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Bachelor Research Project

Continuity and Change in Global Capitalism

Department of Political Science

Regional development in a globalizing world

On the effects of regionalism on economic development in the East

African Community

Bachelor thesis

Maxje van der Heijden

10712402

Dr. Jan Fichtner

Second reader: Philip Schleifer

Political Science 2017-2018

June 25 2018

Words: 7336

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2

Contents

1. Introduction 3

2. Literature overview 4

2.1 The World Trade Organization and Regional Trade Agreements 4

2.2 Why regionalism? 5

2.3 Regionalism in Africa 6

3. The East African Community 8

4. Methodology 10

5. Analysis 12

5.1 Economic overview 1999-2015 12

5.2 Import and export 1999-2015 14

5.3 Intra trade 1999-2015 16

5.4 Trade with other partners 18

6. Conclusion 20

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3

1. Introduction

On the 21st of march 2018 44 African heads of state signed an agreement to create a continental African free market. This agreements fits well into the policy of the African Union (AU) to foster trade between African countries. The idea behind this African regionalism is to boost intra-African trade as to develop its individual economies and to become less dependent on extractive and primary commodities (African Union 2018: 2). One part of this policy by the AU has always been to support existing regional trade agreements (RTA’s) in Africa and to create them where they did not yet exist. One of the most active ones has been the East African Community (EAC). It was founded in 2000 and started with Kenya, Tanzania and Uganda. In 2007 Burundi and Rwanda joined and in 2016 South-Sudan also became a member. Thus far they have created a customs union and started on forming a common market. The plan is to eventually create a common currency and further down the road become a political federation (EAC.int 2018).

Within development studies not everyone agrees on the benefits of regionalism. Some see regionalism as a way for developing countries to invest in their industries in a less competitive

environment as to foster their industries (Powell and Low 2011: 264). Others think regionalism creates unnatural trading partners which will eventually stand in the way of a healthy global free market which is the road to true development (Venables 2003: 759). In this research the case of the EAC will be placed within the discussion about regionalism. Has the EAC, an active RTA who is pushing the agenda when it comes to integration, booked any results so far? Has the creation of an RTA been beneficial for its member countries in terms of economic development? The research question will therefore be: ‘To which extend has the EAC helped its member countries to develop on an economic level?’

The goal of this research is to contribute to the scientific discussion about development and regionalism. To which extend do developed countries still need to support developing countries and at which point is it beneficial to let developing countries grow and invest in each other? And, is a global free market really beneficial for developing countries or is the competition with developed countries still too high? A lot of research has already been done about regionalism and its effects on for instance trade diversion (Freund and Ornelas 2010), regionalism versus multilateralism (Glania and Matthes 2005) and the effects regionalism on small states (Schiff 2001). This research will be focussing on the effects of regionalism on the contents of trade flows (less primary commodities and more

manufactures) and how regionalism changes the position of its member countries in the global world market. Will the EAC member countries trade more with each other and less with for instance non-African states? These questions are also in line with the pillars of the non-African Union mentioned before when it comes to African trade.

In the following chapter an outline will be made of the discussion about regionalism. There will be a brief explanation about RTA’s and its position within the pillars of the WTO followed by the

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4 scientific discussion about regionalism and an overview of regionalism in Africa. In chapter three the history and performances of the EAC so far will be discussed. Chapter four will be the methodology explaining how this research was done. Chapter five contain the results of the research and chapter six will give the conclusion.

2. Literature overview

2.1 The World Trade Organization and Regional Trade Agreements

By the definition of the WTO RTA’s are ‘reciprocal trade agreements between two or more partners. They include free trade agreements and customs unions’ (WTO 2018a). At this moment the World Trade Organization (WTO), with 161 member states, represents more than 95% of international trade. Pillars of the WTO are promoting international trade, settling disputes between member states and providing a forum for negotiations. The main goal of the WTO has always been to promote global trade liberalization. One of its core principles is non-discrimination among trading partners. Although this principle is not in line with the creation of regional trade agreements the WTO does allow it. Under GATT 1947 Article XXIV RTA’s were allowed because many of the original 23 member states were already involved in one or more RTA’s, and they were not planning on abrogating them

(Barnekow and Kulkarni 2017: 100). This article includes the Most Favoured Nation (MFN) principle which obliges member states to treat each other equally in terms of trade and tariff reduction. Another principle is the National Treatment which prohibits countries to give domestic goods a preferential treatment. Both principles are not in line with the idea of an RTA (idem: 101).

Between 1986 and 1994 the 8th round of multilateral trade negotiations was held in Uruguay. This round created the WTO as we know it today, and GATT became an integral part of the WTO agreements. This round also changed the legislative and judicial system of the trade organization. One controversial change was the adoption of the ‘single undertaking’ which means that in implementing an agreement nothing is agreed until all is agreed. This makes negotiations a lot more difficult and less flexible. There also came an updated Dispute Settlement Understanding (DSU) which made the procedure of settling disputes between countries more effective. It is argued by critics that these legislative and judicial changes gave developed countries and regions like the US and EU more power. It also slowed down the Doha round of negotiations on lowering global trade barriers which started in 2001 and still hasn’t concluded. According to Powell and Low WTO member states often resort to RTA’s out of frustration on the lack of progress the WTO makes. Negotiating between a few geographically close countries who in most cases have a similar culture, language, history and economy is more flexible and effective (2011: 265). Barnekow and Kulkarni call it a double-edged sword: ‘Regional trade agreements cannot be strengthened (on a multilateral basis) without a conclusion to the Doha Round of trade negotiations, and without a conclusion to Doha, RTAs will likely proliferate, minimizing the strength of any new agreement’ (2017: 102).

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5 2.2 Why regionalism?

A view on regionalism depends on the author’s broad view on economics. If one sees regionalism as a stepping stone to multilateralism it could fit well in the economic view of someone who supports full global free trade. But a protectionist could see regionalism as the final destination. Jacob Viner, who is seen as one of the classical writers about regionalism, also noted this ‘strange phenomenon’ where free traders and protectionist are united in their support for customs unions (Oslington 2014: xxv). Viner made in the 1950’s the distinction between ‘trade creation’ and ‘trade diversion’. Trade creation occurs when, after the implementation of an RTA, trade barriers are removed and high-cost domestic products in a country are replaced by cheaper products from one or more of the other member states of the RTA. Trade diversion is when cheap foreign products disappear because they are produced in a country which is not included in the RTA (Barnekow and Kulkarni 2017: 103). Both phenomenan will occur when an RTA is implemented. According to Mohammed Nsour an RTA can be seen as

successful when trade creation outweighs trade diversion (2008: 365). According to a literature overview research on RTAs done by Freund and Ornelas RTA’s mostly produce trade creation (2010: 140).

Supporters of regionalism see RTAs as a stepping stone towards a more integrated global economy. Developing countries with industries which cannot yet compete with the industries of developed countries can use an RTA to experiment with liberalization strategies on a smaller scale before entering the world market (Powell and Low 2011: 264). Within an RTA underdeveloped countries (compared to developed countries like the US or France) can invest in some form of industry and increase their comparative advantage in a less competitive and risky economic environment. Additionally, RTAs create economically disadvantages for (geographically nearby) non-members. This could create an incentive for these non-members to join the RTA, given the RTA is open to new members. This results in bigger RTAs and increased trade liberalization (Freund and Ornelas 2010: 153). Anthony Venables, on the other hand, sees RTA’s as a barrier to increased global trade because according to his research RTAs create distorted market prices and unnatural trading partners.

Countries with an extreme comparative advantage can, due to a RTA, be inappropriately disadvantaged while countries with a more average comparative advantage are inappropriately advantaged (2003: 759). Eventually this will stand in the way of global trade liberalization because ‘natural trade relations’, which would be in place without RTAs, are distorted. The discussion comes down to the question whether regionalism is so beneficial that a multilateral agreement becomes prejudicial and whether non-members gain or lose by the forming of an RTA (Freund and Ornelas 2010: 154).

The forming of RTAs can result in further integration within a given region. Member states of an RTA can for instance decide to create a common currency. This would make trade between the member states easier. But other forms of integration could also be beneficial. Walmsey and Winters for instance show that relaxations on the restrictions on the movement of natural persons i.e. migration

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6 creates substantial welfare gains. Especially when it comes to the relaxation of quotas on unskilled labour (2005: 723). Another positive side effect of regionalism is the reduced chance of political conflict. When countries become dependent on each other political conflict becomes less attractive. Furthermore, as Barnekow and Kulkarni suggest, RTAs strengthen the position of countries in multilateral negotiations which could be particularly beneficial for developing countries (2017: 104). Powell and Low call regionalism which goes further than only economic integration ‘new

regionalism’. New regionalism stems from a context of globalization and ‘includes political, social, economic, and cultural aspects, as well as security and democracy, the environment, social policy, governmental accountability, and legitimacy.’ Within new regionalism non-state actors also participate (2011: 262). Regionalism is the better option when it comes to further integration compared to

multilateralism because agreeing on the issues stated above on a multilateral level would be too complicated (idem: 269). But there could also be negative consequences to further (political)

integration. When one of the member states has more power than the other, it could set the agenda in its own advantage (Freund and Ornelas 2010: 159).

2.3 Regionalism in Africa

According to the dependence theory many African states remained economically dependent on their former colonizers after their independence. During colonial times African colonies were designed to serve the European market. Natural resources were exported to Europe so African infrastructure was designed for extraction rather than integration. Many railroads go from the midlands to the coast instead of between African states (Barnekow and Kulkarni 2017: 105). As a result many African states export relatively cheap primary commodities to, and import the more expensive manufactures from regions like the EU. This creates a trade deficit (Tsheola 2010: 49-50). In 2011, according to the UN, only 11% of African trade occurred between African states (Barnekow and Kulkarni 2017: 105).

Since many African states became independent, from the 1960’s and onward, there have been many attempts at regionalism in Africa. The first wave of regionalism, between the 1960’s and 80’s, was one of little success. This was also the period the first attempt at creating the EAC was made. Negotiations between Tanzania, Kenya and Uganda failed in 1977 due to conflicts about economic and ideological differences. Tanzania and Uganda were afraid that the industrial more advanced Kenya would gain more economic benefits from creating an economic community. Besides that the capitalist Kenya, socialist Tanzania and autocratic Uganda could not bridge their ideological

differences (Buigut 2016: 424). Regionalist attempts that did succeed were for instance the Economic Community of West African States (1975) and the Southern African Development Community (1980). In 1963 the Organization of African Unity (OAU) was founded as a rejection of the colonial

fragmentation of the African continent. Although some African states supported the creation of a political unification in the form of an African federation eventually the OAU was founded around ‘the principles of functional economic cooperation and integration, of national sovereignty,

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non-7 interference and territorial integrity’ (Fawcett and Gandois 2010: 620). In 2002 the OAU was replaced by the African Union (AU).

In the 1980’s the African continent suffered from the collapse of many African economies due to political mismanagement, rising debt and declining commodity prices. African governments turned to the IMF and the World Bank who recommended democratization, liberalization and the reduction of the role of the state. Unfortunately these solutions weren’t suitable for African states and eventually conditional lending became the end result for many African governments (Cheru 2016: 1272-1273). In an attempt to turn the tide in 1991 the African Economic Community (AEC) was founded through the signing of the Abuja Treaty. The goals of the AEC are, in the first place, to strengthen existing regional economic communities (RECs) and create new ones where they do not yet exist. Next is the establishing of free trade area’s and customs unions in each of these RECs. Eventually the goal of the AEC is to create a African Economic and Monetary Union (African Economic Community 1991: 12-15).

Nowadays the RTAs in Africa are characterized as a ´spaghetti bowl’ because of the overlapping memberships in RTAs by the African states. In 2006 there was a 95% chance of belonging to at least one other RTA if an African state was already involved in one (Barnekow and Kulkarni 2017: 100). In figure 1. an overview of all the RTA memberships in Africa in 2014. The consequences of the spaghetti bowl for global trade are what Powell and Low call a ‘hodge-podge of dissimilar agreements’ where ‘every country negotiates different trading terms in each RTA with a different country with their own exceptions, loopholes, and regulations’ (2011: 272).

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8 So what has been the effect of regionalism in Africa on its development thus far? According to

Barnekow and Kulkarni there have been some complications. Among them are: asymmetrical power relations within an RTA, poor institutional quality, government instability, a lack of access to

monetary resources and the fact that most African states produce primary goods and are therefore not the most optimal trading partner to each other. What is also mentioned is the fact that many African countries who engage in an RTA focus too much on issues other than trade like for instance political integration (2017: 115-116). On the other hand, like mentioned before, political integration through RTAs can foster peace and stability within a region which is contributory to production and trade. Another problem with evaluating the impact of RTAs on Africa is that in a lot of cases it is compared to global trade which ignores the possible potential in Africa’s economic growth (idem).

3. The East African Community

Like mentioned before the first attempt at creating the EAC with Uganda, Kenya and Tanzania in the 1970’s failed. In the mid 1990’s new negotiations were started between the heads of state of the three countries and after three years they came to an agreement. On the 30th of November 1999 the Treaty for the Establishment of the East African Community was signed and on the 7th of July 2000 it entered into force. In article five of this treaty the Community expressed its objectives:

‘(…) to establish among themselves and in accordance with the provisions of this Treaty, a Customs Union, a Common Market, subsequently a Monetary Union and ultimately a Political Federation in order to strengthen and regulate the industrial, commercial, infrastructural, cultural, social, political and other relations of the Partner States to the end that there shall be accelerated, harmonious and balanced development and sustained expansion of economic activities, the benefit of which shall be equitably shared.’ (EAC 2002: 13).

Through this treaty a number of organs to support the community were established: a summit, council, co-ordination committee, sectoral committees, the East African court of justice, the East African legislative assembly and a secretariat.

After the signing of the treaty in 2000 the three member countries began negotiating about a customs union (CU). The aim of this CU was to create a common external tariff on imports from non-member countries, a duty free trade between the non-member countries and common customs procedures. As a result of this CU, trade between the member countries should increase in terms of value and volume. One hurdle to overcome was the difference in rates of development of the three member countries with Kenya being the most advanced (Othieno and Shinyekwa 2011: 3). If tariffs between the member countries would be set at 0% immediately the markets of the other member countries could not compete with Kenya’s. So they agreed on a asymmetric internal tariff elimination structure

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9 with two separate categories regarding to goods and services. Category A contained goods and

services flowing between Uganda and Tanzania (and some Kenyan goods) which got a duty free status immediately. Category B contained goods and services flowing from Kenya to Uganda and Tanzania and their tariffs would be reduced from 10% to 0% over the course of 5 years with a reduction of 2% every year (Buigut 2012: 41). The customs Union treaty was signed in March 2004 and came into action in January 2005 (EAC.int 2018b). So since 2010 all member countries have zero tariff lines in effect.

The member countries also agreed on a common external tariff (CET). There are three tariff bands: 0%, 10% and 25% (EAC 2004: 15). The first band of 0% incorporates raw materials and capital goods, the second of 10% intermediate goods and the third of 25% final goods and agricultural commodities. The domestic agriculture is protected in particular with an average tariff of 20.2% on agricultural commodities from third countries (Bünder 2018: 4). Exceptions can be made in a couple of different ways. The CU protocol includes a duty-remission scheme (DRS): countries can select a couple of companies who can import duty-free products which support manufacturing within the EAC and therefore promote EAC export. Another exception can be made when countries apply for “stays of application.” States have to prove they cannot produce or source a product regionally to apply a lower tariff or show that their industry needs special protection for a certain amount of time. In reality evidence is almost never provided (idem). According to Bünder this resulted in a CET instability with an increase of CET changes and unilateral derogations since 2011 with a peak in 2014 with almost 160 changes and derogations (ibed: 5).

In 2007 Burundi and Rwanda joined the EAC as member countries. In July 2009 they both joined the CU. Apart from economic reasons, security also played a role in their application. Both countries had a recent violent history and in 2007 some of the refugees from Rwanda and Burundi were still hosted by the other three EAC countries. It would be in everyone’s interest to keep regional peace and with regional integration this could possibly be managed (Ford 2007: 88-89). In 2009 the protocol for the establishment of the EAC common market was signed and in 2010 it entered into force (EAC.int 2018b). The goal of this common market is to establish free movement of goods, persons, services and capital, and the right of establishment and residence (EAC 2009: 5-6). It was agreed that the establishment of the common market itself would be progressive to give the member countries time to adjust their laws. The latest data on the progression stem from 2016. According to this ‘scorecard’ the results between 2014 and 2016 have been mixed, because next to reforms that promote integration different countries also introduced new measures which hinder integration (World Bank and EAC 2016: 5).

In 2013 the protocol for the establishment of a monetary Union was signed. Over the course of ten years the member countries should harmonize their monetary and fiscal policies and ‘progressively converge their currencies into a single currency in the Community (EAC.int 2018c). There are also plans on creating a central bank. Critics argue that the EAC is rushing its integration and member

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10 countries will eventually not accept their decreasing political power which comes with further

integration (African Business 2014). The next step in the integration process, as stipulated by the 2004 EAC treaty, would be forming an political federation. But in 2016 the member countries decided to opt for an confederation for the time being as an transitional model of a federation (EAC.int 2018a). In this year also South Sudan, which became independent from Sudan in 2011, became a member of the EAC. Since 2013 there has been a civil war going on in South Sudan and more than 3.5 million people fled the country, many of them going to EAC member countries like Uganda. The question remains if the admission of South Sudan will subvert further political integration or not.

4. Methodology

The term ‘economic development’ is widely used in economics and development studies. However, it’s not a concept which can be measured with just one indicator. Even the precise definition of ‘economic development’ is under debate. After World War II the terms ‘developed’ and

‘underdeveloped’ were used to make a distinction between the industrialized countries like most in Europe, the United States and Japan, and more agricultural countries like for instance Kenya or Rwanda. Another categorization was the system of the ‘first world’ (western Europe, US, Australia, Japan, South Korea), ‘second world’ (eastern Europe and Latin America), and the ‘third world’ (Africa, south east Asia). Sometimes the first world is referred to as ‘the north’ and the third world as ‘the south’.

The WTO doesn’t use a clear definition when it comes to development. Countries can announce themselves to the WTO as being ‘developing’ or ‘least developed’. When WTO bodies accept this self-selection, developing or least developed countries can get special provisions through the WTO. Like for instance the lowering of tariffs for developing countries by developed countries (WTO 2018b). The WTO uses the definition of ‘least developed’ that is used by the UN. The UN uses three criteria to indicate whether a country is least developed: income, human assets and economic vulnerability. Income is measured by GNI per capita. GNI is GDP + (income earned by foreign residents – income earned by nonresidents in the domestic country). Human assets are measured by a health index and an education index.

Economic vulnerability is measured by the (1) size of the population, remoteness, (2) whether or not export is concentrated on one sector, (3) the share of agriculture, forestry and fishing in GDP, (4) share of population in low elevated coastal zones, (5) instability of export of goods and services, (6) vulnerability to natural chocks and its human impact and (7) instability of agricultural production (UN 2018). According to this indicators countries should seek to become less dependent on agriculture and/or only one sector of production. When a country is not dependent on the whims of nature or the whims of the market of one sector it is concentrated on, it is less receptive of economic shocks. When a country is less receptive of economic shocks it has a better chance of developing.

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11 In this research an attempt is made to look at the effects of regionalism on development in the EAC. A problem with this kind of research is that there is not an alternate universe where the EAC does not exist which we could compare with our universe where the EAC is in force. Improvements in development on any indicator could also be the consequence of other changes and developments in these countries or the world. Improvement in for instance health and education could also be the result of better aid programs. However, assuming that in this alternate universe the Doha Round would still not be completed, underdeveloped countries would probably not have opened up their borders and lowered their tariffs like regionalism is pushing them to in this universe. So therefore we can look at the effects of regionalism on the trade side of development.

One of the goals of regionalism is to increase trade between the member countries of that region. So the first indicator which will be looked at is increased trade between member countries. A reason why many underdeveloped countries stayed underdeveloped was because they continued to export relatively cheap primary commodities to and import the more expensive manufactures from regions like the EU (Tsheola 2010: 49-50). So therefore an analysis will be made of the import- and export flows from the EAC. A focus will lay on the change from primary commodities to

manufactures. This also connects to the definition of development used by the UN. Next to these two indicators there will be a more compact analyses of economic development indicators like: GNI, HDI and net official development assistance and official aid which the EAC member countries received.

This analysis will be made over the course of 1999 to 2015. 1999 is chosen as starting point because this was the year before treaty of the establishment of the EAC entered into force. 2015 is the year the latest data is available from. A special focus will be made on the years 2004 and 2011. 2004 because this is the year before the customs union becomes operational. In the period 2000-2004 in terms of trade and lowering tariffs no actual changes were already implemented. It can be expected however that, because of the anticipation of the customs union changes in trade were already starting to appear. 2011 because this is the year after all the internal tariffs were set on 0% and the customs union has been in force for more than 5 years. Also this year South Sudan joined. However, South Sudan will not be considered in the conclusion of the effect of regionalism on development because the period 2011-2015 is too short to see real effects of its membership and draw any hard conclusions.

For the analysis of import and export a stacked column will be made for every focus year (1999, 2004, 2001 and 2015) and compared with each other to see if any changes appear over the course of time. Intra trade will be measured by looking at which percentage of all import and export done by the EAC member countries with the world went and came from each other. In table 1one can see that 3.3% of the total worth of import done by Kenya came from the other four EAC member countries which is worth $91.7 million. The same is calculated for export. In the third row the value of import and export are added up and also given as percentage of the value of total import and export added up. In the outer right column total intra- import and export are given in millions and as percentage of total- import and export to the world done by the five EAC countries combined. The

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12 outer rights number in the third row is the total value of import and export to each other added up and as percentage of total import and export done by the EAC countries to the world. So 12.9% of all import and export done by the EAC countries with the world was done with each other. Table 1. example 1999

Intra import

Kenya Tanzania Uganda Rwanda Burundi Total

91.7

(3.3%) (7.3%) 137.1 (24.2%) 253.9 (27.5%) 85 (11.4%) 16,7 (9.5%) 584.4

Intra export

Kenya Tanzania Uganda Rwanda Burundi Total

423.1

(22.5%) (8.1%) 61.4 (9.1%) 60.7 (43.4%) 36.8 (3.7%) 2.4 (20.2%) 584.4

Total intra trade

Kenya Tanzania Uganda Rwanda Burundi Total

514.8

(10.9%) (7.5%) 198.5 (18.5%) 314.6 (30.9%) 121.8 (9%) 19.1 (12.9%) 1,168.8 Total EAC import 1999 in billions: 2.8 + 1.89 + 1.04 + 0.308 + 0.146 = 6.2

Total EAC export 1999 in billions: 1.92 + 0.755 + 0.664 + 0.0858 + 0.064 = 2.9 Total trade volume: 4.72 + 2.645 + 1.704 + 0.3938 + 0.21 = 9.1

Data for the analysis of GNI and received aid are drawn from the World Bank data base, HDI from the UN. Data for the import and export flows are drawn from the Observatory of Economic Complexity. A notification has to be made that there are significant differences in the size of the economies of the five EAC countries. The GNI of Kenya and Tanzania are at every point in time 10 ten times to almost 30 times higher than the GNI of Burundi. This means that al percentages representing all five

countries combined are skewed by Kenya and Tanzania. So therefore individual country percentages are also given.

5. Analysis

5.1 Economic overview 1999-2015

1999 was the year before the treaty for the establishment of the EAC entered into force. The economic overview in table 2. shows that although Tanzania has the biggest population, Kenya has the highest GNI. Even before Uganda, Tanzania and Kenya became independent states, Kenya has always been the most industrialized. This was one of the reasons why the first attempt at creating the EAC in the 1970’s failed, because Tanzania and Uganda feared that their markets would be overflown by Kenyan manufactures. Rwanda received, relative to its GNI, the most aid.

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13 Table 2. Economic overview 1999

Kenya Tanzania Uganda Rwanda Burundi

Population (millions) 30.6 33.3 23.3 7.6 6.3

GNI (US$ Billions) 13.3 9 6.6 1.9 0.9

GNI per capita PPP (current international

$) 1,670 1,110 810 590 590

Net official development assistance received

(% of GNI) 2.4 10.3 10.2 20.7 9.4

In 2015 the customs union has been in force for 10 years and in full force for 5 years. In 2009 Rwanda and Burundi joined the customs union after they became members in 2007. Since 2010 the common market protocol entered into force which means that the members have already taken some measures to adjust their laws to enable the free movement of goods, persons, services and capital at this point. Over time the GNI of all the five member countries has grown as can be seen in figure 2. The economic growth of Kenya, Tanzania and Uganda has been in line with the whole of Sub-Saharan Africa (secondary axis) and quite exponential. Also Rwanda saw its GNI go from 1.9 billion in 1999 to 8.3 in 2015. Only Burundi has been lagging behind with its GNI tripling, but not growing as fast as the other members. It is notable that the economic crisis of 2008 is not really visible in the lines of the EAC member countries.

Figure 2. 0 200 400 600 800 1000 1200 1400 1600 1800 0 10 20 30 40 50 60 70 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

GNI US$ billion 1999-2015

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14 Figure 3.

As can be seen in figure 3 Rwanda and especially Burundi received most aid over the years. This has to do with the recent violent history of the two countries. The Burundian Civil War only ended in 2005 and refugees from this war can still be found in surrounding countries like DR Congo and Uganda. Both countries still needed help in rebuilding their country. By 2015 all countries still received aid, but it is at an all time low. This could indicate that development in all countries is increasing. According to the Human Development Index (HDI) by the UN all five countries increased their development since 1999, but they are still low on the world list. Kenya ranked 146 in 2015 and was categorized with medium human development. All the other countries had a low human development with Tanzania on 151, Rwanda on 159, Uganda 163 and Burundi on 184 (out of 188) (UN 2015).

5.2 Import and export 1999-2015

As can be seen in figure 4 the EAC are in 1999, in terms of export, mostly reliant on vegetable products. These contain products like tea, coffee, flowers and nuts. Other big product groups are mineral products (oil, cement and ore), food (processed fruit and nuts) and animal products (fish). Rwanda and Burundi are big exporters of gold, Kenya and Tanzania of oil. The flow has been

differentiated since 2004. In 1999 63.4% of export contained of vegetable products, in 2004 it is 32%. Products groups that have grown in export are metals, textiles and mineral products. It becomes visible in 2011 that the EAC countries have started to produce machines themselves instead of only importing these. This is true for all five of them. In 2015 also transportation products have become a small portion of the export flow. Overall the EAC member countries are, in 2015, still mostly dependent on

0 5 10 15 20 25 30 35 40 45 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Net Official Development Aid received (% of GNI)

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15 agricultural products and finite and non-renewable products like metals and mineral products. This means that their economies are still vulnerable to weather conditions and international price changes in for instance oil. According to the definition of development by the UN this means most EAC countries are still underdeveloped or in development.

Figure 4.

In terms of import all the EAC countries mostly imported machines and transportation products in 1999. In 2015 this hasn’t changed much. The only product group that has grown are mineral products. This is mainly oil from India. Next to the products groups mentioned in the figure below other

medium sized import groups are metals, vegetable products and paper goods. So as will be visible in paragraph 5.4 the import partners have changed over time, but the products imported have not.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1999 2004 2011 2015

EAC export by product group 1999-2015

Vegatable products Mineral products Food

Metals Textiles Machines

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16 Figure 5.

5.3 Intra trade 1999-2015

Table 3 shows the intra trade between the becoming EAC member countries. In 1999 Rwanda and Burundi were not yet on the table of being members of the EAC, but yet Rwanda imported and exported the most with the other soon to be EAC member countries. The biggest share went (tea and coffee) and came (oil) from Kenya. Within the group of Kenya, Tanzania and Uganda, Uganda scores the best in terms of intra trade with 18.5% of its import and export being within the EAC area. The biggest portion of its export went to Kenya (tea and coffee) and Rwanda (cotton waste), its import came from Kenya (oil) and Tanzania (oil and rice).

Table 3. Intra trade in $ millions and as percentage of total EAC trade with world 1999

Intra import

Kenya Tanzania Uganda Rwanda Burundi Total

91.7

(3.3%) (7.3%) 137.1 (24.2%) 253.9 (27.5%) 85 (11.4%) 16,7 (9.5%) 584.4

Intra export

Kenya Tanzania Uganda Rwanda Burundi Total

423.1

(22.5%) (8.1%) 61.4 (9.1%) 60.7 (43.4%) 36.8 (3.7%) 2.4 (20.2%) 584.4

Total intra trade

Kenya Tanzania Uganda Rwanda Burundi Total

514.8 (10.9%) (7.5%) 198.5 (18.5%) 314.6 (30.9%) 121.8 (9%) 19.1 (12.9%) 1,168.8 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1999 2004 2011 2015

EAC import by product group 1999-2015

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17 Figure 6.

Over the years trade between the EAC countries has not increased. As can be seen in figure 6the import and export between the EAC countries has approximately stayed the same. In 1999 it was 12.9% in 2015 it was 10.1%. The orange line shows the intra trade between Kenya, Tanzania and Uganda. This separate line has been made because these countries have been EAC members longer so there is a bigger chance of change in trade between these countries. But also between these three trade has not increased. It has gone from 9.9% in 1999 to only 8% in 2015. In table 4 it can be seen that Rwanda and Burundi trade the most within the EAC in 2015. In terms of both intra import and intra export Burundi went from 9% in 1999 to 19.7% 2015. So its intra trade with the EAC almost doubled although it was even higher in 2004 with 22.3%. Intra trade by Rwanda was actually at its highest in 1999 and decreased from that point on. In terms of export Uganda also decreased since 1999, but export on the other hand increased from 9.1% in 1999 to 31.7% in 2015.

Tanzania has always been the EAC partner who traded the least with the others. Intra export went up from 8.1% in 1999 to 15.1%. However, since intra import went from 7.3% to only 2% the overall intra trade stuck at 6% in 2015. A possible explanation for Tanzania’s small part in the EAC is the fact that all other EAC member countries are also part of another free trade zone; the Common Market for Eastern and Southern Africa (COMESA) which was formed in 1994 and nowadays contains 19 members. Tanzania was also a member but left in 2000. So intra trade between the other four EAC member countries could also be supported by COMESA which explains Tanzania’s low intra trade. This is the result of the spaghetti bowl of overlapping RTA’s in Africa (Powell and Low 2011: 272). Kenya, who has always exported more to the other countries than it imported has closed that gap a bit

0 5 10 15 20 25 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Intra trade as percentage of total EAC trade with world

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18 between 1999 and 2015. In 1999 it only imported 3.3% from the other countries and exported 22.5%. In 2015 it imported 7.4% and exported 17.8%.

Table 4. Intra trade in $ millions and as percentage of total EAC trade with world 2015

Intra import

Kenya Tanzania Uganda Rwanda Burundi Total

1,309.7

(7.4%) 287.4 (2%) (11.1%) 609.7 (25.1%) 482.7 (20.1%) 130.1 2,819.6 (6.9%)

Intra export

Kenya Tanzania Uganda Rwanda Burundi Total

945.9

(17.8%) (15.1%) 1,000.8 (31.7%) 728 (15.3%) 115.1 (18%) 29.9 (18.7%) 2,819.7

Total intra trade

Kenya Tanzania Uganda Rwanda Burundi Total

2,255.6

(9.9%) 1,288.2 (6%) (17.1%) 1,337.7 (22.5%) 597.8 (19.7%) 160 (10.1%) 5,639.3 5.4 Trade with other partners 1999-2015

So if trade between the EAC member countries has not increased, are there any other changes in terms of trade? In 1999 Europe was the biggest trading partner of all five EAC member countries in terms of both import and export. As can been seen in figure 7the EAC member countries exported more than half of their export worth to Europe. Tanzania traded the least with Europe with still a third of its trade share. Burundi traded the most with almost 80% of its export (coffee and gold) going to Germany and Belgium. The EAC member countries exported mostly coffee, tea, sugar and animal products to Europe. They imported mostly machines like computers and telephones and chemical products. The biggest trading partners were the United Kingdom, Germany, Belgium and Italy.

Figure 7. 0 10 20 30 40 50 60

Import Export Total

Percentage of EAC trade to EAC, Europe and Asia 1999

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19 In 2015 this picture has changed quite substantial. Asian countries have taken over the role Europe used to play in the EAC member countries. In 2015 58.9% of total trade was done with Asian countries. This percentage is this high because 69.6% of all import done by the EAC member countries comes from Asian countries. Especially China’s role has grown over the years. It was the biggest import partner for Kenya (34% of total import), Rwanda (18%) and Burundi (13%) in 2015. From China the EAC member countries mostly import telephones, broadcasting equipment and textiles. When it comes to export, only Tanzania exported most to Asia but, compared to the other countries, its export flow had the highest value so the overall EAC export flow percentage is quite skewed by Tanzania. Other Asian countries that have been big trading partners are India (chemical products), Japan, (transportation products), Saudi Arabia (oil) and the United Arab Emirates (machines).

Figure 8.

So instead of trading less with Europe and more with each other, the EAC countries started to trade more with Asia. When it comes to economic growth Asia has been growing quite rapidly the last twenty years. It seems like the attempt at regionalism in the EAC has not been immune to Asia’s and especially China’s economic growth. Almost 70% of import done by the EAC member countries came from Asian countries with a worth of more than 28 billion. When one looks at the trade balance of the EAC member countries over the years one can see it has been negative since 1999, and the gap between export and import has only been growing. Although there can be many reasons why trade balances are negative one can assume there is a connection between the rising import from Asia and the growing negative trade balance by the EAC member countries. The worth of the Asian import (28

0 10 20 30 40 50 60 70 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Trade with Europe, Asia and EAC as percentage of total

trade 1999-2015

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20 billion 69.6% of total import) was much bigger than the EAC export to Asia (4 billion 30.3% of total export) in 2015.

Figure 9.

In terms of export Asia’s influence has also grown and is bigger than that of Europe but again, except for Tanzania, all other EAC member countries exported most to each other and other African

countries. Big African importers of EAC member countries are Zambia, Egypt, Sudan and the Democratic Republic of the Congo who are all also part of COMESA. So the EAC member countries import products from Asia and export to other African countries. In that sense one can conclude that trade between African countries has risen.

6. Conclusion

In this research an attempt was made to look at the effects of regionalism on economic development of its member countries. Over time the GNI of all the five member countries has gone up, although some grew faster than others. Also, all member countries became less dependent on official development aid. In terms of production and export all countries are still mostly reliant on agricultural and non-renewable products which means that their economies are still categorized by the UN as vulnerable and underdeveloped. But, there is a trend visible where the EAC countries are producing more

manufactures like machines and transportation products. This means these countries are becoming less dependent on changes in weather and international raw material prices. Based on these indicators it can be concluded that the EAC member countries are slowly developing. But to which extend has this to do with the forming of the EAC?

-14 -12 -10 -8 -6 -4 -2 0 21999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Trade balance in US$ billions 1999-2015

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21 When one looks at the numbers on intra trade between the five EAC member countries it can be concluded that they have not been trading more with each other over the years. Overall intra trade went from 12.9% in 1999 to 10.1% in 2015. Instead, the five countries have started to trade less with Europe and more with Asia and especially China. In the case of the EAC it becomes visible that attempts at regionalism are receptive for and negatively influenced by the global economic

developments. Europe is losing its economic position in the world and Asia’s has been growing which is visible in the trading numbers of the EAC member countries. Also, the influence of another RTA, the COMESA, is visible. The EAC member countries who are also part of the EAC have been exporting more to each other and to other COMESA members over the years. So in terms of intra African trade, one of the pillars of the African Union, there is a positive development visible. It has become visible that RTA’s cannot be trading islands on their own. Influenced by global economic trends and the spaghetti-bowl effect of other overlapping RTA’s the EAC has not yet reached its goal of increased intra trade. Therefore, the economic developments made by the EAC member countries since 1999 cannot be attributed to the EAC. But this does not necessarily mean that the EAC and RTA’s all together can be discarded. As noted before the EAC member countries who are also members of the COMESA have been trading more with each other over time. The COMESA has been in force much longer than the EAC so maybe the effects of the EAC will become visible in the future. Also, the EAC could have caused other positive effects other than increased intra trade which supported economic development in the member countries. Like for instance increased peace and stability in the region which supports trade and therefore economic development. Further research on the EAC could be done about these other indicators to see if the EAC supported its member countries in other ways other than intra trade. Also research in about ten or twenty years needs to be done to see if any effects on intra trade have appeared after the EAC has been in force for a longer period of time.

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22

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