Journal Issue
Share
Finance & Development, December 1979
Article

Breakup of the East African Community: Problems of regional integration

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1979
Share
  • ShareShare
Show Summary Details

Sena Eken

Regional economic groupings are now found in all areas of the developing world and involve about half of all developing countries. There are two main reasons underlying this drive toward integration—the first, economic; the second, political. First, economic integration may become an important instrument for economic growth of the region as a whole. Removing barriers to the free movement of goods, labor, and capital between regions sometimes leads to the expansion of trade and, therefore, of incomes and employment. Larger economic units, with their larger markets, should permit economies of scale in production and justify the establishment of enterprises previously considered too costly. If permitted, resources such as labor and capital may move freely to the most productive areas of these larger markets and add to the growth of output. Depending on geography, cheaper and more efficient transportation systems may result. Finally, the broader markets resulting from integration should attract more substantial foreign investment. The second motive for establishing regional economic groupings is to strengthen collective self-reliance and thereby reinforce the political independence of developing countries, enhance their power vis-á-vis the developed world, and enlarge their economic and political role in international relations.

Inevitably there are problems confronting developing countries attempting integration. Political rivalries, nationalism, difficulties connected with differences in the level of development reached by member countries, and the tendency of benefits to be concentrated in particular areas, leading to disparities in the development of members—all these factors can thwart moves toward integration and cooperation. This article reviews one attempt at regional integration—the East African Community (EAC).

Cooperation

Since the beginning of this century there has been a considerable degree of economic cooperation among Kenya, Tanzania, and Uganda. (See accompanying box.) The common colonial administration under Great Britain provided the main impetus for cooperation in the fiscal fields, the provision of common infrastructural services, and a sort of common market arrangement. Even then there were disagreements among the three countries over the distribution of benefits. These divergences widened after independence, when each of the countries placed more emphasis on national development.

Attempts were made to rectify the anomalies in the existing arrangements. The Kampala Agreement of 1964 provided for quotas on intra-East African trade to limit trade imbalances of deficit countries and for a licensing system to encourage the establishment of new major industries in the less industrially developed partners. The failure to implement this Agreement led to the imposition of quantitative restrictions by Tanzania and Uganda on intra-East African trade. In other important areas also cooperation began to falter or collapse. There were signs that the common market would break up, unless the economic cooperation arrangements were restructured.

The three countries therefore decided to set up a new system of economic cooperation. On June 6, 1967 the Treaty for East African Cooperation, establishing the East African Community, was signed in Kampala. It came into effect on December 1, 1967.

The Treaty for East African Cooperation was at that time one of the most comprehensive and far-reaching efforts at regional integration. The aim of the Community was “to strengthen and regulate the industrial, commercial, and other relations of the Partner States to the end that there shall be accelerated, harmonious, and balanced development and sustained expansion of economic activities, the benefits whereof shall be equitably shared.” With the signing of the East African Treaty, the East African Common Market was formally established. The partner states undertook to continue to maintain a common customs tariff on all goods imported from outside the Community, to abolish all trade restrictions on intra-Community trade, and to harmonize monetary and fiscal policies. They also agreed to coordinate their economic planning efforts. The East African Common Market did not, however, provide for free movement of labor and capital, nor did the provisions of the Treaty extend to agricultural products.

Monetary and exchange control arrangements were formalized through provisions pertaining to the exchange of currency notes and the freedom of current transactions at par value among member countries. Furthermore, under the Treaty, member countries agreed to pursue economic policies which would safeguard the common value of their currencies by ensuring equilibrium in their balance of payments.

The Treaty established two new “measures to promote balanced industrial development.” The first was a transfer tax on intra-Community trade to protect industries of the less industrially developed members of the Community against those of the more developed. The second was the establishment of the East African Development Bank (EADB) on December 1, 1967 in Kampala, with equal contributions from each state.

Following the Treaty, self-contained services provided by the East African Common Services Organization were consolidated under four autonomous corporations: the East African Railways Corporation (EARC), the East African Harbours Corporation (EAHC), the East African Ports and Telecommunications Corporation (EAP&TC), and the East African Airways Corporation (EAAC). The Treaty established these corporations as commercial institutions within the Community, each country sharing equally in ownership and control. On the principle that benefits should be distributed fairly, the headquarters were dispersed among the member countries. The continuity of the services provided by these corporations constituted a very important part of the economic cooperation among the member countries. In practice, they provided most of the communications services in the member countries. In addition, the Community provided several services in four main categories: revenue collection, economic and statistical services, research services, and other miscellaneous services. Their activities were financed out of the Community budget and from foreign donations.

Breakup

Although cooperation in the EAC was encouraging in the initial years, relations between the member countries started to deteriorate in the early 1970s. The Community’s highest body, the East African Authority, which consisted of the three presidents, did not meet after 1971 because of Tanzanian President Nyerere’s refusal to meet with Uganda’s President Amin. In 1972, exchange controls and import restrictions were imposed on intra-Community trade. They diminished the effectiveness of the Common Market and led to the dissolution of the common monetary area. In 1973, the restrictions imposed by member states on interstate transfers of funds led to financial crises in the four corporations. As a result, the corporations’ operations began to falter, and this led to delays in meeting their external obligations.

In 1975, the three member countries agreed on a review of the 1967 Treaty. A commission was set up in November to make recommendations regarding the future of the Community, but adjourned after a year without agreement. Forces leading to disintegration in the Community then intensified, and obstructions to the efficient administration of the EAC at the regional level became worse. In February 1977, Tanzania closed its border with Kenya, which effectively eliminated all legal trade between Kenya and Tanzania and ended the East African Common Market. In June 1977 member countries failed to agree on the General Fund Services budget; Kenya refused to commit any funds to finance the 1977/78 budget and announced its withdrawal. After the failure to keep afloat the General Fund Services, the EAC ceased to operate in July 1977.

Ideological differences

The political troubles which were to lead to the disintegration of the East African Community were already plaguing the three states before the Community was established. The Treaty had been signed to retain and strengthen existing ties at a time when East Africa still seemed a natural unit, a carry-over from the colonial period, and the member countries were concerned that they were pulling apart after independence. But apart from problems connected with state sovereignty, there were major clashes of ideology. To a significant extent, the problems of the Community arose from its basic framework as a laissez-faire common market. It assumed that many of the advantages of integration would come from free trade, that much of the economic activity would be undertaken by private enterprises, and that enough financial liquidity would be available to pay for the transfer of goods entering interstate trade. But many of these assumptions proved to be unjustified, even by the time the Treaty was concluded.

The Arusha Declaration in Tanzania was adopted in 1967 before the Treaty came into effect. In this statement the ruling party, the Tanganyika African National Union, set out its policy on socialism and self-reliance. The Tanzanian Government attempted to bring the economy increasingly under state ownership and control; the extensive public sector, for instance, was increasingly regulated by central planning.

The effects of the different ideological orientations of the partner states affected trade relations and the general scheme of investments and industrial policies—the situation in Tanzania contrasting with a clear emphasis in Kenya on private, largely foreign, investments. Ideological differences influenced the foreign policies of the countries and, in turn, their relations among themselves. Tanzania developed closer relations with Zambia and Mozambique, Uganda with Zaϊre, and, until the coup in 1974, Kenya looked to Ethiopia for joint initiatives. Tanzania’s construction of the railway to Zambia outside the framework of the East African railways system is said to have caused resentment among its partners, particularly the financing arrangement which required purchase of material inputs from China, including many supplies which had previously been provided by Kenyan firms.

The major factor contributing to the breakdown of the Community was the deadlock in the Community’s highest body, the East African Authority. The Authority, which consisted of the Presidents of the three member states, took all the key political and economic decisions necessary for the Community’s operations. These decisions had to be unanimous. When the EAC was formed, the members were Presidents Kenyatta, Obote, and Nyerere, who met periodically. Whenever the EAC was under strain, the presence of the East African Authority provided a forum for final appeal and resolution of difficult problems. Many of the frictions depended on a favorable political atmosphere for their successful compromise. In 1971 Idi Amin ousted Milton Obote in Uganda. President Nyerere then announced that he would not sit at the same table as President Amin; the East African Authority never met again. The absence of the East African Authority meetings created a vacuum in the decision-making functions in the EAC, and the Community became more and more exposed to the centrifugal influence of national interests.

Regional integration in East Africa: a timetable of events

1917—Kenya and Uganda formed a customs union.

1919—The East African Currency Board was established.

1921—Tanganyika joined the Currency Board.

1922—The common external tariff of the customs union was accepted by Tanganyika.

1923—Tariffs between Tanganyika and the other two countries were eliminated.

1926—The Governors’ Conference was established to review possibilities of common services.

1927—Duty-free transfer of imported goods was established between the countries.

1936—The East African shilling was introduced.

1937—Income tax was introduced in Kenya.

1940—Income tax was extended to Tanganyika and Uganda.

—The East African Income Tax Board was established to handle the collection of the tax.

1948—The East African High Commission was formed to operate common services.

1949—The customs administration operated by Kenya and Uganda was extended to Tanganyika.

1961—The East African Common Services Organization replaced the East African High Commission.

—Tanganyika became independent as Tanzania (with the addition of Zanzibar).

—Talks on an East African federation started.

1963—Kenya and Uganda became independent.

1964—The Kampala Agreement was concluded to reduce trade imbalance (never implemented).

1965—Tanzania and Uganda imposed restrictions on intra-East African trade.

1966—The East African Currency Board was abolished as each country established its own central bank.

—The East African shilling was replaced at par by national currencies.

1967—The Treaty for East African Cooperation established the East African Community and the East African Common Market.

—The East African Development Bank was established in Kampala.

1971—The East African Authority ceased meeting.

1972—Exchange controls and import restrictions were imposed among the three countries.

1973—The East African Corporations started facing financial crises caused by restrictions imposed on interstate transfer of funds.

1975—A commission set up to review the Treaty adjourned a year later with no recommendations.

1976—EAC workers in the General Fund Services (excluding those in Arusha) were asked to work in their own countries.

—EAAC workers from Tanzania and Uganda returned home.

—The headquarters of the Harbours, Railways, and Telecommunications Corporations broke up.

—The East African Railways came to an end.

—Tanzania and Kenya set up autonomous harbor services.

1977—Kenya established its own railway system.

—The East African Airways Corporation collapsed.

—Tanzania closed borders with Kenya which ended the Common Market.

—Member countries could not agree on the General Fund Services budget.

—Kenya announced its withdrawal and took over all EAC services operating in Kenya.

—The EAC ceased operations.

Unequal development

In the economic field, the smooth running of the EAC was marred by problems arising from dissimilarities among the partners in the level of development, from trade imbalances, and from an inability to agree on a fair distribution of the costs and benefits. It also proved difficult to harmonize economic policies in general.

According to appraisals by several study groups—the East African Royal Commission, the Raismann Commission, and the Phillips Commission—the Common Market in East Africa did lead to more rapid growth in the region than would have been achieved had the East African governments pursued the same economic policies in isolation. But the danger with integration is that while it might increase overall productivity and the total real income of the area, it might have adverse effects upon the distribution of that income and might intensify inequalities. Regions where economic activity is expanding most rapidly could draw off labor and capital from other areas: the growing regions would be favored at the expense of other areas.

This in fact happened in East Africa: economic growth in Kenya was more rapid than in Tanzania and Uganda. Between 1967 and 1977, the average annual growth in real gross domestic product was 7.5 per cent in Kenya and 6.3 per cent and 2.0 per cent in Tanzania and Uganda, respectively. Furthermore, new enterprises gravitated to Kenya, where an industrial base with all its requisite facilities existed. The problem was intensified because Tanzania and Uganda paid higher prices for imports of manufactures from Kenya than they would have had they bought them from countries outside the Community—thereby subsidizing Kenya’s industries. As a result of integration, all three countries lost customs revenues. However, as a result of rising incomes in Kenya, the yields from income tax and excise duties increased. The results on balance were favorable for Kenya and the growth of the gap in the levels of income and economic development between Kenya and the other two member countries became cumulative and self-reinforcing.

The Kenyan economy continued to expand under the impulse of foreign investment, whereas industries in Tanzania and Uganda were beset by political dissension, high costs, inadequate demand, distribution difficulties, and managerial problems. The EAC failed to compensate for this concentration of benefits on Kenya. The EADB’s disbursement of funds was quite different from the allocations initially envisaged. Of the total amount of loan disbursements, Tanzania received 39.2 per cent, Kenya 34.5 per cent, and Uganda 26.3 per cent, compared with initially required allocations of 38.75 per cent each to Tanzania and Uganda and 22.5 per cent to Kenya. As a result, unequal benefits, derived from unequal growth rates in the manufacturing sectors of the three countries, created tensions in the operations of the Community.

Trade imbalance

According to classical trade theory, eliminating restrictions on intra-Community trade and establishing uniform tariffs and other controls over trade with the countries outside the Community will lead to the substitution of commodities of partner countries for domestic and foreign goods. This will lead to the creation and diversion of trade. Trade will be created when members of the union produce the same range of products but differ in their comparative advantage for these products. After the union is formed, competition will lead to specialization; the member economies will become complementary—each country will produce and sell to the other members products in which it has comparative advantage. Trade will be diverted from a foreign country to a member country as demand shifts from low-cost producers outside the union to high-cost producers within the union. The smaller the existing external trade with nonunion members, the smaller the trade diversion effect will be. Whether integration is beneficial or not depends on the balance between the trade creation and trade diversion effects of the arrangement.

Even on a theoretical basis—assuming that the political impediments were surmountable—there appear to be few grounds for expecting benefits from a customs union between Tanzania and Uganda. The union could not create trade, as trade between the two countries had not primarily been impeded by tariffs but by the structure of their economies. Both countries produced the same range of primary products; they were at a low level of industrial development and, hence, highly dependent on trade with industrial countries. Kenya exported over 70 per cent of its goods to countries outside the Community (see Table 1), and Tanzania and Uganda exported about 90 per cent to these countries. About 90 per cent of Kenya’s imports and 85 per cent of Tanzania’s imports were from outside the EAC. Uganda’s imports from the Community as a percentage of its total imports were higher than those of the other two member states, and this ratio increased continuously, reaching about 45 per cent in 1976.

Table 1Significance of intra-Community trade, 1961–76
Exports to the Community as a percentage of total exports ofImports from the Community as a percentage of total imports of
KenyaTanzaniaUgandaKenyaTanzaniaUganda
196127.64.214.39.221.121.8
196227.74.314.89.522.722.7
196328.05.013.111.123.524.3
196432:66.712.713.026.329.3
196536.18.313.211.624.029.0
196632.04.913.59.119.427.7
196730.84.616.111.317.027.4
196829.55.313.99.716.525.5
196929.65.911.49.217.027.0
197028.98.212.010.114.729.6
197130.210.39.58.011.423.4
197225.65.88.07.110.830.3
197328.76.64.85.89.839.8
197427.97.63.33.87.842.7
197525.86.31.52.97.138.0
197619.36.30.53.212.544.6
Sources: National sources and Fund documents, 1965–77.
Sources: National sources and Fund documents, 1965–77.

It is true that the three countries were competitive in the sense that they produced the same range of primary products, but they could hardly ever be complementary because their economies had a low level of industrial development. The removal of trade barriers could not have led, and did not lead, to substantial changes in patterns of production. Furthermore, even if this had been possible economically, it would not have been politically feasible, as the development plans of the member countries were totally uncoordinated. Agriculture was an area where potential for coordination existed: but it was excluded from the Common Market and agricultural prices were matters of national political sensitivity.

The main difficulty in the East African customs union, however, arose because the market tended to create and intensify inequalities. The geographical pattern of intra-Community trade was unchanged by the union. Kenya’s exports were divided almost evenly between Tanzania and Uganda, whereas both Tanzania and Uganda traded mostly with Kenya. Trade between Tanzania and Uganda was limited because their economies were heavily dependent on the import of manufactures. Kenya had continuously large surpluses in its trade with Tanzania and Uganda, while the latter had persistent deficits. The deficits in intra-Community trade in current prices for Tanzania rose from T Sh 186 million in 1961 to T Sh 414 million in 1976, and from U Sh 12 million in 1961 to U Sh 6ll million in 1976 for Uganda. Meanwhile, Kenya’s surplus increased from K Sh 200 million in 1961 to K Sh 1,068 million in 1976.

The composition of intra-Community trade has, in large part, been determined by the relative economic development of the member countries. Most of Kenya’s exports to Uganda and Tanzania consisted of manufactures. On the other hand, Tanzania’s and Uganda’s exports consisted mainly of nonmanufactured goods. The increased deficits experienced by both Tanzania and Uganda while the EAC was in operation were almost entirely attributable to their growing net importation of manufactured goods from Kenya. Agricultural exports from Tanzania and Uganda did not grow pari passu with their imports of manufactures.

Besides dominating the intra-Community trade, Kenya’s trade share also increased continuously (see Table 2). In 1961, Kenya’s exports to Tanzania and Uganda represented 64 per cent of total intra-Community trade. By 1976 this share had risen to 83 per cent. Tanzania’s exports to Kenya and Uganda remained relatively small, but its share in intra-Community exports increased to 16 per cent in 1976 from about 9 per cent in 1961. In contrast, Uganda’s relative share in total exports declined tremendously. Furthermore, the absolute value of its exports also declined continuously after 1970, bringing its share in community exports to about 1 per cent in 1976.

Table 2Distribution of infra-Community trade, 1961–76(In per cent)
ExportsImports
KenyaTanzaniaUgandaKenyaTanzaniaUganda
196163.68.827.628.042.429.6
196264.59.026.527.443.828.8
196363.010.826.229.239.328.8
196463.712.623.728.038.633.4
196565.013.421.625.937.236.9
196665.910.523.625.437.237.4
196761.49.429.231.532.236.3
196863.311.025.729.035.635.4
196966.212.021.827.333.739.0
197061.814.523.731.432.935.7
197164.518.716.830.429.640.0
197269.014.017.028.534.836.7
197379.513.07.525.232.042.8
197481.713.64.720.629.749.7
197585.812.22.017.833.848.3
197683.115.91.016.942.940.2
Sources: National sources and Fund documents, 1965–77.
Sources: National sources and Fund documents, 1965–77.

The economic characteristics of these countries, therefore, were such that the benefits of a customs union were not distributed evenly among them. Owing to their different levels of economic development, market mechanisms tended to increase existing inequalities. Benefits from the Community were unequally distributed among the member states: Kenya benefited most from the union, particularly from the enlarged market for its developing manufacturing industries. Tanzania and Uganda found themselves losing revenues from import duties in the interest of development of industry in Kenya. This polarization of benefits in favor of Kenya was the greatest obstacle to the viability of the customs union. In addition, political strains between Uganda and Tanzania, differences in social philosophies between Tanzania and Kenya, and state sovereignty accentuated the economic problems confronting the EAC.

Other Resources Citing This Publication