EFFECT OF EAST AFRICAN COMMUNITY INTEGRATION ON INTRATRADE VOLUME OVER THE PERIOD 1980-2012

ABSTRACT 
This study empirically explored the effect of East African Community (EAC) integration on intra-EAC trade, as reflected by the level of exports, of the East African Community member states over the period 1980- 2012. This time period captured the pre and post EAC eras. Most empirical studies on Regional Integration investigate whether the Gravity Model hold for trading partners. Others investigate the effect of tariffs and other trade barriers on trade but this study considered the influence of FDI. This study therefore sought to complement the existing evidence majorly focusing on developing nations. This is due to the fact that East Africa Community integration members are faced with; low levels of economic growth; minimal share of exports and world trade; low rates of development in human capital and infrastructure, as well as; excess challenges from external pressures. The research sought to: examine the Intra-regional trade patterns both before and after the revival of the EAC; to examine the effects of EAC integration on the performance of intra EAC trade and to determine the influence of FDI on EAC trade. This study was based on Gravity model. 

The study used secondary data obtained from different sources that included Kenya National Bureau of Statistics (KNBS), EAC Offices, World Bank and respective countries’ Ministries of Trade (1980-2012). The Levin-Lin-Chu and Engle-Granger approach were used to investigate the properties of the data with respect to Panel Unit roots and Cointegration respectively. The results show that EAC has significantly increased trade among the member countries. FDI inflow has a positive and significant impact on trade (exports). From a policy perspective based on the study findings, it can be concluded that EAC member states can increase their trade by improving their infrastructure so as to reduce transport costs and encourage FDI which the study found to promote trade. Policies aimed at increasing the GDP are also encouraged among the EAC member states.

CHAPTER ONE 
INTRODUCTION 
Background to the Study 
Regional integration arrangements (RIAs) form a large part and channel through which world trade takes place. Africa and East Africa also form part of this channel. OECD (2005) estimated that close to more than half of total world trade happens through regional trade arrangements. Through RIAs, world trade was estimated to have grown on average of 10 percent and 13 percent between 2005 and 2010 respectively (OECD, 2011). 

By December 2006, WTO (World Trade Organization) had been notified of 211 RIAs and 14 of them were from Africa. A key outstanding characteristic of these African RIAs is overlapping membership which has potential conflicting goals (UNECA, 2004). 

The first East African Community was founded in 1967. Kenya, Tanzania and Uganda were the initial member states who started the EAC. They had an agreement to cooperate on issues revolving around economic and social aspects. The most appropriate entry point to integration process was the Customs Union. Customs Union is an advanced stage of integration which requires stable and well functioning legal and institutional framework. The first East African Community Customs Union collapsed in 1977. 

The failure of the first East African Community can be attributed to four main factors: firstly, its lack of steering functions; secondly, the unequal distribution of benefits; thirdly, the purely intergovernmental – i.e. interstates –structure; and, fourthly, the irreconcilable differences of opinion between leading players, especially between the former Ugandan president Idi Amin and the Tanzanian president Julius Nyerere. The geographical region encompassed by the EAC covers an area of 1.8 million square kilometers, with a combined population of about 132 million. The treaty establishing the current EAC was signed on 30 November 1999 and came into force on 7 July 2001 upon its ratification by the Republics of Kenya, Uganda and Tanzania. (EAC, 2009). 

The main objective of the current EAC is to promote cooperation in “political, economic and social fields” by encouraging economic development (including trade liberalization, monetary and financial integration, the free movement of persons, capital, goods and services); science and technology (including infrastructure, health and education); as well as political and legal matters. It envisages deepening regional integration by establishing a customs union (CU), common market, a monetary union and, ultimately a political federation among the partner countries (EAC Treaty, 2001). 

The EAC customs union protocol aims to liberalize inter and intra-regional trade. Products originating in third countries, that cover approximately 99 percent of all tariff lines, will be subject to a common external tariff (CET). This was be implemented in two phases with the first phase grouping all products into three bands, each having its own tariff rate. There is a zero rate for raw materials, a 10 percent rate for intermediate products and a 25 percent rate for finished goods (EAC, 2005). The second phase of CET implementation comes in 2010 when the 25 percent rate is reduced to 20 percent subject to consultation amongst and approval by the member states (EAC, 2005). Unfortunately, African Economies are still under represented among the league of exporters of manufactured goods. Kenya, Uganda and Tanzania recorded the lowest percentage of manufactured exports which stand at 22 percent, 18 percent and 14percent respectively (World Bank, 2012). 

On January 1, 2010 East African Community had operated as a Customs Union for five years. East African Community decided to adopt and encapsulate a clear path aimed at expanding the integration. Customs Union, the Common Market, the Monetary Union and Political Federation were the four pillars that were encompassed in this path. Currently, EAC is at the level of a Common Market protocol as launched on July 1, 2010. 

The regional integration process is at a high pitch at the moment as reflected by the encouraging progress of the East African Customs Union and the establishment in 2010 of the Common Market. The Protocol for the establishment of the East African Monetary Union was signed by the Heads of State in November 2013 and implementation is underway. The process towards an East African Federation is being fast tracked, underscoring the serious determination of the East African leadership and citizens to construct a powerful and sustainable East African economic and political bloc. 

Statement of the Problem 
East African Community regional integration members have persistently been faced with low levels of economic growth, minimal share of exports and world trade(averaged at 19.6 percent in 2011), low rates of development in human capital and infrastructure as well as excess challenges from external pressures(World Bank, 2011). Member states have therefore resolved to integrate so as to reduce the trading costs and increase the gains necessary for accelerating economic growth and development. Moreover, even with new entrants (Burundi and Rwanda) in the integration little is known about the effect of integration on intra-EAC trade has improved. There have been studies on welfare and tariffs but none focused on the effect of EAC regional integration on intra-trade. It is therefore against this background that this study is carried out. The success of regional integration is crucial especially for policies that will ensure increased benefits from the process of globalization and integration. Regional integration in EAC is expected to help in enhancing economic development and growth in the continent.

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Item Type: Kenyan Material  |  Attribute: 51 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
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