Economics | Q&A

Economics  Follow-Up

Written by  John C. Cannon 10/26/2015
K.E. Blake - Questions

Economics is the study of the use of scarce resources which have alternative uses. - Lionel Robbins

From Basic Economics, by Thomas Sowell:  Economics studies the consequences of the decisions that are made about the use of land, labor, capital and other resources that go into producing the volume of output which determines a country's standard of living.

The decision that influence such outcomes are not only the decisions of individuals, or industrial or agricultural enterprises, or the policies of governments.  Among the major decisions affecting economics outcomes are decisions about what kinds of enduring institutions a society has for making those decisions - what kind of economic system, operating in what kind of legal system, and controlled by what kind of political system.

When India and China began in the late twentieth century to make fundamental changes in their economic policies, their economies began growing dramatically. It has been estimated that 20 million people in India rose out of destitution in a decade and more than a million Chinese per month rose out of poverty.

J. Cannon - Answers

What kind of economic system in Tanzania and Kenya?

  • Tanzania – transition to market economy after economic collapse in late 1970s.

  • Kenya – transition market economy in 1980s and 1990s; now called “most liberal economic system in East Africa.”

What kind of legal system?

  • Kenya – elements of English common law, Islamic law and customary law; 2010 constitution established judicial review in a newly formed Supreme Court.

  • Tanzania – based on English common law; limited judicial review.

What kind of political system?

Kenya – one-party state until early 1990s; multi-party republic; first free and fair elections in 2002; new constitution adopted in 2010 after a power-sharing agreement that followed the violence of 2007; new constitution reined in executive power, did away with prime minister position (which took effect in 2013), and decentralized power to 47 newly created counties

  • President is head of government.
  • Bicameral parliament: 67-seat Senate and 349-seat National Assembly.
  • Supreme Court – justices appointed by president.

Tanzania – One-party rule until 1995; Multi-party Republic, with unity government formed in 2010; 1977 adoption of current constitution with numerous amendments; 640-member Constituent Assembly formed in 2014

  • President is head of government
  • Unicameral parliament: 357-seat National Assembly (Parliament); Zanzibar has its own House of Representatives
  • Court of Appeal – justices appointed by president

Economic policies?

Tanzania - government plays a big role in several sectors – telecommunications, banking, energy, mining; government owns all land. Now, more competition in the financial sector with the entry of foreign banks; began independence in 1961 with economy based on the Ujamaa policy, basically “African socialism” in which the president defined economic priorities.

Kenya - East Africa’s biggest economy; shortly after independence (1963), made reforms to encourage foreign investment, an advantage over its East African neighbors that continues today; liberalized economy in the 1980s and ‘90s; best-connected East African economy to foreign trade; diverse economy based on a variety of exports that makes it resilient (e.g., to violence around elections in 2007, Westgate Mall terrorist attack).

If there is a difference in economic policies, does it explain why Kenya has the stronger economy?

In many ways, the differences in economic policies – or perhaps when liberalizing policies were adopted – are often given credit for Kenya’s superior (by most measures) economy compared to Tanzania. Tanzania’s investment in collectivist agriculture and other tenets of “African Socialism” meant that for decades after independence, the government controlled much of how the economy functioned. To some extent, that is still the case today, as the government owns all of the country’s land and maintains a strong presence in several important economic sectors. By contrast, Kenya allows private land ownership.

Kenya’s economy wasn’t liberalized until the 1980s and 1990s, around the same time as Tanzania. However, even early on, Kenya’s leaders took steps to encourage foreign investment and trade. While Tanzania and other East African countries have followed that same path, Kenya has established itself as the trade power in East Africa. This distinction is helped not only by its coastline and the booming port of Mombasa, but also that it has better developed infrastructure and connectivity to markets within its borders. As a result, even though Kenya does not have as much arable land as, and produces fewer agricultural products than, Tanzania, it exports more of them. Agriculture in Tanzania is mostly small scale and for domestic trade. Thanks to the diversity in Kenya’s economic base, the country has been able to weather events such as the violence around the 2007 elections and the Westgate Mall terrorist attack.

Kenya has continued its emphasis on foreign private investment, working to create the “Silicon Savannah,” a technology hub for all of Africa that has attracted the likes of Google, Microsoft and Intel to set up their headquarters in Nairobi, Kenya’s capital. Whereas a lot of this foreign investment remains in Kenya and builds the capacity of its people, the bulk of money coming in from outside Tanzania and other East African countries is aimed at extractive industries aimed at making money on Tanzania’s vast resource wealth. Kenya also has a strong base of natural resources, including oil, titanium, and coal.

Kenya has also invested a lot in education ­– significantly more, in fact, than its East African neighbors. Accordingly, Kenya leads the region in literacy rates, student enrollment rates and global competitiveness.

Sources: The CIA Fact Book; “Why Kenya's Economy is now Africa's Powerhouse.” Brookings Institution, 2013.