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EAC integration will be an economic catalyst

By Eliud Owalo | December 18th 2017 at 12:44:07 GMT +0300

[Photo: Courtesy]

A key factor that has constrained many Africa countries, including Kenya, from growing into a global economy is the continent’s small markets. These do not permit the realisation of economies of scale.

Regional integration allows a country to effectively utilise its comparative advantage in a wider market to maximise its economic potential, diversify production lines, reverse de-industrialisation and marginalisation, and improve the living standards of the populace.

Regional integration occurs whenever a group of nations in the same region, preferably of relatively equal size and at equal stages of development, join together to form an economic union by raising a common tariff wall against the products of non-member countries, while freeing internal trade among member countries. 

The East African Community (EAC), with a single unified market of more than 120 million consumers, should be viewed as a catalyst for economic growth. The ultimate goal of the EAC, beyond trade liberalisation and economic unity, is to pursue full political federation anchored on establishing regional structures and building institutions to foster international relations and strategic interventions.

Kenya needs to fast-track the implementation of the EAC, given the various benefits, including trade creation due to specialisation based on comparative advantage, administration savings resulting from the elimination of border policing, enhanced bargaining power of member states, as in the case of the European Union with African countries, enhanced competition resulting in efficiency in production and improved quality of the products, and attainment of economies of scale from the enlarged market. 

Similarly, integration will stimulate investment by taking advantage of the new markets and meeting the increased competition that would spur foreign firms to set up production facilities to avoid the discriminatory trade barriers imposed on non-union products.

Another benefit is collaborative infrastructure development. Backward and forward linkages and promotion of a framework for countries to cooperate in developing common infrastructure such as financial services, transport and communications, and mechanisms for joint exploitation of natural resources would enhance growth.

Expanded markets

Integration also provides a growth opportunity for industries that are not yet established as well as those that can take advantage of the large-scale production made possible by expanded markets.

Finally, integration provides the possibility of coordinated industrial planning, especially for industries where economies of scale are likely to exist. This enables all member states to accelerate their rate of industrial growth by assigning given industries to different members, thereby taking the partners much closer to full economic and, eventually, political union. 

One of the EAC advantages is its strategic location that can facilitate mobility of products, people, and capital, with Kenya being a leading beneficiary. For example, to reach Lagos, the distance is slightly over 2,300 mile (about 3,700km) from Nairobi, compared to 2,800 miles (4,500km) from Johannesburg. Similarly, it is over 5,400 miles (8,700km) by air from Johannesburg to Paris, while the distance is about 4,032 miles (6,488km) from Nairobi.

Also, the distance between Johannesburg and Dubai is about 4,000 miles (6,400 km) and about 2,200 miles (3,500km) from Nairobi to Dubai. With improved regional infrastructure, Kenya is expected to reap the benefits of reduced travel times.

Another benefit is the high demand for tourism in the region including the ‘Big Five’ game and the region’s wildlife diversity and the favourable climate. These clearly demonstrate that with integration more jobs are assured for the residents and hence economic growth and the accompanying ripple effects. 

Although EAC has been consistently working to achieve its stated aims of greater economic integration and cooperation, there, however, remain significant issues to overcome. These include poor infrastructure, widespread corruption, low levels of education and underdeveloped healthcare systems, political instability and security, cost of doing business in the EAC, and political squabbles.

Other issues relate to sovereignty of each country, the incompatible political and economic statuses and beliefs coupled with the political appointments with minimal experience in regional integration, fear of losing property such as land, and national politics taking centre stage, thereby overshadowing the regional agenda. 

We can, therefore, impute from a trade perspective that, although Kenya is considered a small nation, it can overcome the smallness of its domestic market and achieve substantial economies of scale in production by exploiting opportunities that exist in the rest of the world.

This would have both micro and macro benefits, including large market, reduction in cost of doing business, employment opportunities, improved welfare of the residents, and acquisition of economies of scale.

Thus, member states need to view integration as a mechanism to encourage economic growth and development and improved standards of living of the people, and not a mechanism for political milestones. 

 

Mr Owalo is a management consultant


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