East Africa Regional Integration

East Africa Regional Integration

Regional Integration in East Africa

Toward a United States of Africa

by

Tatenda Zingoni

Masters in Development Finance

University of Stellenbosch


Table of Contents                                                                                                         2                                                                                                                                                                                    PAGE

Definition of Terms                                                                                                        3

List of Tables and Charts                                                                                            4

  1. Regional Integration

1.1  Overview of regional integration                                                             5

1.2  Africa’s regional blocs                                                                6

  1. Overview of  first East African Community  regional integration attempt               10
  1. Economic Overview of Countries in the East Africa Community

3.1 Structure of the economies                                                                     13

  1. Establishment of new East African Community (EAC 2)

4.1 Customs Union                                                                         17

4.2 Common Market Protocol                                                                    18

  1. Conclusion                                                                                                       19
  1. Bibliography                                                                                                     21

Definition of terms

Preferential trade area (PTA) arrangements in which members apply lower tariffs to imports produced by other members than to imports produced by nonmembers. Members can determine tariffs on imports from nonmembers

Free trade area – a preferential trade area with no tariffs on imports from other members. As in preferential trade areas, members can determine tariffs on imports from nonmembers

Customs union – a free trade area in which members impose common tariffs on nonmembers. Members may also cede sovereignty to a single customs administration.

Common market- a customs union that allows free movement of the factors of production

(i.e. capital and labour) across national borders within the integration area.

Economic union – a common market with unified monetary and fiscal policies, including a common currency.

Political union—the ultimate stage of integration, in which members become one nation. National governments cede sovereignty over economic and social policies to a supranational authority, establishing common institutions and judicial and legislative processes—including a common parliament.

1. Regional Integration

1.1 Overview of Regional Integration

Regional integration is the process whereby countries within a particular geographic area decide to combine forces with regard to their markets and economies. In Africa the current structure for regional integration follows the linear market integration model. This model has sequential phases of integrating goods, labour and capital markets and finally monetary and fiscal integration (McCarthy, 2007).

In the linear integration model, the countries in the region start by establishing a free trade area, addition of a common external import tariff forming a customs union and subsequently the establishment of a common market.

Africa has been a laggard in the global development arena. With a population close to 1 billion, and a number of countries with different economic structures, the continent has lagged behind on the development agenda. One of the most often cited reasons for the lack of significant progress in African countries is the small size of the economies which makes them unable to compete in the global market. Regional integration is seen as an answer for the ‘small market sizes‘ of individual countries.

According to McCarthy (1999), „…economic unity is the solution to Africa’s development problems and political unification is required to make economic integration work.“ The author goes on to acknowledge that political considerations actually are the ones which provide impetus to many integration arrangements (McCarthy, 1999: 15-6).

In a bid to catch up in development via industrialization, the Organization of African Unity (OAU) along with the Economic Commission for Africa (ECA) came up with the Lagos Plan of Action (LPA) in 1980. The LPA was focused on developing a regional strategy for African development, with steps leading up to an African Common Market (OAU, 1981).

The UN Economic Commission for Africa (ECA) spearheaded the primary building blocks upon which subsequent integration of the continent was to be based on.  Economic Community of West African States (ECOWAS) was established in 1975 and therefore predated the LPA. Prior to the Common Market for Eastern and Southern Africa (COMESA) a Preferential Trade Area (PTA) covering East and Southern Africa had been instituted. Central Africa was represented by the Economic Community of Central African States (ECCAS) for Central Africa. The Arab Maghreb Union (AMU) was established in 1989, which then led to a complete coverage of all the different regions of the continent (ECA, 2004).

In a bid to avoid dependence on apartheid South Africa, the Southern African Development Co-ordination Conference (SADCC) was instituted in 1980. During the period when South Africa was still under the apartheid regime it was excluded from the regional groupings. The SADCC bloc later morphed into the Southern African Development Community (SADC) in 1992, with South Africa joining in 1994 after the end of apartheid (ECA, 2004).

In 1991 adoption of the Abuja Treaty acted as a contributor to spurring the African development agenda, following on from the LPA. The primary tenets of the Treaty were, ‘solidarity and collective self reliance, premised on a self-sustaining and endogenous development and a policy of self-sufficiency in basic needs‘ (African Development Bank, 2000: 11).

1.2 Africa’s regional blocs

Despite the initiation of an initial framework by the OAU which was to be followed by African countries, a proliferation of regional blocs occurred which led to a number of countries belonging to more than one bloc. The table below shows the current regional blocs in existence and also indicates the intricate overlaps which are in existence. A problem with these overlaps is the confusion brought about in terms of issues such as harmonization of trade policies, tariffs etc.

Table 1: Africa’s regional economic communities

Community

Members

Specified Objective

Current Status

Arab Maghreb Union (UMA)

Algeria, Libya, Mauritania, Morocco, Tunisia

Full Economic Union

Free trade area not achieved, but conventions in force for investments, payments and land transport

Central African Economic and Monetary Community (CEMAC)

Cameroon, Central African Republic (CAR), Chad, Republic of Congo (Congo), Equatorial Guinea, Gabon

Full Economic Union

Monetary and customs unions achieved, competition and business laws harmonized

Common Market for Eastern and Southern Africa (COMESA)

Angola, Burundi, Comoros, Democratic Republic of Congo (DRC), Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia, Zimbabwe

Common market

The common market is in operation, but due to members belonging to other RECs there are challenges regarding co-ordination

Community of Sahel-Saharan States   (CEN-SAD)

Benin, Burkina Faso, CAR, Chad, Djibouti, Egypt, Eritrea, Gambia, Libya, Mali, Morocco, Niger, Nigeria, Senegal, Somalia, Sudan, Togo, Tunisia

Free trade area and integration in some sectors

In July 2010, leaders agreed to come up with new framework on the structure, objectives and programmes of the bodies of the Community.

East African Community (EAC)

Kenya, Tanzania, Uganda, Rwanda, Burundi

Full economic union

Common Market Protocol kicked in July 2010

Economic Community of Central African States (ECCAS)

Angola, Burundi, Cameroon, CAR, Chad, DRC, Congo, Eq Guinea, Gabon, Sao Tome and Principe, Rwanda

Full economic union

Not much progress has been experienced in the trade liberalization agenda set for the region

Economic Community of Great Lakes Countries (CEPGL)

Burundi, DRC, Rwanda

Full economic union

Current arrears by members have put activities of the bloc at a standstill

Economic Community of West African States (ECOWAS)

Benin, Burkina Faso, Cape Verde, Cote d’Ivoire, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, Togo

Full economic union

Preferential trade agreements (PTA’s) signed

Indian Ocean Commission (IOC)

Comoros, Madagascar, Mauritius, Reunion, Seychelles

Sustainable development through cooperation on diplomacy, environment and trade

Vibrant trade programme

Inter-Governmental Authority on Development (IGAD)

Djibouti, Eritrea, Ethiopia,  Kenya, Somalia, Sudan Uganda

Full economic integration

Progress has been made in fronts such as peace keeping given the strife-torn status of the region

Mano River Union (MRU)

Guinea, Liberia, Sierra Leone

Multi-sectoral integration

Southern African Customs Union (SACU)

Botswana, Lesotho, Namibia, South Africa, Swaziland

Customs union

Customs Union in place along with Rand Monetary Union (excluding Botswana)

Southern African Development Community (SADC)

Angola, Botswana, DRC, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia, Zimbabwe

Full economic union

As can be noted from the above table, the main objective of most of the regional economic communities is to establish a full economic union. The East African Union is the only regional grouping which has made significant progress toward the full economic union goal. A number of factors are acting as hindrances to the same progress in the other blocs.

The Southern African Customs Union (SACU) is currently at the customs union step in the linear integration model. Although SACU countries belong to SADC, it is prudent to build on the foundation of SACU in the integration of Southern Africa. Namibia, Swaziland and Lesotho currently operate in the Rand Monetary Area (RMA). Currently Zimbabwe is operating under a multi-currency regime wherein US dollars, SA rands, Botswana pula and British pounds are used in transactions. This was brought about due to the economic contraction and a hyperinflationary environment which decimated the value of the local currency.

Existing trade ties between SA and Zimbabwe provide a possible ground for inclusion of Zimbabwe into the RMA. Such a move will enable substantive steps to be made in the integration of Southern African countries.

Widespread overlapping of the regional groupings stands as a hindrance to the integration agenda. Policy co-ordination between countries is rendered difficult due to the differences in objectives followed by the groupings. Although member states might have entered into particular groupings due to perceived benefits of doing such, belonging to multiple groupings has actually stood as a hindrance for a number of countries.

The BURKT countries (Burundi, Uganda, Rwanda, Kenya and Tanzania) which comprise the East African Community all belong to at least one other regional group. Kenya and Uganda both belong to three, while Tanzania, Burundi and Rwanda belong to two. It is a cumbersome (if not impossible) process for countries to try and balance between the requirements of the different blocs they belong to.

Potential points of conflict include; enforcement of rules of origin agreements, having a common position on the tariff levels to be applied, alignment with the World Trade Organisation (WTO) and Economic Partnership Agreement (EPA) regulations. Members of regional economic communities will need to decide between the competing memberships/allegiances (Braude, 2008).

2. Overview of the first East African Community regional integration attempt

The East African Community project did not begin with the current steps which are being taken as the BURKT countries are moving toward full economic integration. In the 1960s Kenya, Uganda and Tanzania (KUT) set out to establish the first East African Community (EAC 1).  Most focus on the history of EAC 1 is often focused on the 1960’s, yet the foundation for the community can in earnest be seen as having been laid in 1922.

The KUT countries had all previously been British territories, which made them have a number of things in common which were seen as fertile grounds for the formation of an integrated market. Similar political institutions, school, judicial and government administration systems provided an institutional framework which would enable the community to be founded. KUT had common services which used to be operated jointly. Up to 1966, the three countries all used the same currency- the shilling (Mvungi, 2002).

Even though there were a number of similarities between the countries, some marked differences could also be noted which later contributed to the abortion of the integration project. Kenya attracted more private capital inflows relative to the other countries in the region, which led to it becoming more industrialized (Mvungi, 2002). Different political ideologies which were engendered by the founding fathers of the countries were divergent. For example while Kenya towed the capitalist line, Tanzania was socialist oriented under Julius Nyerere’s Ujamaa system (Nyerere, 1967).

In line with the socialist ideology, Tanzania controlled investment in the country’s economy which saw the nationalization of the major industries. On the other hand, Kenya’s capitalist system fostered foreign/western countries participation in the economic development process. Due to general inefficiency faced by government when they participate in most economic transactions, Tanzania’s economic growth was stunted. As noted in the socialist states such as Russia during the United Soviet States Republic (USSR) era, centralised control of economic activities ‘ties the invisible hand‘ of market forces leading to allocative and productive inefficiency.

Prior to East Africa’s independence, the region was already operating as a common market without formalisation of the structure. Presence of one colonial administration saw post and telecommunications, railways, harbours, airways, customs and excise departments, training research institutions and higher education all being co-ordinated by one authority (Mwase, 1982).

Unravelling of EAC 1 was brought about by a number of factors which were in existence prior to formation of the union along with other developments which crept up later on. Kenya’s dominance in the East African common market resulted in industrial and trade imbalances amongst the three countries. A developed manufacturing sector along with well developed infrastructure made Kenya attract more investment.

The geographical location of Kenya also worked in its favour as it was well situated to serve the whole of East Africa. Despite the talk of ‘community‘, each country tended to focus on protecting their own national interests. Tanzania’s socialist ideology saw it turning toward the East European countries. Given the chasm between the capitalist and socialist schools of thought, policies decided upon by the different countries were inherently diametrically opposed.

Idi Amin’s 1971 military coup contributed a powerful blow to the EAC. The Tanzanian government did not recognise Amin’s government while Kenya did. A paralysis of the system was fostered due to this impasse as no decisions could be reached pertaining to the community (Mvungi, 2002). Furthermore monetary policy, exchange control and currency restriction conflicts were amongst some of the other issues which derailed the EAC 1 train (Mwase, 1979).

An agreement reached in 1964 (Kampala agreement) which focused on new industrial policy aimed at allocating industries to countries in deficit did not take off as anticipated. This was due to lack of ratification of the agreement by Kenya. Tanzania unilaterally, „set out to establish industries in competition with those already in Kenya and to impose quotas against Kenyan manufactures“ (Mahinga, 1976).

Tanzania and Kenya had already been at loggerheads and this lack of ratification by Kenya became the proverbial ‘straw which broke the camel’s back‘, due to the unequal distribution of benefits amongst the three partners (O’Connor 1988). The breakdown in the trust between the member states led to the demise of EAC 1.

3. The case for EAC 2: Economic overview of the member states

3.1 Structure of the economies

The east African countries have a number of similarities regarding the way the economies are structured. As with most African countries there is a predominance of the primary sector with agriculture and mining constituting the main portion. Burundi, Uganda and Rwanda’s main export is coffee, Kenya horticultural produce and tobacco is Tanzania’s.

GDP growth rates for the EAC countries have historically been moderately high, fluctuating within the 3-7% band. Due to the resource based economic structures in these countries, fluctuations in global commodity prices impact on the GDP of the countries. The advent of globalization has led to increased inter-linkages between the region’s economies with the global village.

The knock in 2008/2009 experienced by the different countries was as a result of the setting in of the global economic recession which led to fall in the demand for commodities on the world markets. Given the EAC countries have a large reliance on the export market, slowdown in the world markets had a significant knock on the performance of the economies.

Socio-economic factors

Socio-economic indicators for the BURKT countries, 2008

Country

Literacy

Population

Urban population

Life expectancy

Burundi

65.9 %

8.0 m

10.4%

50

Uganda

74.6%

31.7 m

13.0 %

52

Rwanda

70.3 %

9.7 m

18.3 %

50

Kenya

86.5 %

38.5 m

21.6 %

54

Tanzania

72.6 %

42.5 m

25.5 %

55

Source: World Bank

Tanzania has the largest population of the EAC member states. Burundi and Rwanda have very low populations relative to the other partners. The urban populace in the East African Community is low with the bulk of people residing in the rural areas. Literacy levels are relatively high across all the EAC countries. Kenya is in pole position with regard to the level of literacy. Despite the recent unrest in Rwanda and Burundi, life expectancy in these countries is relatively high in line with the other EAC countries.

Foreign Direct Investment

Foreign Direct Investment inflows into EAC have largely been going into Tanzania and Uganda. In Tanzania, mining (with particular focus on the gold mining sector) has accounted for the largest batch of the inflows along with tourism. Uganda’s recent debut in the oil sector has largely accounted for the rise in the FDI inflows to the country.

FDI inflows to Rwanda and Burundi have generally been muted due to poor investor sentiment. In 2008 Burundi only attracted $3.8 million of FDI, while Rwanda attracted $103.4 million. Although Rwanda’s figure exceeds Burundi, the level of FDI still falls short of the other countries in the EAC.

FDI inflows to Kenya have been muted for quite sometime.  Factors accounting for the low FDI inflows include the maturity of the market (i.e. there is generally less growth potential), local firms expanding into the region rather than domestically, relations with donor countries and perceptions of high corruption levels (Koigi, 2006). The huge jump in FDI between 2006 and 2007 in Kenya reflects the inflow from French Telecom’s $390 million acquisition of a 51% stake in Kenya Telecom (Durchslag, 2008).

The economic slowdown which gripped the global economy contributed to a decline in FDI into the EAC in the 2009/2010 period. Instability which gripped Kenya after the 2008 presidential elections contributed to a negative impact on investor perceptions pertaining to the country as an investment destination.

Examination of the evolution of the sector splits for the EAC member country’s GDP shows a relatively stable distribution. Rwanda, Uganda and Burundi all have agriculture as the dominant sector. Kenya’s service industry is dominated by tourism and the financial sector. Although agriculture is the second dominant sector in the Kenyan economy, as with other countries in the EAC, it employs the bulk of the country’s labour force.

Level of industrialisation in the EAC is generally low. Although Kenya is the most industrialised country in the region, its industrial sector contributes less than 20% to the nation’s GDP.

4. Establishment of the new East African Community (EAC 2)

The first East African Community experience enabled the architects of EAC 2 to have a reference point to work with in crafting the new structure. Following on from EAC 1, substantive steps were taken between the original principals to the first East African Community. Outlined below is the EAC 2 formulation process which emerged from the wealth of experience from the previous integration attempt.

EAC 2 establishment steps

Year

Description

1999

EAC treaty signed between Kenya, Uganda and Tanzania

2005

Customs Union established in November

2007

Rwanda and Burundi join the Union

2009

Common Market Protocol signed in November

2010

Common Market started operating on 1st of July

2012

Target for Monetary Union

4.1 Customs Union

In 1999, the East African Community treaty was signed between Kenya, Uganda and Tanzania. The treaty outlined the process which would be followed in the establishment of the customs union. Integration processes in Africa have been noted to follow the linear model wherein the steps move from customs union, common market, monetary union and finally a political union. The linear market integration model goes through sequential phases of integrating goods, labour and capital markets, and finally monetary and fiscal integration (McCarthy, 2007).

The establishment of the customs union saw Kenya, Uganda and Tanzania set up  a Common External Tariff (CET) regime. The CET enabled rationalization of the regions dealings with other economies. Parallel membership to different blocs posed a concern for the customs union due to rules of origin issues. In order to ensure proper functioning of the union, there is need to harmonize the regional economic communities. Overlaps cause inefficiencies in the implementation and co-ordination of policies due to duplication of efforts.

Although Rwanda and Burundi are still relatively politically unstable, their joining the EAC is expected to enable stabilization of their small economies. Access to the resources of the more established member states is set to assist the countries leapfrog in the development process.

4.3 Common Market Protocol

The Common Market is a stage in the integration process where a customs union allows free movement of the factors of production (i.e. capital and labour) across national borders within the integration area. The protocol’s main objective for the EAC was, „to widen and deepen cooperation among the Partner States in the economic and social fields for the benefit of the Partner States“ (Common Market Protocol, 2009). Kenya, Uganda, Tanzania, Burundi and Rwanda officially entered into the Common Market on the 1st of July 2010.

As outlined in the stated objective of the protocol, the pursuit of a common market transcended both social and economic areas. In order to facilitate the free movement of labour, capital, investment etc, there are a number of processes which the region has to institute. Matters such as „removal of restrictions on movement of labour, harmonization of labour policies, programs, legislation, social services, provision of social security benefits and establishment of common standards and measures for association of workers and employers, establishment of employment promotion centers and eventual adoption of a common employment policy“ have to be addressed in order for the common market to function properly.

With the common market having been rolled out, there are a number of contentious issues which are yet to be ironed out. Three crucial issues which are currently seeing Tanzania pitted against the other EAC member states are with regards to land ownership, permanent residency and travel documentation. The other countries have assented to nationals from other countries owning land in their countries and for people to be considered permanent residents once they have stayed in the country for 5 years. Regarding the issue of travel documents, Tanzania insists people should use passports while the other countries are content with the use of identity documents.

Conclusion

Despite a number of challenges faced within the EAC, the countries have to be applauded for reaching the common market rung of the integration ladder. Rationalization of policies surrounding labour, capital flows, role of trade unions amongst other factors are expected to ensure the smoothing of the transition from the common market to the monetary union.

The plan for the establishment of the monetary union by 2012 might be a bit too ambitious on the part of the EAC principals. Instead of being hard set on wanting to meet this deadline, it is better for the member states to consolidate their achievements up to thus far. Any areas which have not yet been strengthened will need time to be focused on to ensure that when time comes for a roll out of the monetary union, there will not be an unraveling of gains already made.

According to the EAC Monetary Affairs Committee (MAC) there are still a number of challenges faced by central banks in the region which might act as a hindrance for a mooted 2012 roll-out of a monetary union. High interest rate spreads, budget deficits, high domestic debt and relatively high levels of non-performing loans are some of the major challenges currently being faced. (Kisambira, 2008)

Lessons derived from the East African Community integration process are expected to provide substantial input for other regional economic communities within Africa.

The EAC is expected to signal the likely direction for the continent’s aspirations towards a United States of Africa. Although some political leaders might be envisaging establishment of such a federation sooner rather than later, prudence dictates strengthening regional groupings before embarking on a continent wide amalgamation of countries.

Bibliography

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Source by Tatenda Zingoni