The Productivity Paradox
I was reading a blog post on productivity (my favorite subject) and I found this interesting conclusion about what it is begining to mean for the west in terms of future low employment numbers and how it can help your understanding of other economies or businesses in general.
I’ll begin with the quote (below):
“The fewer people employed, the higher the productivity, that is, until you attain perfect productivity with a fully automated economic production. Small problem: fully automated production means no employees. No employees means no wages paid which means no funds to pay for consumption.
Production cannot be consumed unless employees are paid wages with which the production may be purchased. Therefore, productivity beyond a certain point is counterproductive. A productivity paradox?! Just an extrapolated thought“.
So, one could argue that the west has been moving towards automation, which has created perfect productivity and this perfect productivity has led to there being less of a need for many jobs. Therefore, high unemployment rates will become the norm in many industrialized, western countries because they just don’t need as many people to do certain tasks.
However, let’s take this quote and apply it to Kenya and use Equity bank as an example. Why? because all countries ultimately fall into a productivity paradox: Either you are a highly automated productive country (America, Germany, etc) or you a low level automation country that is remaining productive by engaging in manual, low end work that still requires human labor (China, India, etc).
Kenya doesn’t fit into either of these paradoxes. It’s not highly automated and it’s also not very productive. So, how is it that a bank like Equity can generate that much cash for it’s CEO?
There’s an article in Business Daily Africa that talks about Equity’s CEO cashing out Ksh. 600 million worth of shares (or $7 million dollars). In total, James Mwangi has cashed out about Ksh. 1 billion worth of shares (or $12 million dollars).
Now, banks, don’t produce anything. James Mwangi is not a farmer and he doesn’t own a manufacturing plant that makes Iphones or cars or televisions. So, where is this $12 million dollars in cash coming from? Equity bank is a depository bank, which means, you go to Equity and put in your money, Equity puts this money into a pool and then loans it out (at interest) to producers. When the producers pay back their loans, Equity makes money off the interest rates they charge (at least that’s how it’s supposed to work in theory).
Now, I’ve said before that the only real producers in Kenya are it’s farmers. In fact, Equity’s largest shareholder (until his death last year) was a chicken farmer called Muguku. So, Equity’s cash deposits are coming from real producers, aka farmers, but Equity seems to have lots of money flowing into it’s coffer’s and there’s no way it’s all from farmers in Kenya (The country isn’t that rich or that productive).
So, where is the rest of the cashflow coming from? It’s coming from the government. Money from the youth fund, women’s fund and even Central Bank deposits are being cashed at Equity and this explains how James Mwangi is able to cash out that much money. It doesn’t make sense otherwise. Traditional banking (where you loan money out and charge interest) has very low profit margins. Investment banking has larger profit margins, but only because they do invest in productive companies, which, if they go on to become successful, yield higher profits, but which successful companies has Equity invested in? You can’t get all that cash from a bunch of small scale farmers and watchmen.
It’s a paradox, but not a productivity paradox, which means, something isn’t adding up.