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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.

11 comments for “The Productivity Paradox

  1. Julius
    April 1, 2011 at 8:45 am

    By saying forced, I mean the company invests in shares that are not the best pick through coersion. What happens is that the big shots who hold large chunks os shares have their pointmen in the key decision making position in the companies. They influence the company to buys stocks of their allies instead of picking good stocks.

  2. Anonymous
    April 1, 2011 at 8:42 am

    These guys are being forced to buy by the ones who are selling. The decision makers at NSSF (Management and Board) has proxies of these guys and and thus make decisions to buy stocks of their masters instead of picking good stocks.

  3. kenyanentrepreneur
    March 29, 2011 at 11:16 am

    Julius:

    So, you are saying that the NSSF (using people’s retirement contributions) are the one’s buying these company stocks?

    And what do you mean by forced? Who is forcing them? the ministry of finance?

    I did say here before that Biwott stole lots of money from the NSSF when Moi was in power. It was his cash cow. It appears the same thing is happening, but just in a less “obvious” way.

  4. Julius
    March 26, 2011 at 4:27 am

    NSE is a big sham. I knew it a long time ago and I have never bought a single share. How do you entrust your money with some capitalist thieves?
    Kenyans have lost furtunes especially with IPOs. Now look at Safaricom, Access Kenya and Eveready. They are trading below IPO price years after the listing.

    Kenyans were duped that the companies had good fundamentals but they did not take their time to study the companies. Kengen has survived because it is a monopoly and government support. Most companies listed at NSE are not worth more than 25% of their market capitalization. So investors are holding shares whose value can tumble by at least 75% of their value overnight. This is what I call living in a fool’s paradise.

    If you want to invest in Kenya, invest in your own business, however small it is. If you cant run a business, then invest in appreciating assets like property. Dont be lured into the den of thieves that NSE is.

  5. Anonymous
    March 25, 2011 at 3:57 pm

    Sorry but I have to laugh. NSE is a joke!

  6. Julius
    March 24, 2011 at 5:58 am

    KE:
    The shares were bought mostly by institutional investors who get their money from statutory contributions such as insurance and pension companies. They collect money from the kawaida mwananchi and invest in bullshit stocks since the money is not theirs and they will continue getting more contributions coz they are statutory.

    We have had cases where NSSF has been forced to buy certain stocks at inflated prices. It happened in KPLC. Mwangi is jumping out of the boat before it gets rocky and what a better way than to create optimism in the company and offload the stocks. The same case applies to the other big individual investors like Muguku. If they believe in Equity, why offload such huge amounts of stocks within such a short time? These guys know that Equity’s bubble will burst soon and they do not want to be caught inside.

    This is a clear case of insider trading. If Mwangi just wanted to comply with the CMA requirements that he cannnot hold more than 5% of the company, then he should have only reduced his shareholding to 5% but not to 3.83%! These guys know the boat will sink sooner or later and they are jumping out. The clueless mwananchi will be left holding onto a wreckage.
    If you own Equity shares, just sell them now.

  7. shrugged
    March 23, 2011 at 1:07 pm

    KE, you are right it doesn’t make any sense. The transfer of wealth from the middle and poor kenyans to a few wealthy Kenyans is sanctioned by the government. Kenyan dude mentioned the pension funds and insurance companies too as the buyers and that too is a way to siphon money from the poor as the payouts are low and often times take years to be paid to beneficiaries. You see there is no way to track the mutual/pension funds performance

  8. Kenyan dude
    March 23, 2011 at 10:41 am

    The shares were probably bought by some pension fund whose clueless members will get rubbish pensions upon retirement.

  9. kenyanentrepreneur
    March 23, 2011 at 9:51 am

    Julius:

    Yes, this is an important point to make, but I also think that the NSE is completely manipulated. The whole thing just doesn’t make sense.

    Which investors paid for those shares? Who are they? People got burned after the Safaricom IPO and they pulled out of the NSE and now, you want us to believe that they run back to Equity? It’s not adding up.

  10. Julius
    March 23, 2011 at 8:24 am

    Mwangi’s cash out did not come from the bank. It came from the stock market. He sold his shares in the company and investors bought paid for them.

  11. Julius
    March 23, 2011 at 8:23 am

    Mwangi’s cash out did not come from the bank. It came from the stock market. He sold his shares in the company and investors paid for it.

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