- Extractive institutions are those institutions under which governments extract incomes and wealth from one subset of society (the majority African populations) to benefit a different subset (the elite, colonisers).
- The reason for independence was to change the fundamental structure of this exploitative and extractive state but Kenya and other African states, however, seem to have been unable to shrug off their colonial heritage.
- Leaders and the elite who choose an extractive institution can expropriate a large share of citizens’ wealth at the risk of facing a high probability of losing power by losing citizens’ support. But they can commit to a decrease in expropriation and gain support from citizens.
- Our contribution to Kenya’s next one hundred years, is to do the back-breaking work of entrenching the rule of law in the country and strengthening government institutions which allow for government accountability; equal access to justice and political process; efficient judicial and political systems; and the protection of fundamental human rights.
This year, apart from marking the first decade since our new Constitution was promulgated, we also commemorate the first hundred years since the British proclaimed this territory its Kenyan Colony and Protectorate. Some, such as the retired Chief Justice Willy Mutunga, have termed it the first hundred years of formal statehood.
National anniversaries only have a purpose if they stimulate contemplation. The milestones we observe this year are nothing short of monumental. Yet, one gets a feeling that the country is enveloped by a sense of dread. There is palpable disillusionment among us as we watch the political class unashamedly haggling over the state’s resources, not only in Kenya, but in Africa.
The promise of a liberated and self-governing Africa has proven illusory to most of us. While African countries’ wealth has grown over time, our news sources are rife with tales of incomprehensible corruption that follows decades of institutional and state capture. Here in Kenya, confounded by our own leaders’ brazen connivances, we take scant comfort in our shared misery with states such as Angola under the dos Santos, South Africa under the “Zuptas” among others.
This column has for the past recent months, endeavoured to demonstrate the perils of institutional and state capture. This week and this year, we actively ponder the Kenyan state, its successes, and shortcomings. We examine its design for the purpose of reconstructing the state’s foundations and charting out a different narrative for the next one hundred years.
The Colonial state
The graph above demonstrates the evolution of average GDP per capita in the world over time. The data cannot be interpreted to mean that there was no economic growth in Africa or Latin America between 1000 AD and the 19th century because there was no data relating to the economies in both regions. In most of Africa, the idea of the western spatio-temporal construct we now know as the “state” was not even in existence.
From the 1800s though, the graph demonstrates dismal growth in economies in Africa in comparison to the other regions represented. Incidentally, there is a steep and positive incline in western economies’ growths right around the same time. Africa’s poor performance continues right into the 21st century.
Daron Acemoglu and James. A. Robinson, economists, in their book Why Nations Fail, postulate the institutional economic theory on extractive and inclusive states to explain the existence of weak economies in Africa and Latin America and the corresponding spurts in Western economies. We take a brief look at that theory below.
The Colony’s purpose was not as we were told – the messianic civilisation of a barbarous lot. In the words of Chinweizu (1973, p.35), when Europe pioneered industrial capitalism, her demands upon the resources of the world increased tremendously.
This situation required the direct take over and control of the economy and administration of the African enclaves and states. The colonialists had to direct the economy in such a way that the required raw materials were obtained.
The result was an aggressive construction of what Acemoglu and Robison term “extractive institutions”. These are those institutions under which governments extract incomes and wealth from one subset of society (the majority African populations) to benefit a different subset (the elite, colonisers).
These institutions are reflected in the policies of land alienation, protection of this expropriated land in exclusive property rights, racial segregation, forced labour, and taxation. The purpose of these institutions was to compel Africans to supply the new colonial state with labour and resources needed to generate wealth for the few settlers in the colony and for the UK and its global empire.
Kenya’s initial configuration was therefore that of an extractive state. Colonial governments had no interest in making government accountable, promoting equal access to justice, establishing a discernible political process, building efficient judicial and political systems, or protecting the fundamental rights of the native majority.
The result, according to Mahmoud Mamdani, was a dichotomous state where the majority relied on privileges extended to them by the elite, who enjoyed the full breadth of civil and political rights, ensured and protected by the State. This guaranteed the elite the resources they had propped up the state for.
The post-independence extractive state
The reason for independence was to change the fundamental structure of this exploitative and extractive state. The agrarian economy that had developed in the colonial period promised wealth for the citizens of the newly formed republic.
Independence offered the promise of freedom for the inhabitants and with it, greater inclusion. Essentially, independence was the clamour for the creation of the antithesis of the colonial era’s extractive institutions: inclusive institutions.
These inclusive institutions, which Acemoglu and Robison argue are the foundation of every successful economy, are signified by government accountability; equal access to justice; political process; efficient judicial and political systems; and the protection of fundamental human rights. Key to an inclusive state’s institutional architecture, is the rule of law which is guaranteed by a functioning democratic and pluralistic state.
Kenya and other African states, however, seem to have been unable to shrug off their colonial heritage. Inherited extractive institutions pervaded the states’ institutional architecture. Nobihiro Muzuno, Katsuyuki Naito, and Ryosuke Okazawa, economists, in their paper, ‘Inequality, Extractive Institutions, and Growth in Nondemocratic Regimes’ explain that wealth and income inequality are a feature of extractive institutions.
The graphs below demonstrate wealth and income inequality as measured through the Gini coefficient in Rwanda, Tanzania, Kenya and Uganda. The Gini coefficient, also known as the Gini index, is a measure of statistical dispersion intended to represent the income or wealth distribution of a nation’s residents. It is the most commonly used measurement of inequality ranging from 0 to 100; with 0 being perfectly equal and 100 being totally unequal.Te
The African countries represented below have, despite apparent growth in their economies over time, not shown much improvement in their Gini coefficient scores. Most of them have maintained a score teetering near the median. Rwanda and Tanzania have slightly worsened while Kenya and Uganda show slight improvement.
Why have extractive institutions been so prevalent in Kenya and in other African countries? The answer to this question, explains not only the struggles we have with income and wealth distribution, but also the reason for rising cases of state capture in the continent.
An elite’s game
Acemoglu’s and Robison’s work builds upon their previous work on game theory. Game theory is a theoretical framework for conceiving social situations among competing players. In some respects, game theory is the science of strategy, or at least the optimal decision-making of independent and competing actors in a strategic setting.
In this setting, on one side is the elite who control the factors of production in an economy, including the ownership of monopolies. On the other side, are the majority of people: the citizens. For both groups, there is a need to encourage economic growth which will most likely occur under inclusive (economic and political) institutions.
However, these inclusive institutions will create both economic and political losers. Economic losers will lose their incomes, for example in the dissolution of monopolies and introduction of new technologies. The political losers, who constitute the major barrier against the emergence of inclusive institutions, stand to lose their politically privileged positions and their unconstrained monopoly on power.
The creation of inclusive institutions will necessitate the transference of political and economic power to the great majority of citizens. This transference of power will mean the loss of elite control, reform of institutions and the adoption of true democracy and the rule of law.
The preferences do not lend themselves to an optimal outcome for both of the parties involved resulting in what economists call a pareto inefficiency. For the elite, which is in control, the solution is then to stay in elite control without institutional reform that would enable true democracy.
State capture in extractive states
Usually, empowered elites in extractive states will, as discussed above, favour and sustain the status quo. In order to do so, it is necessary for them to capture the state’s machinery. Indeed, after some time, and especially in partially democratised states, state and institutional capture is the only way the elite maintain a hold on power.
The result is the type of news that we have become well-accustomed to. The elite manipulate existing legal and administrative institutions to maintain their hold on power. This might be accompanied by gross corruption as we have seen in the Kenyan cases we have previously talked about in this column.
An institutional solution
The solution is, however, inherent in the problem itself. The colonial government’s tenure culminated in the uprising of the Mau Mau (1952-1960). A revolution, according to Acemoglu and Robison, is the natural end of an extractive system. The reason is because the citizens will inevitably rise against the elite to demand more and better from the system they have hijacked.
Muzuno, Naito, and Okazawa however find that forward-looking elites, in societies such as East Asia, have found it necessary to ensure wealth, income distribution, and equality for the purpose of maintaining their hold on power.
They argue that a ruler who chooses an extractive institution can expropriate a large share of citizens’ wealth but faces a high probability of losing power by losing citizens’ support. By introducing institutions that restrict the ruler’s confiscatory behaviour, the ruler can commit to a decrease in expropriation and gain support from citizens.
The graph above represents inequality and GDP per capita among various states. African countries, with intermediate levels of inequality, unfortunately also have very low-income levels. Take note of the disproportionate distribution of the already scarce resources in countries like Central African Republic and Benin. Elites in Kenya, Tanzania, Nigeria and Rwanda are also in a precarious position. Swaziland is also worrying because high income is accompanied by very high inequality. These countries’ elites, according to Muzuno, Naito, and Okazawa, are, based on the data above alone, less stable than Gabon, which shows a relatively high GDP per capita index and a relatively low Gini coefficient.
The figure above illustrates the current situation in Asia. Consider the data with relation to what are commonly known as ‘the four Asian tigers’: Singapore, South Korea, Taiwan, and Hong Kong. With the exception of Hong Kong, whose inequality has risen sharply in the last decade, (see figure 7 below), the rest have exceptionally high GDP per capita indexes and low Gini coefficients.
Of importance is the fact that wealth creation in the four countries was accompanied by income distribution regardless of the countries’ governance structures. Compare this to China, India, and Malaysia which are struggling with income distribution in the light of their increasing wealth. In fact, Muzuno, Naito and Okazawa, find that high levels of income inequality impede economic growth because they encourage the formation of extractive institutions and imperil social and political stability. In order to achieve the ‘tigers’ status, their neighbours would have to pay more attention to income equality.
The choice to decrease expropriation does not however come without cost to the elite. It means that they are mandated to reform institutions. This reform makes the institutions predictable and impersonal. The impersonality is as a result of developing rule of law systems. These good institutions encourage equal wealth distribution which in turn yields a great number of citizens with similar political interests to the elite, making them responsive to the elites’ choice of institutions.
State capture on the scales we have witnessed, however, puts the elite in a precarious position. The reason why corruption of such magnitude is dangerous is because it causes wealth and income inequality, making the entire system, unsustainable.
The solution to a pilfering extractive state is therefore through institutional reform, otherwise some form of revolution is inevitable. Eventually, regardless of our preferences, the course of history will favour more inclusive institutions in the years to come.
The only question is how painful the transition will be.
Our contribution to Kenya’s next one hundred years, is to do the back-breaking work of entrenching the rule of law in the country and strengthening government institutions which allow for government accountability; equal access to justice and political process; efficient judicial and political systems; and the protection of fundamental human rights. It is back-breaking because one must fight the full weight of entrenched corruption. However, the prize is to bequeath future generations, unlike what has been handed to us by those before us, an inclusive state. Once a state is inclusive, political differences will not matter much since, in one form or another, the state will be more responsive to the will and needs of its citizens.
This article is part of a long series of articles on the rule of law in the context of politics and ethics. The views expressed here are personal and do not represent institutional views. The series is researched and co-authored by:
• Karim Anjarwalla, Managing Partner of ALN Anjarwalla & Khanna, Advocates
• Wandia Musyimi, Research Associate at ALN Anjarwalla & Khanna, Advocates
• Kasyoka Mutunga, Research Associate at ALN Anjarwalla & Khanna, Advocates
• Prof Luis Franceschi, Senior Director, Governance & Peace, The Commonwealth, London