Tuesday, September 13, 2005

Economic Brief: East African Community

Drafted By:Dr. Michael A. Weinstein

As trade ministers of the newly revived East African Community (E.A.C.) -- made up of Kenya, Tanzania and Uganda -- met in early September to discuss dismantling trade barriers between the member states, their deliberations were shadowed by trade disputes, pitting Kenya and Tanzania against Uganda, and Kenya and Uganda against Tanzania. Analysts in the region saw signs that the same divisions that had caused the original E.A.C. to collapse in 1977 had once again opened up, threatening the success of the fresh experiment.

Attempts at regional economic integration have been almost universally perceived as essential steps to achieving freer world trade. In Africa alone, there are 14 regional blocs, with half the countries on the continent participating in more than one of them. Despite this dense organizational network, intra-regional trade in Africa has not moved beyond around ten percent of total trade, reflecting the dominant north-south configuration, in which less developed "southern" countries export primary products to "northern" industrial powers and import finished products from the north.

The rationale for regional integration in the less developed world is that the formation of economic blocs will foster growth and eventually strengthen weaker economies sufficiently to permit the blocs to bargain more effectively and compete more efficiently with established powers. A consensus is shared by the major industrial powers and the less developed countries that economic globalization cannot succeed unless wide disparities of economic strength are ameliorated.

Regional integration is expected to spur economic development by creating a larger market for goods produced in participating countries, allowing for the operation of comparative advantage in production, and eliminating the need to duplicate major infrastructure projects, such as satellite communications systems. It is also thought that by forming supra-national institutions staffed by technical specialists, transparency will be increased and corruption diminished. If successfully realized, regional integration would make the various blocs strong enough to be less dependent players in the bargains that need to be made to achieve inter-regional and eventually global integration.

Central to the viability of a regional bloc is the reduction of trade restrictions among its members and agreement on a common regime of tariffs imposed on goods from outside the region aimed at protecting infant industries within it. Conflicts among members of regional blocs are most likely to break out over those requirements, as interests disadvantaged by freer trade mobilize within their countries to forestall or slow integration.

Revived on January 1, 2005, after six years of tortuous negotiations, the E.A.C. has the ambitious goal of modeling itself on the European Union and eventually instituting a common currency and forging a political federation. At present, the organization is primarily a customs union in which Kenya is pledged to eliminate trade restrictions on goods exported by the other two members, and Tanzania and Uganda, which have weaker economies, are permitted to impose tariffs on Kenyan goods for the first five years of the agreement, after which the restrictions will fall.

The power configuration of the E.A.C. members reflects the provisions of the customs union, with Kenya the dominant player, Uganda the weakest partner and Tanzania in between. The trade disputes that have arisen so soon after the revitalized E.A.C.'s formation are based on those inequalities of economic power.

Kenya and Tanzania vs. Uganda

As one of the preferences accorded to it by virtue of Uganda being the least developed member of the E.A.C., Kampala was allowed to present a list of primary products that it could import from outside the Community without imposing the common external tariff. Kampala argued that duty-free imports of industrial inputs -- some of them semi-processed like cooking fat, petroleum, soap and materials used in steelmaking -- were essential to protect its less efficient producers temporarily from lower cost competitors in Kenya and Tanzania.

When Kampala presented its list that included 134 types of goods and 117 companies that would import them, Nairobi joined by Dar es Salaam refused to accept it, arguing that many of the companies did not exist at all and that others did not produce goods requiring those inputs. More importantly, Kampala's partners were unwilling to disadvantage their own producers by giving Ugandan competitors a cost advantage. Kenyan Trade and Industry Minister Mukhisa Kituyi stated plainly that "national interests also have to be involved in how we negotiate, how much more concession should be given to Uganda." Kampala responded by saying that if it had to impose duties on the inputs, which had not been taxed before Uganda joined the E.A.C., its manufacturing sector would suffer serious decline.

At the E.A.C. trade ministers' meeting, Kampala's list of companies was cut to 81, rather than the 57 demanded by Nairobi and Dar es Salaam, and there was reported unanimous agreement that a technical team from the E.A.C.'s secretariat would perform a new review of the inputs and enterprises. It is likely that the dispute will be resolved successfully because Kampala stands to benefit on the whole from the preferences that it already has and Nairobi's strategic interest is in maintaining the E.A.C., in which it expects to be the dominant partner.

Kenya and Uganda vs. Tanzania

In contrast to the dispute over Kampala's lists, the tensions between Dar es Salaam and Nairobi, which has Kampala's support, are deeper and more threatening to the Community, in part because similar conflicts brought down the original E.A.C. and the present dispute is not confined to a single issue.

Among the concerns complicating relations between Nairobi and Dar es Salaam are Nairobi's claims that Kenyan exports are being delayed from entering Tanzania, Nairobi's decision to suspend imposition of tariffs on external imports of pharmaceuticals, which has prompted Tanzanian business interests to threaten a legal suit aimed at protecting Tanzania's nascent pharmaceutical industry, Dar es Salaam's refusal to renew the work permit of a Kenyan media executive and its expulsion from Tanzania of two Kenyan editors of a media network, and Nairobi's charge that state-owned Tanzanian media are disseminating "hostile propaganda" against Kenya.

Behind the tensions is a growing sentiment in sectors of Tanzania's political class -- opposed by parts of the country's business community -- that Kenya's economic power threatens Tanzania's long-term interests. In addition, Tanzania's managers are fearful that they will be replaced by Kenyans, as Kenyan businesses penetrate Tanzania's economy. In August, Dar es Salaam delayed the collection of views from Tanzania's public on accelerating E.A.C. integration, pending forthcoming elections. At that time, there was considerable parliamentary resistance to strengthening the Community, based on the claim that Tanzania had been disadvantaged in the original E.A.C. and was likely to suffer the same fate in the new one.

E.A.C. skeptics in Tanzania probably aim to scuttle the Community. They see Kenya benefiting from it because of its more advanced development and Uganda gaining from its special privileges, with Tanzania the loser, despite the prospects opened up by the 35 percent rise in exports the country has experienced since the inception of the revived E.A.C. The presence of organized and formidable opposition to the E.A.C. in Tanzania is the greatest threat to the Community's success.

The Bottom Line

The disputes that have broken out in the E.A.C. so soon after its birth show the obstacles that less developed regions face in their efforts to achieve integration. All of the difficulties of trade relations in general are present in less developed regions, compounded by the added factor of less resilience of sectors disadvantaged by the dislocations that integration necessarily causes.

Look for the E.A.C. to lose momentum in the short run as Tanzania sorts out its domestic conflicts over its orientation to the Community.


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