The EAC helps maintain growth in the region

While efforts at regional integration on the continent have had mixed results, the EAC has been a standout success. The trading and Customs bloc has become an increasingly important driver of sub-regional growth and development, to an extent that far outstrips the performance of other African economic communities such as ECOWAS in West Africa or CEMAC in Central Africa. This is clear in terms of trade, where the figures illustrate the fruits of greater integration. However, it is also the case in a number of other fields, including political development and infrastructure. Much of this success is down to both the clear protocols for integration and the commitment of member states to the full realisation of the project.

History

The countries of the Great Lakes region in East Africa have a long history of regional cooperation. Kenya, Tanzania, and Uganda entered into many formal and informal partnerships over the course of the 20th century. This began in 1917 with a Customs union between Kenya and Uganda, which Tanganyika, the precursor to Tanzania, joined in 1927. This was followed by the development of the East African High Commission and the East African Common Services Organisation. The first EAC was then established in 1967 and subsequently disbanded in 1977.

Despite the dissolution of the first community, the three member states continued to explore opportunities for cooperation. This led to the launch of the Permanent Tripartite Commission for East African Cooperation in 1993, which itself was upgraded to the Treaty for the Establishment of the EAC in 1999. The treaty was ratified in 2000 and the first summit of the new EAC was held in Arusha, Tanzania, in 2001.

The latest incarnation of tripartite cooperation between Kenya, Tanzania, and Uganda, the EAC has grown into something more substantial and ambitious than its predecessors. The community established the framework for a Customs union, which went into effect at the beginning of 2005. Two years later, Burundi and Rwanda joined the regional bloc and then became members of the Customs union in 2009. A year later, the member states established the framework for a common market, and in 2013 set up a monetary union.

The bloc continues its move towards integration and expansion. In April 2016 it welcomed its sixth member, South Sudan. The country of almost 12m people provides a market for just under 10% of exports from within the regional bloc. Furthermore, South Sudan stands to gain significantly from regional integration. The nascent nation has a GDP per capita of $1111, but is designated as fragile and conflict-affected by the World Bank. Policymakers hope the EAC will provide a path to development and stability for the country.

Current Performance

Indeed, today the EAC has become a significant regional market and vehicle for development and stability throughout East Africa. The community has a market of more than 150m people, with almost a quarter of that population living in urban areas. The combined GDP of the community stands at $146bn, which, if it were a country, would rank it as the fifth-largest economy on the African continent behind Nigeria, Egypt, South Africa and Algeria.

In its first six years after the Customs union went into full affect in 2005, the rate of economic growth has exceeded the rest of sub-Saharan Africa, and was nearly double that achieved by the wider region in the previous 15 years, according to the IMF. A 2016 study by the International Growth Centre (IGC) laid out the early achievements of the EAC.

The IGC study not only found that the community outperforms its regional peers – such as COMESA and the Southern African Development Community (SADC) – in terms of increasing bilateral trade, but also that the EAC has had a sizable impact in terms of GDP and political stability. According to the ICG, the establishment of the EAC has led to a 0.45% increase in real GDP in the region and a 12% decrease in the statistical risk of bilateral conflict between member states. An effective implementation of the common market protocols could also double welfare gains.

However, there is a recognition that much more needs to be done moving forward. Despite the recent strides and strong growth rates, the sub-region remains under-developed in global terms. The EAC Vision 2050 notes that GDP per capita in the region grew from $140 in 1960 to $790 in 2015. This compares poorly to the GDP per capita of South Korea, which grew from approximately $140 to $21,000 over the same period. As such, the EAC is targeting much more aggressive growth over the next three decades. The EAC Vision 2050 sets the goal of increasing per capita GDP for the region ten-fold to $10,000, allowing the EAC to achieve upper-middle-income status.

Trade Integration

This ambition is likely to rise or fall, to a large extent, on the back of trading performance across the bloc. Indeed, the EAC’s early success has been built on the back of a dramatic increase in trade. Between 2006 and 2013, intra-EAC trade grew from $1.55bn to $4.85bn, largely due to a rise in exports from $1.23bn to $3.41bn. In the same period, imports increased from $320m to $1.44bn. The EAC’s massive growth in trading volumes has outperformed other regional trading blocs. According to IGC, by 2016 the Customs union had increased bilateral trade among members by an average of 213%. This compared to 80% and 110% for COMESA and SADC, respectively.

This suggests that the EAC is becoming an increasingly important destination market for its member states. This is good news for the countries of the bloc, given that trade accounts for almost 50% of GDP across the region. The community is now a leading destination for goods and services for all countries in the bloc. Indeed, the EAC ranks in the top five export destinations for each of the partner states. For Kenya and Uganda it is the second most important export destination, and for Rwanda it is the top destination for the country’s exports. This is unlikely to change anytime soon as, for the last decade, exports to the EAC from member states have been growing at a rate of 17%, compared to 9% to the rest of the world.

Nevertheless, there remains room for substantial growth. Intra-regional trade accounts for 19% of total exports from the bloc and 8% of total imports. This is well short of the intra-regional trade achieved by the world’s most integrated trading blocs, with the EU achieving 65% of exports and 59% of imports, and ASEAN 25% for both. However, it compares well with other regional blocs, such as Latin America’s MERCOSUR – with 13% of exports and 17% of imports – and ECOWAS, with 9% and 11%, respectively. The impressive growth in intra-bloc and bilateral trade is the result of a measured implementation of community-wide trade policies. All member states have met the requirements under the EAC tariff schedule. The community has also begun the process of implementing one-stop border posts, meaning that people and goods passing through such a post can travel throughout the EAC without a second inspection. There are currently nine such posts across the six-member region. Furthermore, three of the countries – Kenya, Uganda, and Rwanda – only require the presentation of national identification cards to gain access to their countries. This is likely to be rolled out across all member states in the near future.

Dampening Effect

However, despite these steps forward, there are still significant impediments to free and unimpeded trade across the region. While tariffs have been removed, and rules of origin regulations have been adopted, there has been an increase in non-tariff measures that inhibit trade. Such measures include the use of restrictive health and environmental regulations, price controls, and limitations on certain imports and exports. Between 2014 and 2016 non-tariff barriers grew by 53% across the EAC. Every member state saw deterioration in respect to non-tariff barriers. In the same period, Kenya’s use of such barriers more than doubled, while Tanzania’s grew from seven to 24.

The community is well aware of these impediments, highlighting them in its latest compliance report, “The East African Common Market Scorecard 2016”. Furthermore, the EAC’s legislative assembly introduced the 2015 EAC Elimination of Non-Tariff Barriers Act. The main emphasis of the act is a dispute resolution framework that can be used to remove protectionist measures by member states. It also allows for the introduction of sanctions against offending countries.

Eu Ties

The community has not only been working on intra-trade measures, but has also been looking at partnerships with other trading bodies. In October 2014 the EAC finalised the outline of an economic partnership agreement (EPA) with the EU. Under the terms of the prospective deal, all EAC exports will gain duty- and quota-free access to the 510m-strong EU market. In return, the EAC commits to the gradual opening up of its market to imports from the EU. This includes allowing access to 82.6% of EU imports by value. More than 50% of these are already duty-free and the remainder will be liberalised over a 15-25-year period, depending on the product. The EPA has exempted certain products from import liberalisation, including certain agricultural products, textiles and clothing, and vehicles.

In terms of EAC exports, access to the EU will be of greatest benefit to Kenya – in the short term at least. The other member states, designated as least developed countries, already receive tariff-free access to the European market under the “Everything But Arms” initiative. The EPA agreement also touches on regulations and cooperation regarding rules of origin, dispute settlement, sustainable agriculture and fisheries policy, democracy, human rights and the rule of law, as well as economic and development cooperation. Trade between the two blocs stood at $7.34bn in 2015. EAC exports accounted for $2.88bn of this total.

Delays

However, while there was great optimism and fanfare about the deal in 2014, the EAC has missed a number of deadlines for ratification. The bloc negotiated a three-month extension to the deadline in October 2016 in order to complete a consultation on the domestic impacts of the deal. However, the community has subsequently missed further deadlines. Reticence to the deal grew after Burundi, Uganda and Tanzania. Kenya and Rwanda signed the agreement in September 2016, yet will not see the benefits of the EPA unless all member states ratify it. Tanzania has expressed the greatest concern about the deal, believing that the liberalisation of the EAC’s import regime could threaten industrialisation in the bloc. In the short term at least, all the member states, with the exception of Kenya, have more to lose than gain from the deal, given that they already receive tariff-free access to the EU under existing agreements. As such, the fate of the EPA with the EU is up in the air, with little sense of a near term or definitive resolution on the horizon.

Despite this potential stumbling block, the EAC continues to look at other opportunities to work with regional trading partners. In June 2015 the EAC signed up to the COMESA-EAC-SADC Tripartite Free Trade Area, a 26-member market stretching from Cairo in the north to Cape Town in the south. The deal involves the continent’s three largest trading blocs and creates a market of nearly 600m people with a combined GDP of approximately $1trn. Once fully operational, the free trade area is expected to bring an aggregate net benefit of more than $3.3bn to the area. However, as with the EU EPA, the full implementation of the deal is far from complete. While more than two-thirds of countries have ratified the agreement, negotiations are ongoing, or yet to commence, on a number of subjects.

Investment

Beyond trade, the EAC has been performing well in terms of attracting investment. Under the terms of the EAC Establishment Treaty, member states are committed to efforts to harmonise and rationalise investment schemes and incentives across the community. The ultimate goal is to create a single investment area. All member states are already benefitting from strong investment incentives. Across the bloc, inward foreign direct investment (FDI) increased by 14.4% from $6.2bn in 2013 to $7.09bn in 2014. Tanzania accounted for $2.14bn of this inward investment, Uganda for a further $1.14bn, while Kenya received $989m. The region continues to be an attractive investment destination. According to the UN Conference on Trade and Development, the general East Africa region received $78.8bn worth of inward FDI in 2015, accounting for more than 10% of all such FDI on the continent and 23.9% of regional GDP.

However, while the EAC has seen a positive trend in terms of investment into the zone, there is still substantial scope for further growth and improvement. Indeed, one of the criticisms of the current investment trends is that they have not generated employment. As research and development organisation Trademark East Africa, a has pointed out, the investment and employment trends in EAC member states have not moved in tandem with each other. For example, although inward FDI to Uganda was growing in 2014, the estimated number of jobs generated by investments was actually falling by 7%. Part of the problem lies in attracting investment in job-creating sectors, such as agriculture. Another problem is the lack of a clear development framework across the region that could measure development goals and be used to hold investors to account.

Infrastructure

However, other deeper problems persist. One of the greatest challenges to ensuring that investment is successful for both the investor and the local community is the poor state of infrastructure across the region. Indeed, transport and power deficiencies, as well as soft infrastructure limitations, restrict not only investment, but also trade. The region’s road network is the main conduit for the transport of goods in the region, yet it suffers from significant problems. The Northern Corridor, a 1690-km route that connects the EAC with the Kenyan port of Mombasa, is racked by traffic delays that cost an average of $800 per day per truck, according to the Northern Corridor Transit Transport Coordination Authority. Furthermore, a recent World Bank study has found that there are roadblocks every 30-50 km on East African roads.

The region’s ports also act as an impediment to doing business and facilitating trade throughout the bloc. For example, Kenya, a major port of entry to the EAC, only ranked 107th in terms of trading across borders on the World Bank’s doing business index in 2017. It takes 180 hours to meet border compliance and import into Kenya, compared to averages of 144 hours and nine hours for sub-Saharan Africa and high-income OECD countries, respectively. Tanzania, which is home to the major port of Dar es Salaam, fares even worse. The country ranked 180th for trading across borders on the same World Bank index. It takes 402 hours to meet border compliance and import goods into the country.

These bottlenecks are a consequence of soft infrastructure issues, such as inefficient and outdated Customs procedures, as well as hard infrastructure problems such as port capacities. However, member states have long recognised these flaws and are now investing heavily in infrastructure rollout. For example, Kenya is working on a number of port projects at Mombasa and Lamu, as well as rail and road network expansion and upgrade. There is also significant capital flowing into infrastructure across the bloc. In 2014, for example, the World Bank committed $1.2bn to improving infrastructure and competitiveness across the trading community. The capital is being used in conjunction with private investors and other development partners to improve port capacity, inland waterway transport and secondary road networks that connect to the main corridors in the landlocked nations of Burundi, Rwanda, South Sudan and Uganda.

Looking Ahead

These moves will play a vital role in bolstering investment and trading volumes throughout the bloc and beyond. Indeed, while the EAC stands as a success story on the continent, it still has some way to go to reach the standards of its international counterparts. Although trade and investment numbers have been on the rise, further integration and harmonisation of policies across all six member states will help the community move towards its goals under the EAC Vision 2050 of achieving upper-middle-income status.