficient use, as opposed to endlessly subdividing it for people to hold onto for speculation, we should zone it for productive use, and tax those who keep it idle/for speculation.

Perhaps if we begin here, we can begin to solve for the inequality that is surely behind phenomena such as terrorismBrexit and the rise of Donald Trump, and prevent further division and violence in Kenya. Only once we place human dignity at the centre as opposed to capital can we fight this disease.

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