East African Community – The Advantages

  • Comparative Advantage
  • Greater Freedoms for it’s populations
  • New Markets
  • Reduce Poverty
  • Benefits of Globalisation

1. Comparative Advantage

This is the point of all customs unions. The brilliant Ricardo devised this, it is the ultimate argument to those who argue Economics is either too complicated to be of any use or simple common sense. Comparative Advantage is the most beautiful theory with astonishing implications.

Everyone knows that if Tom is fantastic at raising sheep and Maria completely brilliant at painting it makes sense for Tom to raise all the sheep and Maria to do all the painting. Then they can swap so they can both have more and better of each. Great.

However, if Maria suddenly wakes up and can raise sheep as well as or even better than Tom, what should they do? Conventional wisdom says Maria should forget Tom, she can do it all herself now and Tom and his miserable sheep can get lost.

Ricardo says “Wait! Maria get back here!” He showed that they’d both be better off if … they continued trading! Incredible and so from that day on everyone lived happily ever after. (well actually not quite, nearly all leaders completely fail to understand the theory at all. They say they do, they nod at all the right points, and then they go and slap tariffs on everything. It’s enough to make you cry, I mean really they’re running countries, how do they not know this!?!) For a full explanation with figures see here (ESPECIALLY if you happen to be running a country)!

So to summarise, the reducing and eventual abolition of barriers to trade within the EAC will result in a simplification of trade because they’ll be no taxes etc. distorting the price mechanism, so it should result in more trade and more trade leads to specialisation which means Comparative Advantage will come into effect, which will increase output and productivity creating more stuff to be either consumed or further traded. Hopefully, this will lead to higher living standards, jobs will be created and with the increased economic activity increased education and general skill improvement will ensue!

2. Greater Freedoms for it’s populations

These countries do not enjoy the freedoms of the west. Their very recent history is more troubled and turbulent than anything in Britain for hundreds of years. Living there, one does not have the rights or protection enjoyed in Western society. In some ways they are very forward thinking, but in many ways  this is not the case. Hopefully economic progress will usher these human rights in. The exact connection between living standards and economic growth are not fully understood but the strong correlation is undeniable. anda

For homosexuals in Kenya, Uganda, Tanzania and Burundi there is a chance the union may begin the process of legalising homosexuality. If the countries wish to trade on a global scale they will have to conform and for the moment there is refuge in Rwanda where homosexuality is not illegal (just quite unpopular). Furthermore economic growth will increase the flow of information to the region, I think it is safe to say that once the internet is available for the majority, human should improve fairly rapidly as people learn what they are entitled to and see the precedent set by more liberal countries. At least I sincerely hope this will be the case.

3. New Markets

Entrepreneurs suddenly have fantastic new markets. This will increase trade and innovation, with specialisation the necessities of life will likely be quickly consolidated into several big companies supplying the whole area meaning those who were previously self sufficient find it more profitable to buy food and work creating that other than basic necessities, think luxuries and other goods to make life better not simply facilitate it.

4. Reduce Poverty

If it is assumed that the unavoidable consequence of this union will be increased economic growth (they’ll have to do something really really wrong not to benefit from this) then there will be two effects on poverty. I predict Absolute Poverty will decrease, whilst Relative Poverty may rise. On the whole I believe this is both unavoidable and not necessarily bad. A LOT of fuss is made about inequality, however I really don’t see it as such a massive deal. I am talking specifically about wealth gaps as a result of some people earning higher incomes because there is more demand for their work.

If it is a result of prejudice or because your Uncle’s the boss then of course it’s bad. Surely, however, Sam earning more than Richard because Sam is either a faster worker, or because he makes a superior good is no bad thing? Richard won’t like it sure, he may moan it’s because Sam begins with an S and people like people whose names begin with S’s. In fact it’s because people want more of what Sam makes than what Richard makes and the people who value it most get it because they’ll pay most so Sam sells to them. People who are less bothered about how well the good is made will buy from Richard but at a lower price because the goods simply aren’t equal. THIS IS FINE. Sorry, rant over, back to the topic…

So an increase in growth (which translates to higher GDP) will create jobs and generally the trickle-down effect means everyone eventually sees some of the benefit. Thus absolute poverty decreases, which means the poorest people are less poor in real terms. So for example, before when the poorest person could only buy five loaves of bread a month, they can now afford seven.

It is highly likely that the rich will get rich faster than the poor get less poor, especially in the beginning as they will be better situated to take advantage of the freedom of labour and capital by starting businesses, or investing in new opportunities. But surely everyone being better off is good. So what if the rich end up much better off whereas the poor only end up quite better off. They still both have improved lives. I think relative poverty is  far lesser issue especially because it often involves redistributing income, and high taxes for relatively high earners is not what a developing country needs.

5. Benefits of Globalisation

The EAC will also gain all these benefits as that is ultimately what uniting countries moves towards, Globalisation.

  1. Bigger export markets for domestic manufacturers
  2. Economies of scale through being able to specialise in certain goods
  3. Greater competition which leads to a greater choice of goods and lower prices.

So looks good, there are of course many disadvantages too, but hopefully the union will bring the millions of inhabitants greater rights, greater opportunities, and better living standards.

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