Free Essay

Regional Econ

In: Business and Management

Submitted By elkanarorio
Words 12144
Pages 49
Regional intergration

List of acronyms
AERC African Economic Research Consortium
ASEAN Association of Southeast Asian Nations
AU African Union
AUC African Union Commission
CBI Cross Border Initiative
CEPGL Economic Community of the Great Lakes (Communauté Economique des Pays des Grand Lacs)
CET Common External Tariff
CHE Commission for Higher Education (Kenya)
CIEREA Conference of Economics Research and Training Institutions in Francophone Africa
CIRES Ivorian Centre for Social and Economic Research
CM Common Market
COMESA Common Market for Eastern and Southern Africa
COBET Complementary Basic Education in Tanzania
CODESRIA Council for the Development of Social Science Research in Africa
COMESA Common Market for Eastern and Southern Africa
CPI Consumer Price Index
CRE Christian Religious Education
CSAE Centre for the Study of African Economies, University of Oxford
CSO Civil Society Organization
CU Customs Union
EA East Africa
EACSCO East African Common Services Organization
EABC East African Business Council
EAC East African Community
EADB East African Development Bank
EAHC East African High Commission
EARISC East Africa Regional Integration and Scientific Cooperation
ECCAS Economic Community of Central African States
ECDE Early Childhood Development Education
ECOWAS Economic Community of West African States
EPA Economic Partnership Agreement
EAPF East African Political Federation
EPZ Export Processing Zone
EU European Union
FCCs Fears, Concerns & Challenges
FDI Foreign Direct Investment
FTA Free Trade Area
GER Gross Enrolment Rate
GCR Gross Completion Rate
GDP Gross Domestic Product
GOK Government of Kenya
GOR Government of Rwanda
GOT Government of Tanzania
GOU Government of Uganda
GRP Gross Regional Product
HELB Higher Education Loans Board (Kenya)
IEC Information, Education And Communication
IGAD Inter-Governmental Authority Development
ILO International Labor Organization
KBC Kenya Broadcasting Corporation
KNBS Kenya Bureau of Statistics
MDGs Millennium Development Goals
MFN Most Favored Nation
NAFTA North American Free Trade Agreement
NECTA National Examinations Council of Tanzania
NER Net Enrolment Rate
NTBs Non-Tariff Barriers
OSSREA Organization for Social Science in Eastern and Southern Africa
PWD Person with Disability
PTA Preferential Trade Area
RI Regional Integration
RMS Regional Manpower Survey
RTA Regional Integration Agreement
SAARC South Asia Association for Regional Cooperation
SADC Southern African Development Community
SID Society for International Development
Sida Swedish International Development Cooperation Agency
SITC Standard International Trade Classification
SMEs Small to Medium-Size Enterprises
TI Transparency International
TIFA Trade and Investment Framework Agreement
TORs Terms Of Reference
TTRI Trade Tariff Restrictiveness Index
UNCTAD United Nations Conference on Trade and Development
UNDP United Nations Development Programme
UNESCO United Nations Educational, Scientific and Cultural Organization
UNICEF United Nations Children’s Fund
USA United States of America
USEA United States of East Africa
VAT Value Added Tax
WTO World Trade Organization

Executive summary

The East African Community (EAC) is the only regional economic community whose treaty explicitly states that it aspires to establish a political federation as its ultimate goal. Article 2 of the EAC Treaty establishes a Customs Union and a Common Market as transitional stages towards political federation, but it does not do the same for the Monetary Union and Political Federation. The initial stages of integration have faced serious challenges of implementation undermining the integration process. Therefore the quest for political federation is coming at a time when benefits have not been fully realized.

In addition, absence of a model for the proposed East African Federation has evoked fears of the “unknown” among East African citizens, which has impacted on the speed of implementation. Therefore, the pace of political federation will be determined by the strategies adopted to address the prevailing challenges. This paper analyses the fears, concerns and challenges (FCCs) expressed by the peoples of the EAC. It also proposes recommendations on how the FCCs will be addressed. The study has classified the FCCs into three categories namely political and legal, economic as well as socio-cultural. The study has also identified overarching challenges and made recommendations on how to address them.
FCCs related to political and legal issues are linked with the fear of losing national sovereignty and the ability to make independent national decisions. Since federation results in the birth of a new international entity, Partner States will have to address the question of ceding of sovereignty. In the meantime, Partner States have to commonly exercise their sovereignty before federating to lock-in and showcase the benefits of integration. East African citizens are also concerned about the disparity in upholding good governance standards and a possible spill over of bad governance practices from one Partner State to another.
Among other measures, Partner States are required to develop and implement a common foreign, and security policies as enshrined in the EAC Treaty. The East African Court of Justice as a regional judicial body should be empowered to play its role to be the guardian of justice, uphold the rule of law, protect human rights and promote good governance across the region. There are certain concerns that are specific to each Partner State that could hinder the federation process. These concerns ought to be addressed at either national or regional level, depending on the context, to strengthen the integration process.
Economic related FCCs mainly arise out of inadequate implementation of the Customs Union and slow take-off of the Common Market. This has affected the realization of benefits of integration. Realizing benefits will necessitate strong regional institutions to implement fully the Customs Union and the Common Market as a foundation for a stable and sustainable monetary and fiscal integration.
The citizens of East Africa are concerned over loss of employment opportunities through increased labor mobility and competition. Deliberate programs should be developed to tap the benefits of labor mobility, for instance through exchange programs of language teachers across the region. In addition, the region should also focus on building productivity and competitiveness of the human resource. The fear of loss and competition over land continues to be a sensitive issue and potential source of conflict. This fear is largely a symptom of limited alternative means of livelihood besides land. A regional strategy should thus be developed to create alternative means of livelihood besides land.
Socio-cultural FCCs are mainly associated with the loss of identity and social cohesion. The biggest threats to social cohesion identified both at the national and regional levels are largely subsumed under ethnicity. Partner States need to develop solutions to address divisive politics by adopting inclusive policies that promote unity in diversity. Citizens of East Africa are also worried of losing social protection measures gained at national level. The EAC should thus adopt best practices to establish regional social protection mechanisms to avoid the erosion of gains in this area.
There were also cross cutting issues identified from the analysis of the FCCs that have implications for integration. Unless the Partner States accept to cede powers to the regional level and refrain from undertaking new engagements before honoring past commitments, the deepening of the integration process will be set back. In conclusion, for concerns about political federation to be defused and political integration to proceed, it is critical that the top leadership in the region that is the Summit sends a clear signal of strong political will and commitment to political federation, and mobilize and encourage citizens at the grassroots and other stakeholders to embrace the political federation.


Attempts by the East African countries to unite date back to the colonial period. Indeed formal economic and social integration in the East African region began in 1897 with the construction of the Kenya-Uganda railway. Other institutions that marked the first East African union include the establishment of the Customs Collection Center (1900), the East African Currency Board (1905), the East Africa Postal Union (1905), the Court of Appeal for Eastern Africa (1909), the Eastern Africa Customs Union (1919), the East African Governors Conference (1926), the East African Income Tax Board (1940) and the Joint Economic Council (1940). The East Africa High Commission (1947), the East African Common Services Organization (1961) and the East African Community (1967) were established as joint organizations to manage matters regarding the East African countries as well as to regulate commercial and industrial relations and transactions between the partner states.
Unfortunately the initial East African union failed to hold, and in 1977, the East African Community collapsed and was officially dissolved. One of the many reasons for the failure of this union was the continued disproportionate sharing of the benefits of the community fueled by differences in the levels of development among the partner states and lack of adequate policies to address this problem.
The desire for East African unity has persisted. Indeed, even at the time of winding up the EAC in Arusha in 1984, the Agreement for Division of Assets and Liabilities of the former East African Community (the Mediation Agreement), signed by Presidents Julius Nyerere, Daniel Moi, and Milton Obote at the time, committed them in Article 14 to ‘explore and identify further areas of cooperation’ (Deya, 2007). Consequently, despite the long hiatus lasting nearly a decade, in 1992, fresh attempts to restart East African integration commenced. Considerable work went into this process such that by 30th November 1999, the Treaty for the Establishment of the East African Community was signed by the three original partner states: Kenya, Uganda and Tanzania. The EAC Treaty came into force in July 2000 marking a major milestone in the revival of the East African integration project. Rwanda and Burundi, two neighboring countries, expressed interest in joining the EAC and on the 18th June 2007 they both assented to the EAC
Treaty and became full members of the Community on the 1st July 2009.
The second East African Community was formed to enhance cooperation among the partner states with a view to maximizing benefits to the region in the political, economic and social fronts. It adopted a private sector rather than a state-led development approach - a marked departure from the first EAC, and very much a reflection of the globally dominant neo-liberal economic ideology that was on the ascendancy at the time of its revival. Indeed, regional integration, and the revival of EAC, was seen as a necessary step to help EAC countries manage the competitive challenges posed by globalization. Regional integration would strengthen the national economies to cope with globalization and take advantage of opportunities such as increased market access, trade levels and sustainable development. Thus to the minds of EAC leaders, restarting the EAC was an existential decision, and the potential benefits of integration were seen as being greater if the countries acted collectively rather than individually. If this argument is true, then the region must examine the factors that led to the collapse of the initial EAC and attempt to manage, minimize or eliminate any risks – whether old or new.
Equity was and is one of those risks – and it is a risk that plagues all regional integration initiatives. Although not all members will benefit equally, if the distribution of benefits and costs is perceived to be skewed, or if they are acutely asymmetrical in real terms, the regional integration project may be undermined considerably. The Treaty for the Establishment of the East African Community, signed in November 1999 duly recognized this problem and emphasized equity as a fundamental objective and principle of this new attempt at regional integration.
It also sought to promote cooperation among the East African partner states in various political, economic and social spheres in a manner that recognizes good governance and adherence to the principles of social justice, equal opportunities, gender equality, as well as the recognition, promotion and protection of human and people’s rights.

The Distribution of Costs and Benefits in Trade
The signing of the treaty to establish the East African Community (EAC) on 30 November 1999, and its entry into force on 7 July 2000 marked a major milestone in rekindling the integration of the three East African countries – Kenya, Uganda and Tanzania. With the treaty, the three partners undertook to establish among themselves a customs union, a common market, subsequently a monetary union and ultimately a political federation. In March 2004, the countries signed the EAC customs union (CU) protocol, which came into force on 1 January 2005. In 2007, the EAC Heads of State agreed to form national committees to coordinate the exercise of gathering views on fast-tracking the formation of the East African political federation. The protocol for establishing the common market came into force in July 2010. The countries have also been slowly working towards a monetary union. Rwanda and Burundi have since joined the EAC, increasing the Member States to five. Clearly, the EAC has covered some ground in its integration path, although it is still very far from the levels it had reached with the defunct EAC treaty, which collapsed in 1977.
An important issue in the EAC integration process – and indeed in any other regional integration agreement (RTA) – is the manner in which the benefits and costs are distributed among the participating countries and its implications for the long-term sustainability of the agreement. This is because real or perceived imbalances in the distribution of benefits and costs often lead to disillusionment in advancing the RTA agenda, and in the extreme case may result in dissolution.
Equitable distribution of benefits and costs is thus critical for successful integration, even if they do not accrue equally. The EAC as an RTA has often been cited as being unequal in as far as the distribution of benefits and costs is concerned.
Indeed, the failure of the original EAC has been linked to the perception of skewed distribution of benefits associated with the integration process. As the EAC member countries forge ahead with integration efforts, an assessment of the benefits and losses that arise from the integration process is necessary in order to boost gains and to minimize losses. Through the EAC treaty, the Member States have committed themselves to cooperate on a wide range of fields to ensure harmonious development in the region. The main areas of cooperation include: trade liberalization and development; investment and industrial development; standardization, quality assurance, metrology and testing; monetary and financial cooperation; and security.
Other areas are infrastructure and services; human resources development, science and technology; agriculture and food security; environment and natural resources management; tourism and wildlife management; and cultural issues, youth and enhancement of the role of women. The expected benefits and associated costs for the EAC thus span a similarly wide range of fields. A comprehensive assessment of the full benefits and costs of the integration would therefore require coverage of all the areas of cooperation. This study instead focuses on only two areas: trade liberalization and development, and investment and industrial development. These two form the core pillars of most RTAs. The analysis is essentially an assessment of the benefits and costs associated with the implementation of the CU.
As there is already a substantial amount of empirical evidence (see for example, Castro and Rocha, 2004; Stahl, 2005) on the expected revenue, trade and welfare effects of a fully implemented CU for the EAC, we do not in this paper seek to duplicate the same work. Instead, we first review and discuss results of key studies and surveys that have been carried out on the subject. Thereafter, using a partial equilibrium model, which most of the studies have utilized to assess the costs and benefits of the CU, we carry out an assessment of the implications of further liberalization in the region. The analysis is limited to the original EAC countries – Kenya, Uganda and Tanzania – for which data are readily available.

Socio - Economic Profiles of EAC Countries
Prior to the re-launch of the EAC in 1999, Kenya, Uganda and Tanzania had enjoyed a long history of cooperation under successive regional integration arrangements dating back to the colonial period. These include a customs union between Kenya and Uganda in 1917, which Tanganyika joined in 1927. Other mechanisms were the East African High Commission (1961–1967); the East African Common Services Organizations (1961–1967); and the previous EAC common market, which lasted from 1967 to 1977 when it collapsed. The other two countries, Rwanda and Burundi, joined in 2009.
Kenya, Uganda and Tanzania – the original EAC Member States – exhibit a fairly homogenous historical and cultural outlook. The three share a similar colonial heritage, which formed the basis for integration in the post-colonial era. But even as the British bequeathed a common infrastructure and homogeneity in the social and cultural sphere in East Africa, it also left behind a legacy of inequalities in the levels of development among the three countries, with Kenya enjoying the highest level and Tanzania the lowest. This inequity has manifested itself in many ways. For example, Kenya was able to integrate into the international capitalist market much better than Tanzania and Uganda. The situation was not made any better by the differing ideologies that the countries pursued immediately after independence; with Kenya pursuing a more market-oriented approach while Tanzania opting for a socialistic trait (Barkan, 1994).
The other two members, Rwanda and Burundi, also share a common history. They both became Belgian colonies in 1918 after Germany’s defeat in the First World War. They have similar socio-economic characteristics, as well as geographical ones. They are both small and nearly the same geographic size (27,834 square kilometers for Rwanda and 26,338 square kilometers for Burundi). Moreover, the history of both countries has largely been characterized by different political conflicts (Rusuhuzwa and Baricako, 2009).
The current socio-economic and political situation in the EAC countries thus reflects historical, political and economic developments spanning several decades. Tanzania’s economy has evolved gradually over the years from a centrally planned socialist type economy to a fairly liberalized and well-managed one. Today Tanzania’s economy is one of the fastest growing in the region (Table 1.1) and has attracted substantial foreign direct investment (FDI), including from Kenya.
Kenya experienced rapid growth and socio-economic development in the early years after independence largely because of its market-oriented approaches. Since then, owing partly to adverse political and economic challenges, including corruption, economic performance has been modest and fairly volatile with the effect that the early gains have partly been eroded. Investor confidence in the country has also waned; investors are considering locating to other countries in the region and elsewhere. On its part, Uganda entered a protracted period of economic and political crisis a decade after independence characterized by wars and coups. Since 1986, however, the country has been stable and the economy has been recovering through a process of reconstruction and liberalization. Uganda’s economy has as a result experienced sustained periods of growth well above that of Kenya, although from a lower base.
Rwanda’s economy has recovered substantially after contracting by about 40–50 percent following the ethnic tensions that led to genocide in 1994. Since then the country has undertaken significant reforms that have seen the economy grow at rates well above 5 percent in the last decade. More recent performance has been impressive – the economy grew by 11.2 percent in 2008 and 7.9 percent in 2007.
In 2009 Rwanda was named the top reformer in the World Bank/International Finance Corporation Annual Report (2009), on the basis of the ease of doing business. Despite these achievements, important challenges still remain in the country, particularly relating to the structural transformation required to enhance growth and sustainable development. Burundi, the other new entrant to the EAC, is by far the smallest and least performing economy in the region. The GDP growth for the country has fluctuated following political disturbances and has for many years remained below the mean of sub-Saharan African countries. After several years of political upheaval, a transitional government was established following the signature of the Arusha Agreement for Peace and Reconciliation in Burundi on 28 August 2000. A series of institutional measures including holding elections, reforming public administration, tackling corruption, and reforming the legal sectors and the security forces has since followed (Rusuhuzwa and Baricako, 2009). These reforms have led to remarkable recovery of the economy, which registered an impressive growth of 5.6 percent in 2006, although it has dipped somewhat in the last few years. According to the government, economic growth relies on three factors: continually removing economic distortions in order to increase total-factor productivity, particularly in the coffee sector; substantially increasing investment, driven by international aid and oriented mainly towards infrastructure redevelopment, in order to reduce the main bottlenecks to economic development; and ensuring further improvements in trade deregulation, by taking further steps including joining the EAC, which is expected to contribute to economic diversification, stimulate competition and attract more investment.
Table 1.2 summarizes two key socio-economic out turns in the EAC countries – poverty and income distribution levels. Despite the impressive growth that the EAC countries have experienced in the last 5–10 years, poverty remains a major challenge for all the Member States. Whereas issues of distribution of benefits and losses in regional integration are important, equally important is the need to grow the economies for poverty reduction – so to speak, baking a larger cake. It is worth mentioning here that agriculture remains the region’s main economic activity and engages the majority of the poor in the region. The contribution of the sector to GDP ranges from 45.3 percent in Tanzania to 22.7 percent in Kenya in 2007.
There are plans in the region to transform the economies away from agriculture to industry and services. For instance, Rwanda has envisaged a set of policies with the goal of transforming the agrarian subsistence economy into a sophisticated knowledge-based society. Through its Vision 2020, the country plans to transform the country into a middle-income country, with a per capita income of about US$900, and transforming the structure of the economy so that industrial and services sectors will lead by 2020. It is expected that services will contribute 42 percent, industry 26 percent, and agriculture 33 percent of the GDP. Kenya has launched its own Vision, this for 2030, which projects transforming the country into rapidly industrializing, middle income status by then (GOK, 2007). The services sector in Kenya in 2009 accounted for about 58.2 percent of the GDP, while industry accounted for 19 percent. The aim of Vision 2030 is to achieve annual economic growth of 10 percent over the next 20 years.

The EAC Trade Agenda: Policy and Outcomes
Like many other African countries, the five EAC members have been implementing a wide range of trade and trade-related policies. Starting from the late 1980s, the EAC countries (separately) implemented trade reforms as part of World Bank/IMF structural adjustment programmes. These reforms, which had the aim of reducing the role of government in the economy, contributed significantly to the liberalization of the productive sectors such as agriculture, as well as the opening up of the financial markets to foreign competition and foreign exchange liberalization. The reforms also sought to substantially reduce the average tariff protection in the region through reduction of applied duties.

Trade policies in the EAC
Continued liberalization of trade regimes has been achieved through multilateral agreements, specifically the World Trade Organization (WTO), of which all the EAC countries are members, and through RTAs in which the countries participate like the Common Market for Eastern and Southern Africa (COMESA) and the Southern African Development Community (SADC). Thus by 2008, the most favored nation (MFN) applied tariff for Kenya, Uganda and Tanzania had come down substantially. Comparatively, the MFN applied rates in Rwanda and Burundi have remained high, although they are expected to reduce substantially with the implementation of the EAC common external tariff (CET).
Table 1.3 shows the ranking of the EAC countries among 125 countries of the world in terms of trade restrictiveness. According to the MFN trade tariff restrictiveness index (TTRI), which is normally computed by the World Bank to gauge openness, Tanzania is today East Africa’s most open economy with a TTRI of 7.8, which is still lower than the sub-Saharan average of 11.3. It ranks 81st out of the 125 ranked countries in the world and has experienced the highest growth in total trade in the region. Kenya is second with an index of 8.2 and is ranked 84th. According to these rankings, Rwanda was found to be the EAC’s least open economy with a TTRI of 16.2.
Regional trade integration is an important pillar of trade and investment policy in the EAC countries. In a bid to maximize benefits from regional trade, the EAC countries – apart from participating in the EAC – are also members of other regional integration arrangements. This, as will be discussed in the next section, creates a problem and is one of the reasons impeding the maximization of benefits of regional integration in the region. It needs to be noted that the EAC member states have signed a framework Economic Partnership Agreement (EPA) with the European Union and have a framework agreement, the Trade and Investment Framework Agreement (TIFA) with the United States of America.
The EU EPA has far-reaching implications as far as trade is concerned as it will lead to substantial reciprocal market access for goods from the EU. The agreement implies a market opening of 64 percent within 2 years, 80 percent within 15 years and 85 percent within 25 years. This has implications for revenues and trade in the local and regional markets. As for investment, it is notable that EAC member states have articulated a shared objective of investment policies in order to make the region attractive to investments. To this end, there have been a number of successes. These include the enactment of the EAC Competition Policy and Law (2006) and the EAC Standardization, Quality Assurance, Metrology and Testing Act (2006). Plans are under way in the region to formulate and enact a policy to curb piracy of intellectual property and counterfeit goods, both of which have been major investment disincentives. A significant development has been the attempt to formulate an EAC Investment Code to guide the member states in the development of national investment laws. Unfortunately, in its current form it is not a binding investment protocol.
Despite efforts to harmonize investment policies, EAC member states have retained their own institutions and regulatory mechanisms for dealing with foreign investments. The EAC countries retain responsibility on such matters as investment legislation, entry and exit requirements, investment protection, and incentives. While this arrangement has given countries sufficient autonomy to deal with the promotion of foreign investment in the region, it has resulted in a highly differentiated investment environment. This prompted the development of the Investment Code referred to above. At the national level, EAC members are in the process of simplifying procedures to facilitate foreign investment. They have also taken measures to harmonize their investment policies, including policies on commercialization of technologies and the promotion and protection of intellectual property rights.

Implementation of the customs union and the move to a common market
Trade policy is largely defined in the EAC’s CU protocol. The main elements of the protocol are: removal of internal tariffs and all non-tariff barriers on intra- EAC trade; introduction of CET regime; and agreements on a list of goods classified as sensitive and therefore requiring additional protection. In the first phase, i.e., from 2005 –to 2010, exports from Kenya were categorized into two lists, A and B, in order to provide Uganda and Tanzania with an adjustment time.
Category A goods enjoyed immediate duty free status in the other two countries. Category B listed some 880 and 443 importable goods from Kenya by Tanzania and Uganda, respectively that are subject to duties. The tariffs on these goods were to be phased out over a five-year period and were not to exceed the CET. The implementation of the CU protocol has been ongoing since 2005. By and large, tariff reductions have been effected as expected. Tanzania and Uganda began eliminating the internal tariffs in the 2006/07 fiscal year. Although there were initial hiccups in the removal of the tariff, the achievement has been remarkable.
As will be discussed below, however, there remain numerous non-tariff barriers that still hinder the smooth movement of goods across the countries. The three EAC countries also successfully negotiated and agreed on the CET, which became operational in January 2005. A three-band tariff structure (0 percent, 10 percent and 25 percent) was codified under the EAC Customs Management Act of December 2004.
All the countries agreed on a list of goods that were to be classified as sensitive goods and were therefore to be accorded additional protection over a transitional period. Such goods were to be charged a rate over and above the maximum rate of 25 percent. However, there have been numerous cases of charges well above the allowable maximum rate. For instance, as at December 2009, the rate on sugar was as high as 105 percent. The latest case has been with cement. While cement producers in Uganda and Rwanda have been pushing for the zero rating of cement, Kenyan and Tanzanian stakeholders insist that this will be detrimental to their respective cement industries. Cement had a CET pegged at 55 percent in 2005, 50 percent in 2006, 45 percent in 2007, 40 percent in 2008 and 35 percent in 2009. In 2008, the CET was reduced from 40 percent to 25 percent. Uganda and Rwanda want these taxes to be completely eliminated. The direct result of Rwanda and Burundi joining the CU in 2009 has been an expanded area of trade with a larger population (currently estimated at 120 million). The bigger market comes with a number of challenges, however. First, by regional standards, the two countries have weaker economies and are at lower levels of development, having just emerged from civil strife. This implies that the issue of inequity in sharing the benefits and the need to address them will become more prominent and urgent as the countries move into the common market. Indeed there have been calls for special provisions for the weaker economies that have just joined the EAC. Second is the challenge of language. The official business language in the region will most likely be English. While this poses no problem for the former British colonies, it will be a challenge for Rwanda and Burundi, which are French speaking countries, although Rwanda has already taken a major step in rectifying this problem by introducing English as the mode of instruction in schools.
Jointly, the five EAC countries are moving forward with the integration process to establish a common market. A protocol for a common market would provide for the free movement of factors of production such as people and money, and the right of settlement and establishment of EAC citizens within the EAC member states, among other things. This will be in addition to the free movement of goods under the CU. The EAC already has in place key institutions that are necessary for the establishment of a customs market. These include the East African Legislative Assembly and the East African Court of Justice. There is ongoing cooperation in a wide range of fields, from trade, investment and industrial development, infrastructure, tourism and wildlife management, to health, education; science and technology, agriculture, and standardization and quality assurance, as well as coordination and harmonization of macroeconomic, monetary and financial policies including free movement of capital and cooperation in defense and security matters. It is expected that transiting into a common market should be relatively easier given that most of the required institutions are already in place.
The challenge will thus be one of strengthening these institutions to ensure that they can support an effective common market. In the course of the negotiations for the common market, a number of key issues emerged. These relate to the free movement of persons and settlement of enterprises as well as the acquisition of land, all of which are cardinal requirements in a common market. As part of the fast-track process, the EAC member states have been negotiating an agreement to allow free movement of their citizens with the use of identity cards; to allow citizens of member countries to acquire land anywhere within the trading bloc; and to allow members’ citizens to gain permanent residence in any EAC country. It has emerged that there are fears in some member states of allowing the free movement as required in a common market. That such fear exists is a reflection of the deep suspicions that continue to bedevil the countries, especially relating to the costs and benefits of regional integration.

Direction and patterns of trade flows in the EAC
The trade structure of the EAC countries, like those of many African countries, displays the following common characteristics: a commodity structure of exports dominated by primary products in Standard International Trade Classification (SITC) categories 0–4; a commodity composition of imports heavily weighted in manufactured goods in SITC product categories 5–8; and a heavy concentration of exports to markets in Europe, Asia and North America. Table 1.4 depicts the evolution of EAC trade (by Kenya, Uganda and Tanzania) since the 1980s. It is evident that the pattern has been dominated by trade with industrialized countries and in particular the EU and (lately) Asia (accounting for 14.9 percent of exports and 21.5 percent of imports in 2005). It is also important to note that trade – both intra- and inter-regional, has constituted a sizeable and growing proportion of the EAC’s GDP, rising from 8.1 percent in the 1980s to 14.5 percent in 2005 for exports, and from 14.1 percent to 30.6 percent for imports over the same period.

Who is gaining from EAC trade?
Participating countries may turn out to be net gainers or losers depending on how they are affected by trade liberalization in the context of regional integration. Within the countries, sectors and groups may gain or lose. So which groups in society have been gaining from the EAC regional integration processes? To answer this question, one would need to have an idea who participates in trade and how they are affected. Ideally, this would require collection and analysis of disaggregated data collected from surveys. Unfortunately, this was not possible as part of this study. We therefore relied on a number of primary surveys collected by others in the region to shed light on the development benefits of the integration process.
The EAC Secretariat (2001) identified the following as the largest groups of beneficiaries from the EAC process: consumers, traders, transporters, producers and service-oriented firms. Consumers are expected to benefit from a greater supply of goods and services and lower prices. Transporters and traders are expected to benefit from time saving at the borders, reduced vehicle operation costs on road corridors, less spoilage in transporting perishable products and better utilization of vehicle fleets through faster border crossing. Producers and service-oriented firms would benefit from expanded regional markets and competition. The expanded local market should, in addition, provide them with a training ground for international competition. In addition, there are other general benefits including the establishment of centers of excellence, efficient utilization of scarce resources through cross-border provision of public goods, and the joint planning and implementation of policies. Among the other benefits identified are the attraction of foreign direct investment and regional peace and security. In a recent survey to gauge the nature and level of benefits from the integration process, Karega (2009) on behalf of the East African Business Council (EABC) enumerated a number of benefits that accrue to business persons, workers, professionals, and farmers. Other beneficiary groups include consumers, travelers, employees and students.
According to the survey, business was identified as the leading beneficiary.Seventy-five percent of the respondents in Kenya, 51 percent in Uganda and 48 percent in Tanzania indicated that they had benefited from the business opportunities resulting from the integration process. This is expected as the removal of tariffs among the EAC countries has so far been the main integration tool. Producers in the EAC countries have thus been able to find markets in other member countries. It is significant that a large proportion of those who reported improved trade opportunities were in Uganda. The survey also showed that an increasing number of informal sector businesses were benefiting from trade across the region. These were those mainly engaged in formal and informal trade through trading points such as Malaba and Busia.

Differing tax regimes
Delays by EAC member states in harmonizing their tax regimes are causing imbalances in cross-border trade. Although the CU was launched back in 2005, the main taxes affecting the business community, such as value added tax (VAT), withholding tax and excise tax, are yet to be fully harmonized. At present, Rwanda and Uganda charge VAT at the rate of 18 percent, Kenya charges 16 percent, and Tanzania, 18 percent. The disparities in the tax regimes result in distortions and have negative impacts on cross-border business activities. In particular, they increase the cost of compliance and affect decisions made by investors with regard to where to invest and where to source finance. The variance in VAT rates in essence translates into different prices and costs to consumers for similar items.
The countries also provide differing incentives for investors. While Kenya and Tanzania offer tax incentives for investors, Uganda and Rwanda do not. Similarly, companies operating in the export processing zones (EPZs) in Kenya and Tanzania are exempted for the first ten years from income tax and withholding tax on payment to non-residents, but this is not the case in Uganda. There is thus a perception in Uganda that the EPZs and the associated tax holidays provide an advantage to Uganda’s EAC partners. This is despite the fact that Uganda has been able to attract more FDI than Kenya. Pressure is thus being put on Uganda to establish its own EPZ, to match the incentives provided by Kenya and Tanzania. Plans are also under way to establish the same in Rwanda and Burundi.

Non-tariff barriers and measures
The overall effect of non-tariff barriers (NTBs) in the EAC region, like elsewhere, is that they result in delays and increased costs, which ultimately hinder the free movement of goods and services. And according to many analysts, the removal of NTBs is much more important for boosting intra-regional trade than tariff liberalization. A recent analysis by Karugia et al. (2009) demonstrates that the removal/reduction of NTBs in maize and beef trade in the East African region has significant positive welfare implications. According to the study, completely abolishing or even significantly reducing the existing NTBs in maize and beef trade would increase intra-EAC maize and beef trade, with Kenya and Tanzania importing more maize from both Uganda and Tanzania. Out of the realization of the negative impact of NTBs, efforts have been made to reduce or eliminate them. As part of the CU, EAC member states committed themselves to eliminate all existing NTBs on intra-EAC trade with immediate effect and to refrain from introducing new ones. However, not only have countries failed to eliminate such barriers, but they have in some cases introduced new ones to compensate for tariff liberalization.
Within the EAC, coherence or lack of it can be seen by the prevalence of NTBs that countries impose on products from other member states. To the extent that NTBs result from deliberate policies and procedures, their existence in many ways signifies trade policy incoherence. Though EAC countries have over the years negotiated the elimination of policy and procedure linked NTBs, success has been limited. In fact, NTBs remain one of the outstanding and sticky issues that have affected the speedy integration of the economies of the EAC. At a very basic level, a major challenge has been the lack of a common inventory of NTBs in the East African region.
One of the most troubling NTBs within the EAC has been transit procedures. The critical issue here is the lack of harmonization of regulations regarding axle loads and vehicle technical specifications within the EAC, which makes overload control management difficult. The differing axle weights would mean, for instance, that a truck from Tanzania transiting through Uganda has to strip off excess cargo to avoid financial penalties. There are also restrictions in the countries on gross vehicle mass, which means that certain types of vehicles cannot transit through some countries. A related problem is the poor enforcement of applicable rules and regulations across the EAC region, owing to inadequate institutional capacity and serious integrity issues arising among public officials who operate weighbridges.
This causes delays at border points. This last points to an important issue with implications for the benefits and costs of regional integration in the EAC, and that is corruption. There is concern that rampant corruption especially along the major trading routes is not only hampering trade flow but also eroding potential benefits. A recent Transparency International (TI) (Kenya) survey showed rampant corruption in the region (excluding Rwanda and Burundi). Kenya was perceived to be by far the most corrupt of the three original EAC countries, followed by Uganda and Tanzania (Table 1.15). The TI index shows that of the five current member states, Burundi is the most corrupt country within the EAC, while Rwanda was found to be the least corrupt. Rwanda came in at number 89 with a score of 3.3; Tanzania ranked 20 positions above Kenya at 126 with an index of 2.6, while Uganda was ranked at position 130 with a perception index of 2.5. Among the institutions identified as being involved in corruption are the police (in all the countries), the revenue authorities and the customs offices. As noted above, these institutions play an important role in the facilitation of trade and their being perceived as corrupt is inimical to trade in the region.

Revenue losses and border inefficiencies
A substantial proportion of revenue that would reflect as benefits of integration is usually lost as “unofficial” exemptions and smuggling. In the context of the EAC, it is important that the member states address weaknesses in their customs and revenue administration, border control, and transit arrangements to reduce losses on customs revenue collection. Also important are issues of efficiency at border points. The performance of trade procedures at border points involves a large number of actors including customs officials, freight forwarders, insurers, immigration authorities, police, plant inspectors, bankers, brokers, quality assurance, weights and measures and standards institutes, health, and port authorities to mention but a few. For effective border point facilitation, it is critical that all these agents with varying roles work in tandem. This is seldom the case, however. If, for example, inspection of goods is undertaken by different agencies, an importer has to present different documents to each one and a lot of time and money are wasted. This diminishes the benefits of regional integration. Measures to seal revenue losses and to harmonize border procedures are thus crucial in ensuring maximum benefits.

Mechanisms for Addressing Imbalances within the EAC

An undesirable feature of regional integration is that member countries are unlikely to benefit equally because of the existence of economic and social disparities. The EAC is often cited as an example of an RTA in which benefits are skewed. Indeed, this was one of the main reasons for the collapse of the first attempt at regional integration. It is therefore important to carefully monitor the integration process to ensure that every country benefits from their participation. There is need for a compensation mechanism that adequately addresses the losses member countries suffer as a result of the implementation of trade liberalization measures undertaken in the context of the agreement.

Past and current approaches
The EAC treaty of 1967 tried to remedy the problem of unequal distribution of benefits of the common market and the common services by instituting a transfer tax system. Transfer taxes are generally imposed by countries with trade deficits against countries with which they have deficits. The transfer tax was a legalized tax applied by Tanzania and Uganda against some goods from Kenya under certain conditions. The objective of the transfer tax was to encourage industrialization in Tanzania and Uganda, which were lagging behind Kenya. This did not work, however, as a mechanism to ensure the distribution of industries in the region was never put in place.
In addition, the East African Development Bank (EADB) was established in order to promote the industrial development of partner states so as to reduce the industrial imbalances between them. On establishment, the EADB was required to loan or invest 38.7 percent of its capital to Tanzania and the same amount to Uganda. Kenya was supposed to get 22.5 percent. Following the breakup of the community in 1977, the EADB was re-established under its own charter. It currently focuses on providing a broad range of financial services with the objective of strengthening socio-economic development and regional integration. Then and now, the EADB has faced serious difficulties in realizing its objectives owing to its low capital base. The limited capital, which has confined the Bank to minority participation with private and public enterprises, has not enabled the Then and now, the EADB has faced serious difficulties in realizing its objectives wing to its low capital base. The limited capital, which has confined the Bank to minority participation with private and public enterprises, has not enabled it to initiate independent projects. The EADB has therefore not been able to influence industrial location, let alone the kind of industries to be established.
The current EAC agreement is fully cognizant of the differing levels of social and economic development of the member states and has put in place a number of measures. In fact, it needs to be noted that the equitable distribution of benefits is one of the fundamental principles of the EAC. We examine some of the practical measures for ensuring equitable distribution of benefits.

The principle of asymmetry
This is the principle that addresses variances in the implementation of measures in an integration process for purposes of achieving a common objective. As discussed in Section 3.4.1, the principle was adopted in the phasing out of internal tariffs by providing firms located in Uganda and Tanzania with an adjusted period of five years. In the agreement, goods produced within the region were divided into category A and B. While category A commodities from Tanzania, Kenya and Uganda entering the EAC market were eligible for immediate duty free treatment, those category B commodities coming from Kenya and entering Tanzania and Uganda were eligible to pay tariff for a period of five years. The tariffs were to be gradually phased out by January 2010, following which all goods from Kenya would enjoy the same treatment as goods from Tanzania and Uganda. This form of protection, it was believed, would give Ugandan and Tanzanian firms the opportunity to adjust their cost base and eventually compete with their Kenyan rivals. The arrangement is premised on the infant industry approach, which was popularized in the 1960s and has been a subject of debate for a number of years.
Within the EAC, the issue is whether the temporary protection through the asymmetrical approach has had any effect. From an operational perspective, it is clear that Kenyan firms largely adhered to the principle of asymmetry, albeit with occasional complaints. Kenyan firms were thus able to adjust to the lower protection afforded by the EAC CET compared with previous levels. Initial fears that the firms would not be able to adjust and would relocate to Tanzania and Uganda to take advantage of the preferential margins accorded by the CU protocol were not realized. The impact of the application of the principle on firms in Uganda and Tanzania is less certain and would require an empirical investigation. There are signs of increased trade of goods and services from the two countries, and a culture that is more oriented to making profits on the scale of production and less dependent on political protection. The decision by these countries to ratify the EAC common market treaty is a pointer to growing confidence in the regional trade agenda.

Safeguard and countervailing measures
Articles 77 and 78 of the EAC Treaty provide measures and safeguards to address imbalances and serious economic injuries to members’ states emerging from the establishment of a CU and a common market. Safeguard measures are applied by member states on imports for which there is sufficient evidence of the potential for serious injury to domestic production as a result of the application of CET on industrial inputs and raw materials. These measures can take the form of raising tariffs above the CET, restricting imports by volume or allocating quotas.
Safeguard measures are normally applicable for a year and are renewable annually, but may not be used for more than three years. Countervailing duties can also be imposed to offset the effects of subsidies. Subsidies are incentives that governments provide to producers or exporters of certain commodities with the aim of increasing production or providing advantages in foreign markets. This is why subsidies are regarded as unfair in the context of regional integration and are offset using countervailing duties. The EAC CU protocol defines subsidies as follows: direct transfer of funds, e.g. grants, loans and equity, and indirect transfer such as loan guarantees by the government; tax incentives for exported products; provision of goods and services by the government; and income or price support. Where countervailing measures are applied, they must be equal to the amount of the subsidy determined to have been given to the imported product.
Clearly, these two measures are aimed at creating a level playing field and ensuring that the member states do not suffer as a result of their participation in trade integration. There is no evidence that the EAC countries have so far resorted to these measures, but they remain available should their use become necessary.

Compensatory and development funds
Another means for addressing the imbalances in the EAC is the possibility of a compensatory fund. This type of mechanism has been successfully utilized in other RTAs such as the EU. It would involve money transfers through a budget. In this case, monies collected from the CET can be shared according to a formula that takes into account differential impacts of the CET. Alternatively; monies collected from the CET can be placed in a central budget and used for programmes agreed upon by the member states. In the EAC, however, the Council of Ministers ruled out the possibility of establishing a compensatory mechanism in a decision taken in August 2005. Instead, the EAC is considering a development fund, similar to the COMESA Fund.
The proposed EAC development fund would, if established, seek to address infrastructural development issues, development imbalances, investment promotion and other development challenges of the partner states. The EAC has made it clear that it may not be used for compensation. Rather, it is meant to be a vehicle for mobilizing resources for development programmes in the region. In addressing imbalances within the region, the fund will provide balance of payments/ budget support to countries within the framework of policy-based operations to support member states in undertaking macroeconomic and trade liberalization reforms related to economic integration. The fund may also support the financing of infrastructure to support a deeper and more balanced regional integration. The fund would thus operate through two main windows, an infrastructure fund and an adjustment facility.
The implementation of a successful development fund in the region will require considerable legal and institutional reforms that compel member states to make concessions in streamlining the way business is conducted in the region. One of the key issues that will have to be addressed is the source of the funds. As is the case with the COMESA Fund, the fund will target both internal and external sources. The former is likely to include contributions from member states, levies and taxes, and raising capital from domestic and international financial institutions.
Clearly, this will require that the countries are able to generate resources for their development needs and spare balances for the fund. Where the tax regimes are not robust enough, countries may not be able to generate adequate resources. The implementation of a development fund thus poses real challenges for the EAC countries in coming up with the enough resources needed for the fund and for their own national programmes. In setting the levels of member contributions, there is as well a need for equity considerations. Expectations of equal contributions by member states are likely to cause excessive burdens on the smaller states.

Implications for Future Integration Processes
The costs and benefits of economic integration – the process by which economic barriers against exchange of goods, services, capital and people are eliminated – was the focus of Section 4 of this chapter. It is evident from the empirical evidence that while the EAC CU has generated benefits, it has also been associated with a number of costs. Here we look at the implications of the balance between costs and benefits for the future of the union.

Socio-economic and political implications
Available evidence shows that the EAC has boosted intra-regional trade through tariff reductions – meaning that it has been trade creating. Although there is as yet no concrete evidence, chances are that the EAC has also sparked greater investment in the region as the size of the market increased and internal tariffs declined. The entry of Rwanda and Burundi, which resulted in a larger market, will clearly boost trade and hopefully investment for the region. If there are economies of scale in specific production processes, a larger market may enable firms to lower unit production costs. Similarly, region-wide transportation and communication is likely to be cheaper on a per unit basis. Overall, this is expected to boost overall welfare in the region.
A protocol for a common market would provide for the free movement of factors of production such as people and money, and the right of settlement and establishment of EAC citizens within the EAC states, among other things. This will be in addition to the free movement of goods under the customs union. The signing of the EAC common market protocol in November 2009 is thus expected to spur even greater trade in the region, particularly if the countries agree to and implement the liberalization of services. As already indicated, however, although the CU has been in place since 2005, even the free movement of goods is yet to become a reality. Although much has been realized in harmonizing tariffs in the region, the issue of tariffs on the so-called sensitive products is yet to be resolved. The benefits of the transition from the CU to a common market will not be fully realized unless these bottlenecks are removed.
Ultimately, the objective of any RTA is to promote economic and social development through integration. This includes self-sustaining development, economic growth, the alleviation of poverty, and the promotion and sustainable utilization of resources, including human resources. Today, RTAs are also expected to strengthen peace and security and to involve not only states, but civil society and industry as well. Indeed, the objectives of the EAC do encompass all these and more including gender equity and good governance. From an equity perspective, the concern is how RTAs affect growth and poverty alleviation. It is often suggested that regional integration is good for reducing poverty because it increases trade and investment and thereby creates jobs for the poor. On the other hand, however, as noted above, integration and associated trade reforms can also reduce government revenue, the main source of redistribution. This will make governments less able to cater for the poor. Nevertheless, evidence so far indicates that integration does not necessarily reduce revenues because they lead to higher trade volumes and increased collection rates.
A recent study by Duygan and Bump (2007) demonstrated that the adoption of the EAC CET has most probably indirectly helped the poor in the rural areas, especially those in agriculture, while hurting those in urban areas and in industry. Directly, as already noted, farmers participation in trade remains low. The study shows that further integration in the region, i.e., with the reduction of the CET to 15 percent and then to 15 percent, may not necessarily help the poor. In other words, pro-poor gains were shown to be possible only with a maximum tariff of 20 percent. An earlier study (Kweka and Mboya, 2004) concluded that regional integration (not necessarily EAC) had a better poverty focus than other forms for Tanzania; that is, it affects products that involve the poor more directly. Kweka and Mboya conclude, however, that the effect of poverty through trade and investment is limited, mainly because of capacity constraints in areas where the poor live.
Though seemingly economic, issues of distribution of benefits and losses in RTAs quickly turn political. Perceived losses in RTAs are always politically sensitive as politicians seek to respond to complaints, real or perceived, from their constituents. Throughout the integration process in East Africa, there has been political resentment expressed at the disproportionate benefits in terms of growth in the GNP, foreign investment, international trade and the location of common services. Indeed, the disproportionate distribution of benefits – among other things – fuelled the animosity among political leaders that ultimately led to the collapse of the EAC in 1977.
The issue of distribution of costs and benefits also came up quite strongly in the negotiations for the common market and the fast tracking of the East African Political Federation. There are still some strong concerns, especially in Uganda and Tanzania that Kenya is likely to benefit disproportionately from the enhanced integration process. This translates into equal political unease. Other political issues that are likely to be important in the process of further integration include security and loss of sovereignty.
Political as well as social and economic concerns have also been given as reasons for supporting or not supporting fast-tracking of the political federation. The outcome of the surveys conducted in the three East African countries to gauge citizen perceptions on the political federation provides important insights on the concerns of different stakeholders. In the case of Tanzania, an estimated 75.9 percent of the respondents were of the view that the formation of the political federation should not be fast-tracked, leaving only 20.8 percent in favor. Among the political concerns were issues of democracy and governance, sovereignty, defense and security, and ideological differences. Topping the list of the socioeconomic concerns are issues of differences in economic development (between member states), competitiveness, and land and natural resources issues. Generally, most Tanzanians are of the view that the formation of the East African Political Federation should be gradual. It is instructive that perceived differences between the countries in East Africa are likely to continue to be a sticking point in any future relationship in the EAC regions. There have been similar concerns in Uganda. In Kenya, the concern has mainly been related to the slow process of the integration and, lately, the distribution of common services.

Institutional implications
Further integration of the EAC countries has a number of institutional implications as far as the distribution of benefits and costs is concerned. For coordinated and equitable development in the region, the EAC Secretariat has a very important role to play. The Secretariat is the executing organ of the EAC and is responsible for strategic planning, management and programme monitoring. Long-term sustainable and equitable development in the region is crucially dependent on the actions of the Secretariat. Given its sensitivity, one of the issues that the EAC Secretariat will be expected to assess and monitor is the distribution of benefits and costs. Currently, however, the Secretariat has limited capacity in terms of human and financial resources to undertake some of its crucial activities.
Only recently, the Secretariat almost ground to a halt as it had not received contributions from some member states to run its activities. Ensuring the capacity of the Secretariat will be key in future integration activities.
Recently there have been some concerns about the distribution of the common services. There has been talk of a decentralization of the EAC facilities and organs to ensure that all the member states benefit. The concern has been that while some member states host several of the EAC’s organs, some had none. Currently, the EAC has seven organs: the Heads of State Summit, the Council of Ministers, the Coordination Committee, the Sectoral Committees, the East African Legislative Assembly, the East African Court of Justice and the Secretariat. In addition, there is a number of autonomous institutions such as the Nile Basin Initiative, the Inter Universities Council of East Africa and the Lake Victoria Environmental Programme, the East African Community Civil Aviation Safety and Security Oversight Agency, and the East African Development Bank. While Kenya hosts the Lake Victoria Environmental Programme, the rest of the organs are shared between Uganda and Tanzania. It is therefore not surprising that Kenya has been very vocal in calling for “an equitable distribution of the organs”. Rwanda and Burundi have supported Kenya’s position and are calling for an amendment of the EAC Treaty to allow for redistribution.
The EAC subscribes to the principle of “subsidiarity”, which requires the multilevel participation and involvement of a wide range of stakeholder in the process of integration. In this context, promotion of the role of the private sector, women and civil society is underscored. The participation of business associations, nongovernment organizations and other actors is crucial in establishing modalities of cooperation and inclusiveness. It is thus important that these institutions be supported to ensure sustainable development in the region. Some successes have already been achieved in this direction, but much more needs to be done, including ensuring that the key institutions such as the Secretariat actually work.
Equitable development in the region will also require strengthening the existing intergovernmental institutions in the region. As already indicated, the EADB is one of the surviving institutions of the defunct EAC. It was established in 1967 with the objective of generating and financing projects of regional significance and redressing the imbalance of industrial development in the member states (Kenya, Uganda and Tanzania at that time). Expansion of the resource base for EADB targeted at expansion of the shareholding and introduction of new financial products is key in achieving its renewed mandate.

Conclusions and Recommendations
Clearly, the EAC agreements represent an ambitious process of economic and political integration. Kenya, Uganda and Tanzania have since 2005 been implementing the customs union protocol, which in principle allowed the free movement of goods across their borders. Along with newcomers Rwanda and Burundi, the member countries in 2010 ratified the EAC common market. The ultimate objective of the EAC is to form a political federation.
Universally, regional integration has been associated with costs and benefits, both of which sometimes accrue disproportionately. Equitable distribution of these costs and benefits is critical for the success of the integration, even if they do not accrue equally. The EAC is in no way exceptional in this regard. The objective of this paper was thus to analyze the distribution of the benefits and costs that result from the EAC integration process. The main conclusions and recommendations of the study are outlined below.

The main conclusions are:
Through a series of reforms carried out at national, regional and international levels, the EAC countries have progressively liberalized their trade regimes. All the EAC countries except Rwanda are today more open than the average sub-Saharan African country, according to the 2009 World Bank’s Trade Tariff Restrictiveness Index. Further reform in all countries is essential for effective economic integration in the region. There is strong evidence showing that the operation of the CU has tremendously improved the business environment in the region as the member states rely on common sets of import duties and customs rules, common coding and description of tradable goods, common valuation methods, and lately a common investment code.
Although the trade pattern in the region is changing, it still favors Kenya, which accounts for well over 60 percent of the total exports in the region. Uganda accounts for most of the imports from the EAC countries, and particularly Kenya. Rwanda and Burundi jointly account for less than 1 percent of the exports and about 15–19 percent of imports. The latest trends show that the share of Tanzania and Uganda in EAC exports is rising. Manufactured goods form the bulk of the commodities being traded in the region.
Regional integration is in the long-term interest of the EAC countries. The empirical evidence reviewed supports the pursuit of integration through the EAC as the overall effect is likely to be positive, meaning that the region stands to benefit with greater integration. From an integration point of view, the literature suggests that although the EAC economies are neither very complementary nor particularly competitive, the EAC integration process is an important stepping stone on the way to greater integration into the world economy.
However, the empirical literature, the bulk of which is based on comparative simulations for the original EAC members (Kenya, Uganda and Tanzania), point to the inequitable distribution of costs and benefits as a result of the implementation of the CU. The literature generally shows aggregate welfare benefits in Kenya and Tanzania, but welfare losses in Uganda, where consumers and producers have had to face higher consumer and import prices as a result of the EAC CU. There are also remarkable differences between the countries on expected revenue and trade effects of the CU. Further, the benefits and costs of integration accrue disproportionately to different sectors and social groups in the region, which has a direct implication on the development impacts of the CU. Partner states with more developed sectors, are likely to benefit more. The key beneficiaries in the process are traders, transporters and consumers.
Our analysis shows that further liberalization in the EAC involving the reduction of the CET and the reduction of exemptions for sensitive goods is likely to lead to further welfare gains in the region through an increase in consumer surplus in all the countries. Uganda stands to benefit more in this regard than Kenya and Tanzania.
The full realization of the benefits that are likely to accrue from greater integration in the region are currently inhibited by a number of factors. These include supply-side constraints and lack of competitiveness, multiple memberships in various trading blocs differing tax regimes, and non-tariff barriers and measures, as well as border inefficiencies and losses. Removal of these constraints is important in realizing the full benefits of integration in the region.
The EAC Treaty (1999) is not oblivious to the fact that the different levels of development of the partner states’ respective economies may give rise to imbalances with the application of measures towards further regional integration, and particularly trade liberalization. Consequently, the EAC treaty provides for the application of the principle of asymmetry in trade measures. The exact effect of the application of this principle remains unclear, but there are signs of increased trade of goods and services from the countries and a culture that is more oriented to making profits on the scale of production and less dependent on political protection. To further ensure equality in the development benefits of the integration, the EAC is considering putting in place a development fund.

To ensure equity in the EAC integration process, it is essential that measures be taken to address the equity concerns in the process. The findings of this study prompt the following recommendations, which intend to be useful to the policy community:
There is need for further reforms in the region to address the potential revenue and trade losses that accrue to the EAC member states.
To reap the benefits of trade integration by the member states, it is crucial that the existing factors that negate the benefits from the EAC CU and the upcoming common market be addressed. This includes the elimination of NTBs to ensure free trade in the region. The EAC will also need to finalize the harmonization agenda especially on taxes and policies. To eliminate the negative effects of multiple memberships of EAC countries, the EAC common market should negotiate a free trade area with other blocs, particularly COMESA and SADC, or even in the extreme case merge with them.
To effectively address imbalances in trade, there is continuous need for assessment of the prospective benefits and costs so as to boost the gains and minimize the losses. Ensuring equitable outcomes among member states calls for establishing the magnitude of the benefits and costs involved. In this regard, it will be important to boost the analytical capacities of key institutions involved including the EAC Secretariat.
Although there is need to put in place measures to cope with unequal distribution of benefits in the short term, there is need for long-term measures that would tackle the root causes of underdevelopment in the region. In the short to medium terms, the implementation of a development fund would seem prudent. In the longer term, sustained economic development in the regional is imperative. The countries basically need to “bake a larger cake” so that there is enough to go round. Realizing the benefits of regional trade requires strong, sustained commitment from the member states.

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