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Tuesday, July 12, 2011

Kenyan Job Market and Policies

Everyone who has been looking for good news on the economy this morning cannot help but be deeply disappointed BECAUSE OF LOW JOBS . Job losses were widespread across most sectors of the economy, including government; and extended to both full time and part-time jobs; labor force participation was down; wages were down and unemployment was up. It seems like the job engine of the economy is shot down.

What makes these numbers particularly dire is that they come after an unprecedented monetary easing that included two rounds of quantitative easing that drove already record low interest rates to near zero levels; and an unprecedented fiscal stimulus that extended kibakis call for lower interest ratese; a payroll tax, credits to buy houses, money for mortgage modification, cash for clunkers, a prolonged extension of unemployment benefits—and all this in the face of soaring national debt.

Obviously, there is something fundamentally wrong with these policies. They have been destroying rather than creating jobs, especially the CBK's ultra-low interest policy that misguides animal spirits of entrepreneurs—the ultimate source of genuine job creation of this country.

To understand how ultra-easy money for a prolonged period of time misguides animal spirits, we define and distinguish two forms, demand-side entrepreneurship and supply-side entrepreneurship. Demand-side entrepreneurship begins with “market gaps,” consumer needs that have yet to be fulfilled, and comes up with a viable business concept to bridge that gap. This means that the consumer is the center of the business universe, the guide of the “animal spirits.” Economic resources, including capital, are amassed after the business opportunity has been identified and explored. Factories and buildings are built because they have a use, not just because borrowed funds are easy to find. This sort of entrepreneurship places the economy into a “virtuous,” cycle of economic growth and job growth, as investment projects remain viable after they are completed.

Supply-side entrepreneurship, by contrast, begins in the opposite direction, with economic resources, and comes up with a business concept to deploy these resources. This means that economic resources, including capital, are amassed before a business opportunity is identified and explored. Shopping outlets around the country are built because someone had the land and someone else (a financial institution) was willing to provide low cost financing rather than to fill the shopping needs of the local consumers. The Government rather than the consumer guides animal spirits! This sort of entrepreneurship gives a temporary boost to economic growth and GDP growth, as it sets off a “multiplier,” but not an “accelerator effect.”—Growth and jobs lasts as long as the investment last, but fades afterword.

Supply-side driven entrepreneurship misguides animal spirits, wasting resources and talent, fueling asset bubbles that end up in financial crisis like the US recently experienced, the sovereign debt crisis in Europe, and the Japanese real estate market collapse of the 1990s. Let’s not forget that it was also one of the features of the former Soviet Union, whereby communist party leaders and government bureaucrats were in charge of all economic resources building residential and commercial real estate for the primary purpose to deploy these resources rather than to address consumer needs. We do know for sure by now that was the right way to create jobs.