BY ELIUD OWALO
A key factor that has constrained many Africa countries including Kenya into global economy is the continent’s small markets, which do not permit the realization of economies of scale. Regional integration allows a country to effectively utilize its comparative advantage in a wider market to maximize on its economic its potential, diversify production lines, reverse de-industrialization and marginalization 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.
Integration may take various forms with the first and the lowest being Preferential Trade Area where countries lower barriers on trade among participating nations than on trade with non-member nations. The second form is Free Trade Area wherein all barriers on trade are removed among members but each nation retains its own barriers to trade with non-members. Third is Customs Union which allows no tariffs or other barriers on trade among members and in addition harmonizes trade policies such as including the setting of common external tariff towards the rest of the world. Examples include the East African Community (EAC) and European Union (EU). Fourth is Common Market which goes beyond a Customs Union by also allowing the free movement of labor and capital among member states. The European Union achieved the status of a common market early in 1993. Fifth is the Economic Union which goes beyond the common market by harmonizing and unifying the monetary and fiscal policies of member states. An example is Benelux, which is the economic Union of Belgium, Netherlands and Luxembourg formed after World War (WW) II (and now part of European Union). An example of a complete economic and monetary union is the United States of America.
The EAC with a single unified market with over 120 million consumers should be viewed as a catalyst for the economic growth, allowing for record levels of trade, economic cooperation and development. A Monetary Union (MU) Protocol was signed by the Community in 2013 outlining a ten‐year road map towards monetary union with the East African Shilling as the new currency. Finally, the ultimate goal of the EAC, beyond trade liberalization and economic unity, is to pursue full political federation intended to be anchored on establishing regional structures and building institutions to foster international relations and strategic interventions. Kenya needs to fast tract the implementation of EAC given the various benefits including trade creation due to specialization based on comparative advantage; administration saving resulting from the elimination of border policing; enhanced bargaining power of member states like in the case of European union with Africa countries; enhanced competition resulting in efficiency in production and improved quality of the products; and attainment of economies of scale due to enlarged market.
Similarly, integration will stimulate investment by taking advantage of the enlarged market and meeting the increased competition which spurs foreign firms to set up production facilities to avoid the discriminatory trade barriers imposed on non-union products. Another benefit is collaborative infrastructure development with expected induced 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. Integration also provides a growth’ opportunity for industries that have not yet been 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 those industries where economies of scale are likely to exist. This enables all member states to accelerate their rates 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 will 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 miles from Nairobi, compared to 2,800 miles from Johannesburg. Similarly, it is over 5,400 miles by air from Johannesburg to Paris, while the distance is about 4,032 from Nairobi. Also, the distance between Johannesburg and Dubai is about 4,000miles and about 2,200miles 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 favorable 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, costs of doing business in the EAC, and political squabbles. Other issues relate to sovereignty of the 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 center 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. In the process this is expected to have both micro and macro benefits including large market, reduction in costs of doing business, employment opportunities, improved welfare of the residents, and acquisition of economies of scale, among others. Thus, member states need to view integration as a mechanism to encourage economic growth and development, improved standards of living of the people and not a mechanism for political milestones.
In the absence of integration, each separate country may not provide a sufficiently large domestic market to enable local industries to lower their production costs through economies of scale or realize optimal capacity operational levels. The EAC should learn several lessons from those of advanced integrations such as EU. Key to this includes impressive infrastructure network and the prioritization of infrastructure improvements to spur growth and development. Additionally, the EAC should strive to achieve the same kind of economic diversification that has allowed the EC countries to prosper, and reduce over-reliance on the volatile agriculture sector to enhance intra-trade. Although an analysis of the current EAC Strategic Plan shows that the leadership has set out an impressive and visionary agenda, this does not necessarily translate into economic development or regional integration. Hard work and tough choices must be made by each of the EAC member states, or else the integration processes will sputter and die out, like it happened in 1977.The EAC must responsibly pursue regional and economic integration to enable the region become a world-renown economic power base.
The Writer is a Management Consultant