East African Community sets up Common Market and Integrates.

On November 20, the East African Community (EAC), which comprises of Burundi, Kenya, Rwanda, Tanzania and Uganda, announced that in July 2010, pending ratification by all member states, they will introduce a Common Market for goods, services and people. Following their development strategy motto for 2006-2010, ‘Deepening and Accelerating Integration‘, the EAC has made big strides in becoming more interlinked and at this pace, a single currency which is scheduled for 2015 looks a reality. In a bloc that boasts a population of 126.2 million consumers and a collective GDP of US$60 billion, if managed well, the benefits could be huge. However why has this region of Africa chosen this route of development, and is it sustainable and advantageous to the region?

Common Market

A common market is defined as a “customs union with provisions to liberalise movement of regional production facts (people and capital).” The EAC implemented the customs union (CU) in 2004 that included the common external tariff (CET) for goods coming into the region from 3rd parties. Thus far, the implementation of the CET has been a thorny issue as can be expected from countries that are all trying to develop and some of this involves importing and exporting of goods to grow their businesses. There has been clear divergences in individual countries on the taxes they impose, for instance, for wheat, whilst the tax rate across all countries should be uniform, Kenya has a 60% tax, Tanzania 50% and Uganda 35%. Not having uniform taxes exposes the CU to breaking up, it is harder to import into Kenya than Uganda, and in effect, the local Ugandan wheat producers are most at risk than the Kenyan wheat producers, when under the terms of a CU, all taxes should be the same.

Whilst the CU is being fully ironed out, the impending introduction of the common market is very intriguing. Based on the successful (or unsuccessful depending how one analyses it) European Union common market where there is total integration, especially for capital and labour, the task ahead for the EAC is very ambitious. For labour, most of the countries are agrarian based economies with high unemployment rates, and many informal traders, it gives the opportunity for traders on the border towns to sell their products in neighbouring countries that have higher prices. However, what it does raise in concern is that countries that have a larger population and a more highly skilled population, they can export their workers and firms to other countries without employing local labour, instead using their own people. This applies as well on the reverse, a I.T. worker from Rwanda could relocate to Kenya and get paid more there than he will in Rwanda in the short-medium term.

A theory of common markets eventually leading to wage equalization, the Factor Price Equalization Theory has been proven to work in the EU and USA, especially when analysed in the Hecksher-Ohlin Model of trade. Through competition in a free and common market for land, labour and capital, over time, prices will become equal. However, this has yet to be substantially proven in developing countries, and there are some countries in the EAC that are more advanced than others economically such as Kenya has a more advanced financial sector than any of the others in the region. It will take a very long time before the same conditions are made in any of the other countries to rival the advancement of the Kenyan economy (GDP of US$35 billion), and probably more EAC citizens will look to move to Kenya and work/sell their products there.

Macro-Economic Convergence

This is also one of the key criteria for the common market, and in the initial targets set by the EAC, many of the macro-economic targets were set at:

1. Stabilisation of underlying inflation of less than 5%.

2. High and sustainable real GDP growth of 7%.

3. Raising national savings to GDP ratio of 20% in the medium term.

Many of these targets were due to be met, and if it were not for the global financial crisis, it may have begun to have been exceeded. Up to 2008, the average GDP growth was 6.8%, just in the middle of the crisis. All the countries could boast high levels of growth, although Uganda has been stalling and falling behind, Kenya has emerged as one of the consistent performers, allied with the brave drive by Rwanda.

Inflation however hasn’t been tamed to the levels wanted, has high growth, in 2009 it was at 7% but had peaked at 13% in 2005. the EAC has genuine ambitions on having a single currency, but if there isn’t deeper integration and coordination and management of inflation (although spiked by higher food prices, and these are set to continue in the future), then the currency will be far away. Similarly for savings, with higher inflation, families have less money to consume, and hence less money to save, so this target will need to be rectified if the single currency is to become a reality.

Social and Political

Socially, there is a lot that binds East Africa as one peoples, although there are some very sensitive issues that separate them. The majority of them have a legacy of being former British colonies, and those that don’t such as Rwanda, have implemented English as the national language so that the whole bloc has a uniting language. This will also be allied to the language of KiSwahili that is spoken by all the member countries.

A unity of countries may also help end the often bloody relationships between the different tribes in the region, the Kenyan presidential election violence of 2007 had underlying mistrust between the Luo and Kikuyu tribes, and in 1994 there was the genocide of 1 million Rwandans when Hutu’s and Tutsi’s clashed. An envisaged East African Federation may give to a sense of being one people, and not separate people.

There are some disputes from member states, most notably Tanzania. They are the largest country in the EAC, and as yet, have an economy with vast untapped potential, and with a common market, they see it as a means for the other smaller and richer countries to take over their resources such as land and energy resources such as uranium and natural gas. The negotiations over ownership of natural resources has been sticky, and it remains to be seen come July 2010 if the borders to Tanzania and ownership and means of commerce are compliant with this agreement.