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The Real Purpose of the EAC and the AU - Economies of Scale

Discussion in 'Jukwaa la Siasa' started by Akwaba, Oct 18, 2010.

  1. Akwaba

    Akwaba Senior Member

    #1
    Oct 18, 2010
    Joined: Sep 26, 2010
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    As we move towards integrating our economies and creating joint market as I read posts on this forum I am getting the sense that alot of people don't really understand the purpose of a common market. Nor what is required to get a common market. All I hear about is who will get the current jobs.

    Let me us a nice metaphor to highlight what is going on. The folk are fighting over table scraps even though if they joined hands they could live comfortably.

    Some of you might not yet be sure as to how the EAC and AU make this possible. Well people often talk about the advantage of bargaining power when you negotiate as a block. Yes, this is important but it is nothing compared to what the real advantage of a large block is. It is one of the most fundamental economic theories and drives most large corporations today.

    It is ECONOMIES OF SCALE. Economies of scale - Wikipedia, the free encyclopedia

    Let me highlight a couple of tidbits which will demonstrate the concept.
    India has the same per capita GDP as Kenya.
    Do you see any steel mills in Kenya, Car manufacturing plant (not assembly), pharmaceutical research (not donor funded), analog circuit design, house hold appliance assembly.

    When you have a certain business you need to produce a certain amount of goods to be cost effective. Therefore you need a certain amount of customers. For a poor country a larger population is needed as they are fewer people that can afford manufactured goods. However, when enough people are present to support an industry and the goods get manufactured locally, the cost of the product also goes down as you are no longer paying salaried for people in America and Europe.

    So here we are on the verge of the EAC complaining about who gets the current jobs and none is wondering about the massive industries to be created.

    Imagine an Auto industry. You need at least 10,000 units sold per year to make it viable. In Kenya about 10,000 vehicles are sold per year. allAfrica.com: Kenya: Vehicle Sales Plummet as Auto Sector Slumps

    So Kenya, can not support an auto industry. If you combine the five states, we are barely able to support one local company. More companies are possible if they are assembling and not manufacturing cars.

    Then you have the steel industry the aluminum industry and the entire value chain required to support all these industries.

    PEOPLE often talk about how many resources we have and how we are still poor. One of the big keys is ECONOMIES OF SCALE.

    Now the next question is what is needed to be a real market. Well you need to look less like the EU and more like China, India or the U.S. You need TOTAL free movement of labor, capital, and goods. We will probably have to have a single VAT collection agency as otherwise there is too much fraud. We shouldn't worry about the scraps we are losing today we should focus on the Gold we will get tomorrow.
     
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