Resurrecting the EAC

July 26, 2010

East African countries are on the verge of a remarriage of sorts. An uneasy first trial at unity ended up collapsing back in 1977 after only a decade of existence, causing bad blood among the then partner states, and thus explaining the frustratingly slow current reintegration. Starting 2000 however, a revival has been in the works with the last major groundwork before full cooperation being laid down last year (2009) when leaders from old members; Kenya, Tanzania, Uganda, and new members Rwanda and Burundi met in Arusha, the proposed union’s capital, to ratify the official roadmap.

This was the culmination of gradual efforts cautiously stepped up since that acrimonious breakup. After three decades, July 2010 finally sees the coming to fruition of East Africa as a common market. Citizens of these partner states are now allowed to travel and transact freely across their borders. Earlier on, the beginning of this year saw the coming into effect of the EAC Customs Union protocol. This theoretically removed all taxes levied on intra-regional trade allowing for free movement of goods and services across the region.

A treaty crafted to guide the EAC’s timeline provided for four phases to full integration; first was a Customs Union introduced back in 2005, a Common Market set for July 2010, Monetary Union starting 2012 (with political will, full monetary union is expected by 2015) and then ultimately a Political Federation.

Macroeconomic benefits

This is welcome news. Having seen a fairly successful implementation of the aforementioned first two phases, expected now is the relatively more complicated, but far more crucial Monetary Union part. With proper implentation and management, the benefits from this will be immense. First on the list will be macroeconomic stability. A common currency eliminates susceptibility to sudden fluctuations in valuation thus boosting investor confidence. The cost of exchanging currencies within the region will of course disappear, thereby benefitting firms trading in the region. Cost transparency of goods traded within the community will give consumers competitive prices. Member states with higher inflation rates will stabilize, therefore benefitting by association. Trading in the local stock markets will also go up as barriers blocking partner countries’ firms are eliminated.

There’s security in numbers they say. Working together will give EAC citizens a collectively bigger clout at negotiating with its trading partners. Globalization, being virtually about integration, favours regional economic unions which in turn are actually transitioning into one global village. That is why there are regional and/or strategic economic blocs amalgamating everywhere around the globe. It is a do or die. By necessity, similar-interest-nations coalesce and morph into bigger unions, accruing benefits from the economies of scale.

Furthermore, EAC countries with weaker currency will benefit from lower interest rates and their firms will have easier access to capital. For perspective, a look at European Union points at what to expect with the new EAC. According to Wikipedia, the introduction of the euro (European Union’s common currency) in Europe has most specifically stimulated investment in companies that come from countries that previously had weak currencies. The euro decreased interest rates of most member countries, and in particular those with a weak currency. As a consequence the market value of firms from countries which previously had a weak currency significantly increased. A study found that the introduction of the euro accounted for 22% of the investment rate after 1998 (the euro was introduced on 1 January 1999) in countries that previously had a weak currency. So the prognosis is clear: EAC’s poorer countries are set to gain on this front. Additionally, as the poorest of them in this region are landlocked (i.e. Uganda, Rwanda and Burundi), they are also set to gain from cheaper and faster transfer of goods to and from the ports in Mombasa and Dar-es-Salaam.

The bloc’s people are their biggest capital. Given the projected decline of China and India as the leading havens of cheap labour, opportunities abound for EAC’s estimated 130 million strong (and mostly young) population, especially in low-end goods manufacture. The region’s proximity to the Indian Ocean cannot be overstated. Trade with commodity-rich landlocked neighbours like Congo, Sudan and Ethiopia is expected to increase extensively. With an estimated combined GDP of $75 billion, the economic union places the community in good position to gain significantly from trade with its African neighbours.

All round prospects are excellent if there will be no policy reversals as has unfortunately been witnessed with Tanzania on a number of previous occasions. Tanzanians are generally thought to fear that the association’s benefits will be minimal for them, thus their reluctance to waive taxes on some goods from partners, especially Kenya. Their worry is that suave and relatively well educated Kenyans will swamp their job market at their citizens’ expense. However, these should be taken as teething problems to be ironed out with time and therefore not the cue to throw the baby out with the bath water.

Although not on the radar at the moment, optimists see an eventual marriage between the East African Community with their South and West African counterparts. This would make for a more hopeful, brighter vision for 2030.