Occasional Paper No. 06 of 2006 on State-Private Sector Nexus in National Wealth Creation: A Framework for Analysis and its Application to Kenya

Abstract

This study discusses a theoretical framework that is used to explore the interaction between the state and private sector. Three classes of businesses are identified, namely: makers or producers; traders/merchants or middlemen; and producers of financial services. Interactions between these three classes form a natural order in economics that can allow people to become wealthy without need for direction from the State. These three classes, together with the government, comprise a quartet that is key in national wealth creation. In terms of a national strategy for wealth creation, the businesses in the segments involved in 'production' are the strategic choice. However, there is no guarantee that government interventions or the institutional environment will favour this class of enterprises. Information on private sector and interactions with the Kenyan government is used to illustrate this framework. It is argued that despite market reforms some aspects of the institutional environment continue to favour those business classes in the distribution chain rather than the 'production' and is inimical to upgrading. Although the informal sector continues to receive wide policy attention, based on this framework, only about 30 percent would qualify for a strategic public policy; for the rest, the best the government can do is to concentrate on the fundamentals.