EAST AFRICA’S ECONOMIC PROBLEMS: - A BIG CHALLENGE FOR THE INTEGRATION
PROCESS
By Sarah Bireete
Introduction
The East African
Community (EAC) is an intergovernmental
organization comprising five countries in East Africa: Burundi, Kenya,
Rwanda, Tanzania and Uganda. Pierre Nkurunziza, the President of the
Republic of Burundi, is the EAC's current Chairman. The organization was
originally founded in 1967, collapsed in 1977, and was officially revived on
July 7, 2000. In 2008, after
negotiations with the Southern
Africa Development Community (SADC) and the Common
Market for Eastern and Southern Africa (COMESA), the EAC agreed to
an expanded free trade area including the member states of all three. The EAC
is an integral part of the African
Economic Community.
The East African Community is a potential precursor to
the establishment of the East African
Federation, a proposed federation of its five members into a
single state. In
2010, the EAC launched its own common market for goods, labour and
capital within the region, with the goal of a common currency by 2012 and full
political federation in 2015.
Quick Fact sheet
1.
Comprises the Republics of
Burundi, Kenya, Rwanda, Uganda and the United Republic of Tanzania
2.
Combined
population of approximately 132 million
3.
Total
combined area of 2.01 million sq km
4.
Total
GDP of 50 billion Dollars
History of East Africa’s Regional Integration
1900 Mombasa
established as a Customs collection centre for Uganda.
1905 Currency Board
set up to issue currency for Kenya and Uganda
1917 Customs Union established between Kenya and
Uganda – Tanganyika joined in 1922
1948 High Commission established
1961 Common Services Organisation established
(East African Posts and Telecommunications, East African Railways &
Harbours, East African Airways, East African Air Aviation Services, East
African Development Bank
1967 The treaty establishing the community Signed
1977 The then community collapsed
1984 Mediation agreement signed for division of
assets and liabilities
Why did the Community Collapse?
1.
Different political
ideologies pursued by individual partner states as follows: Kenya was
capitalist, Tanzania socialist while Uganda was mixed.
2.
Influence of the
American-Russian Cold War period
3.
Disagreements on the
sharing of benefits from jointly owned common services organizations and lack
of policy to redress the situation
4.
Low private sector
and civil society involvement in the running of the then Community
5.
Greed and
short-sightedness on the part of some influential political leaders in EAC
6.
Foreign influence for
Economic reasons
7.
Lack of uniformity in
governance instruments Democracy and
Democratization processes (Dictatorships, military coups, Civil Strife, Human
rights abuses)
8.
Lack of mechanism to
address corruption, non-respect for Rule of Law, impunity, government’s high
handedness
Impact of the Collapse
1.
Loss
of jobs
2.
Loss
of Common Services
3.
Loss
of Free Movement of persons, goods and services
4.
Negative
Nationalism created
5.
Unhealthy
and wasteful competition flourished
6.
Political
destabilization by one another created more tension
7.
Suspicion
and Mistrust among member states
Safeguards against another
collapse
1. SAFEGUARDS IN THE EAC
TREATY :
Drawing lessons from the experience of
the erstwhile EAC, the Treaty Provides for:
1.
A
gradual approach to the Regional Integration Process
1st Phase - Customs
Union (Entry Point)
2nd Phase - Common Market
3rd Phase - Monetary
Union
4th Phase - Political Federation
2.
De-concentration
of Power from the Summit through a bottom-up decision making process
3.
People
Centered and Private Sector Driven integration.
4.
Involvement
of Civil Society as key stake holders
5.
Withdrawal
Procedures Made more Stringent
6.
Consensus
as a confidence building tool
The need for Integration
1.
African
states continue to be marginal players in the global world.
2.
This
is due to the small and economically unviable states which produce what they do
not largely consume and consume what they do not produce.
3.
Africa
is a large continent with a lot of natural resources but lacking in ability to
optimally exploit the resources because of under development, human and
financial resource.
4.
Small
sovereign states have small internal markets and less negotiating capacity in
the international arena
5.
Infrastructural
development remains a big challenge because of inadequate finances and absence
of plans to connect Africa beyond National boarders
6.
Without
proper infrastructure even Private Sector cannot develop because it lacks the
required huge financial resources to invest in infrastructure
7.
Regional
integration is therefore, a necessity in order to create large, more viable,
stable and economically sensible blocs to save the African people from poverty,
disease and perennial conflicts.
8.
In
addition, the reality around us is that deeper regional integration has become
necessary for sustained economic survival the world over
The benefits of the Integration
A.
Economic Benefits
1.
Economies
of scale in the exploitation of development opportunities
2.
Better
management of shared resources e.g. Lake Victoria, Mt. Kilimanjaro and Mt. Elgon
3.
Marketing
EAC as a single tourist destination
4.
Free movement of
people, goods and labour would spur economic growth and well being of the
region’s citizenry.
5.
By pooling resources
together there will be the benefits of comparative advantage, economies of
scale and efficient use of public resources.
6.
Avoid duplication of
costs borne by individual states for the same services.
7.
Compete favourably in
the global trade arena.
8.
With a large
population and more varied resources, more serious local and international
investors will be attracted to the region because of bigger internal markets.
9.
The combined revenue
base of the five EAC partner states would be better utilized in a more cost
effective way.
B.
Social and political benefits
1.
Cost
effective political administration
2.
Good
governance, democracy and political stability
3.
Enhanced
democratic space, devoid of nepotism, ethnicity and negative tribalism
4.
More
viable and cost effective infrastructure projects e.g. East African Power
Master Plan, East African Road Network, East African Railways etc.
5.
Conservation
of the region’s cultural heritage
6.
Use
of a common language (Kiswahili)
7.
Mutual
Trust and Political Good will
8.
Peaceful
co-existence and good neighborliness
9.
More
political stability in the region
10.
Peaceful
settlement of disputes
11.
Good
governance
The Stages of EAC Integration Process
Article
5 (2) of the Treaty for the Establishment of the East African Community states that:-
The
Partner States undertake to establish among themselves and in accordance with
the provisions of the Treaty, a Customs Union, a Common Market, subsequently a
Monetary Union and ultimately a Political Federation.
n Customs Union: When two or more countries remove tariffs and other
barriers on the movement of goods originated from among member states
Importance of the customs union
The key aspects of the customs union include: a Common
External Tariff (CET) on imports from third countries; duty-free trade between
the member states; and common customs procedures.
Different rates are applied for raw materials (0%),
intermediate products (10%) and finished goods (25%), the latter percentage is
fixed as the maximum. This represents a significance decrease from what was
previously the maximum in Kenya (35%), Tanzania (40%) and Uganda (15%).
However, this customs union is not yet fully implemented, because there is a
significant list of exclusions to the Common External Tariff and tariff-free
movement of goods and services. Technical work is also needed to harmonise and
modernize the customs procedures in the EAC's major ports of entry.
The expected revenue benefits are understood to be
minimal by many analysts, based on comparative-static simulation exercises
demonstrating the one-off impacts of the immediate introduction of the CU's
full tariff package.
The findings suggest an increase in intraregional trade that is largely the
result of trade diversion, not trade creation, with some aggregate welfare
benefits in Kenya and Tanzania but welfare losses in Uganda. From a trade-integration
perspective, the EAC may not be the best chosen unit, because the current trade
between the three countries is small compared to their external trade, and the
EAC's 105 million citizens do not represent a large
market in global terms, given the very low average incomes.
The main goals of the East African Community
Customs Union are:
1. Liberalizing
intra-regional trade in goods on the basis of mutual beneficial trade
arrangements among the Partner States.
2. Promoting efficiency
in production.
3. Enhancing domestic,
cross border trade and foreign investment.
4. Promoting economic
development and diversification as well as industrialization.
5. Liberalizing
intra-regional trade in goods on the basis of mutually beneficial trade
arrangements among the Partner States.
6. Promoting efficiency
in production.
7. Enhancing domestic,
cross border trade and foreign investment.
8. Promoting economic
development and diversification as well as industrialization.
Why the Customs Union
1. Over the past 7 years, all 5 EAC economies implemented a
total of 62 regulatory reforms improving the business environment for local
entrepreneurs.
2. Burundi was among the most active economies in the world
implementing regulatory reforms across several areas in 2010/11. Burundi
implemented policy changes in 4 areas measured by Doing Business: dealing with
construction permits, paying taxes, protecting investors and resolving
insolvency.
3. Rwanda made the greatest progress in improving its business
environment between 2005 and 2011, followed by Burundi. Rwanda was also the
second economy globally to advance in closing the gap to the
frontier.
4. Sharing good practices could bring East Africa closer to
global top performers.
5.
New data show the importance of
access to regulatory information. The rise in e-government initiatives in the
region and around the world provides an opportunity to increase access to
information and transparency. Examples
·
6. Worldwide, 125 economies implemented 245 reforms making it
easier to do business in 2010/11. In the EAC, all 5 economies implemented a
combined 10 regulatory reforms in 2010/11 making it easier to do business — 4
were carried out in Burundi, 3 in Rwanda and 1 in each of Kenya, Tanzania and
Uganda.
7. Burundi jumped 8 places in the ranking in the ease of doing
business in 2010/11 thanks to improvements in 4 areas as measured by Doing
Business 2012: dealing with construction permits, paying taxes, protecting
investors and resolving insolvency.
8. Rwanda, the top performer in the region, made the most
progress over the past six years. Worldwide, it made the second-most progress.
Over that period, Rwanda implemented 22 regulatory reforms, making it easier to
do business. The economy, among others, has undertaken ambitious land and
judicial reforms, introduced new corporate, insolvency, civil procedure, and
secured transactions laws.
9. In the past 6 years, economies in the EAC implemented 11
trade facilitation reforms in areas such as the electronic submission of
documents, risk management systems for inspections and joint border
cooperation.
10. Regulatory reforms — such as the consolidation of different
registration processes into 1 single point in Rwanda and Kenya — simplified the
registration process in the EAC region. To start a business in the EAC now
requires an average of 10 procedures and costs an average of 55% of income per
capita — compared to 12 procedures and a cost of 140% of income per capita 7
years ago, in 2005.
Challenges of the Customs Union
|
While the Customs union will
generate major benefits, it will also bring about greater competition among
domestic firms. In the short run, the firms that stand to gain most are those
that are already competitive. It is with this consideration that the
principle of asymmetry was adopted in the phasing out of internal tariffs, in
order to provide firms located in Uganda and Tanzania with an adjustment
period of five years.
Nevertheless, such firms may in
the medium term overcome lack of competitiveness, through: additional
investment in newer production technologies; specialization in activities
where they have a competitive advantage; re-training of human resources; and
forming strategic alliances with their competitors.
Another
implication of the customs union is that it will minimize
discretionary powers earlier enjoyed by partner states, and which sometimes
had created uneven playing ground for firms.
Such powers, in particular, relate to granting of exemptions from customs
duties. The partner states have undertaken harmonization of their exemption
regimes which shall be administered regionally. In some cases, this has been
viewed negatively as reduction of national sovereignty.
In view of the current global
trend where trade negotiations are increasingly being carried out under
regional blocs, formation of a customs union in East Africa is not a matter
of choice but a necessity. It would be difficult for partner states to
negotiate a Free Trade Area (FTA) with other regional blocs unless they have
liberalized trade among themselves. Due to the multiple memberships of the
partner states in other regional organizations, the EAC Customs union could
enter into a FTA with other trading blocs, or in the extreme circumstance,
merge with them to make a larger trading bloc.
It is worth noting that countries
which are on their own have strong competitive economies such as Germany,
France and UK are strong supporters of EU, which is still expanding, taking
on board former less developed countries of eastern and central Europe. The
USA together with Canada and Mexico have come together under NAFTA, and want
to expand taking on board countries of central and Latin America. In Asia,
the countries of south East Asia are revolving around Japan. Therefore, it
will be difficult for small countries such as those of Africa to negotiate
with such giants on their own.
The process of regional
integration as stipulated in the Treaty for the Establishment of the East Africa
Community aims at creating opportunities for the East African people.
However, it will be difficult for the East African to realize such
opportunities without deepening economic integration through operationalising
the Customs Union. This is a necessary step towards translating provisions of
the Treaty into economic opportunities for the East Africans.
|
n Common Market:
When two or more states come together to trade as a block thereby creating a
bigger consumer base for their products and services
On 1 July 2010 Kenyan President Mwai Kibaki officially
launched the East African Common Market Protocol; an expansion of the bloc's
existing customs union that entered into effect in 2005.The protocol will lead
to the free movement of labour, capital, goods and services within the EAC.
Member states have to change their national laws to allow
the full implementation of some aspects of the Common Market such as
immigration and customs. This has not
happened. This legislation may take up to five years for each of the
countries to enact fully but official recognition of the common market took
place on 1 July.
Kenya expected that its citizens will begin to enjoy
freedom of movement in the EAC within two months. Kenya, Rwanda and Burundi had already agreed
to waive work permit fees for EAC citizens. Also the EAC single tourist visa
has not been implemented.
The Common Market was seen as a step towards
implementation of the common currency by
2012 and full political federation in 2015.
Kenyan businesses complain that the benefits of the Common Market only exist on
paper to-date, and that all the work remains to be done. Arbitrary rules and
delays continue to make trade between Kenya and Tanzania expensive and
difficult.
The free movement of people in the EAC was set to improve
with the introduction of "third generation" ID cards. These cards were
supposed to identify the holder as a dual citizen of their home country and of
"East Africa". Third generation cards are already in use in Rwanda
and or Kenya but I have not heard of them in Uganda.
There is supposed to be mutual recognition and
accreditation of higher education institutions as a way of harmonizing the social
security benefits across the EAC.
Objectives of the EAC Common Market
The objectives of establishing a Common Market are to:-
1.
Accelerate economic growth and development through the attainment of free
movement of goods, labour, services, capital, persons, and right of establishment
and residence;
2.
Strengthen, coordinate and regulate the economic and trade relations
among Partner States in order to promote their accelerated harmonious and
balanced development;
3.
Sustain expansion and integration of economic
activities, the benefit of which shall be equitably distributed.
4.
Promote common understanding and cooperation among the
people of EA for their economic, social, cultural and technological
advancement.
The freedoms and rights under Common Market
In accordance with the provisions of Articles 76 and
104 of the Treaty, the EAC- CM provides for: -
Free movement of goods; Free movement of persons; Free
movement of labour; Right of establishment; Right of residence; Free movement of services;
and Free movement of capital; Common Market Protocol singed 20th
November, 2009 Ratification by Partner States; To enter into force by 1st
July, 2010; Study on Institutional Structure; Amendments of Laws and the Treaty.
n Monetary Union
Monetary Union: When two or more states agree on a single currency
for their daily transactions within the Common Market. The scheduled activities
include:
1.
Monetary
Union to be in place 2012
2.
Meetings
of Governors of Central Banks
3.
Harmonization
of Macro-Economic and taxation policies
4.
Harmonization
of Common Market Development
5.
Budget
of the Three countries read same day
6.
All
discussions now under a co-operation arrangement, based on goodwill
7.
Need
for a binding instrument
8.
EAC
Consultants from European Central Bank to advise on East African Monetary Union
Challenges to EAC Monetary Union
The
major challenges facing all the five central banks in EAC are high interest rate
spreads and budget deficits. Other challenges are high domestic debt and
relatively high levels of non-performing loans.
All these ingredients are part of a set of macroeconomic and economic policies that should be in place before a monetary union can be realized. In August last year, the heads of state decided to fast track the establishment of the monetary union to 2012 as opposed to 2015 as had earlier been agreed.
Bank
of Uganda governor, Mr. Emmanuel Tumusiime Mutebile warned in an earlier
meeting that meaningful monetary and financial integration could only be
achieved only with a sustainable convergence of economic fundamentals, particularly
price stability and sound fiscal, monetary and structural policies.
Before the decision to bring the implementation of a monetary union was brought
forward to 2012 from 2015, in stage one (2007-2010) governors had agreed to an
overall budget deficit to GDP ratio (excluding grants) of not more than 6.0%
and an overall budget deficit to GDP ratio (including grants) of not more than
3.0% and that annual average inflation rate not exceeding 5%.
Members
had also agreed to the achievement and maintenance of stable real exchange
rates, achievement and maintenance of market based interest rates, achievement
of sustainable real GDP growth rate of not less than 7.0% and national savings
to GDP ratio of not less than 20%.
In
stage two (2011-2014), the criteria looked at an overall budget deficit not
exceeding 5% and overall budget deficit to GDP ratio not exceeding 2%, annual
average inflation rate of not more than 5%.
Others are maintenance of market based interest rates, a high a sustainable rate of real GDP growth of not less than 7%, sustained pursuit of debt sustainability and domestic savings to GDP ratio of at least 20%.
Stage
three (2015) was initially meant to be the year when a single East African
currency would be introduced and circulated.
The challenges are the turbulence in the international financial markets that arose out of the collapse of the US subprime mortgage market and world oil and commodities prices that have sky rocketed. Others are China and India along with other strong emerging markets that have gained prominence in the global economy and inflationary pressures that pose a major risk to macroeconomic stability. There is need for the efficiency of the financial sector in the region, the status of the national payments systems and legal and regulatory frameworks particularly with regard to the banking, micro-finance sub-sectors, information technology including emerging issues of electronic banking and its impact on monetary policy, and the building of requisite technical capacity to facilitate effective implementation.
Emerging business trends
Business leaders are far more positive than economists
about the benefits of EAC integration, its customs union as a step in the
process, as well as the wider integration under COMESA. The larger economic players
perceive long-term benefits in a progressively expanding regional market.
Pattern of regional development are already emerging, including:
Kenyan firms have successfully
aligned to the lower protection afforded by the EAC CET and fears that firms would
not adjust to a 25% maximum CET, or would relocate to Tanzania or Uganda have
not been realized;
An intraregional division of labour
is developing that results in basic import-processing relocating to the coast
to supply the hinterland. The final stages of import-processing (especially
those bulky finished goods that involve high transportation costs) and
natural-resource based activities, are moving up-country and up-region, either
within value chains of large companies or different segments located by firms
in different countries;
Trade in goods and services has
already increased as service provision to Kenyans and Tanzanians is already
important for Uganda (in education and in health). Kenya exports financial
services, for example via the Kenya Commercial Bank and purchase and upgrading
of local operators in Tanzania, Uganda and Sudan. Uganda hopes integration will
help support its tourism potential through integration with established
regional circuits;
There are signs a business culture
oriented to making profits through economics of scale and not on protectionism.
Poverty reduction challenges
East African economies have large informal sectors,
unintegrated with the formal economy and large business. The concerns of
large-scale manufacturing and agro-processing concerns are not broadly shared
by the bulk of available labour. Research suggests the promised investments on
the conditions of life of the region's overwhelmingly rural poor will be
slight, with the significant exception of agro-industrial firms with out-grower
schemes or that otherwise contribute to the coordination of smallholder
production and trade.
It is informal trade across borders that is most often
important to rural livelihoods and a customs union is unlikely to significantly
impact the barriers that this faces and taxes are still being fixed separately
by countries. However, the introduction of one-stop border posts being
introduced and the reduction in tariff barriers are coming down progressively. The
establishment of a common market will create both winners (numerous food
producers and consumers on both sides of all borders) and losers (smugglers and
the customs, police and local government officers who currently benefit from
bribery at and around the borders) in the border areas. More substantial impact
could be attained by a new generation of investments in world-market production
based on the region's comparative advantages in natural resources (especially
mining and agriculture) and the new tariff structure creates marginally better
conditions for world-market exporters, by cheapening inputs and by reducing
upward pressures on the exchange rate.
Political Federation
Political Federation: When two or more
states come together to form a super-state under a single political authority. In
such an arrangement, federating states cede their sovereignty and some of their
powers to the super-state. Some known examples of federal states are: USA,
Russia, Nigeria, South Africa, United Kingdom, United Republic of Tanzania and
the Federal Republic of Germany
Justification for the Political Federation
1.
The
need for a central authority to coordinate and implement decisions made by
various organs by the East African Community and to ensure that they are
implemented efficiently and effectively.
2.
The
Political Federation will enhance the consolidation of what has so far been
achieved the integration process
3.
The
Political federation will be used as a mechanism for channeling the benefits of
economic integration more equitably among the Partner States.
4.
Political
Integration quickens economic integration because it is easier to coordinate
one planning unit than several sovereign ones.
5.
A
central political authority will generate savings through consolidating rather
than duplication of efforts.
6.
There
will be higher revenues from the bigger unit. The higher revenues will be more
equitably accessible to all citizens under a Political Federation.
7.
A
Political federation will enable the people of East Africa to harness diversity
for a common goal and re-unite erstwhile cross border communities
8.
The
Political Federation will minimize the occurrence of conflicts in the region as
well as enhance and legitimize the participation of Partner States in conflict
management in the region whenever they occur.
9.
The
Political Federation will promote better management and utilization of shared
natural resources, better environmental management and the promotion of tourism
and investment.
10.
The
Political federation will represent EAC as a bigger unit in the global economic
arena with a united and stronger voice.
Challenges
The
EAC integration process is largely a government/civil servants job contrary to
being people centered, private sector led as provided for in the Treaty; there
is Insufficient information dissemination; there are no tangible benefits to
the citizens; economic disparity between the member states; disparity in
education and skills / entrepreneurship; peace and Security, cross boarder
issues, case in point is failure to resolve the migingo crisis (Uganda/Kenya
territorial disputes over L. Victoria Island; land issues vis a vis population
ratios and right of establishment; power distribution at various levels – are
the member states ready to surrender their sovereignty powers in favor of
integration process?; and governance issues – there are no clear governance
benchmarks in the region.
Recommendations:
1. There is urgent need to rethink the
EAC institutional structure. EAC needs to have an organ that will act in a
similar manner to an executive but in cooperation with the Council. This will
be an equivalent of the European Commission; with both policy and legislative
initiative[1].
2. The EAC Treaty declares a
people-centered and market driven integration[2]
process with a pivotal role for the private sector. However, the actual
functioning of the EAC process is like a government project dominated by civil
servants. The EAC peoples are completely locked out of the EAC integration
process and must change. There is need for an urgent bottom up approach to the
whole integration process and not the other way round.
3. The citizens of the five EAC member
states must be prepared to partake on the greater share of integration benefits
as well as a comparable share of liabilities for a deeper integration to take
place.
Thanks to this report. Having said that, searching for an income protection quote is still a wise thing to do.
ReplyDeleteThanks Jason. Indeed income protection is key in the EAC Integration process.
DeleteSarah