Front Matter Page
The African Department
Front Matter Page
Copyright ©2016
International Monetary Fund
Catalogitig-iti-Publicatioti Data
Names: Alper, C. Emre | Chen, Wenjie, Professor of international business. | Dridi, Jemma. | Joly, Hervé, 1966- | Yang, Fan, 1951-
Title: A work in progress: integrating markets for goods, labor, and capital in the east African community / C. Emre Alper, Wenjie Chen, Jemma Dridi, Hervé Joly, and Fan Yang.
Description: Washington, DC : The African Department, International Monetary Fund, 2016.
Identifiers: ISBN 9781475560350 (paper)
Subjects: LCSH: Africa, East — Economic integration. | Economic development – Africa, East. | East African Community.
Classification: LCC HC860.A44 2016
Publication orders may be placed online, by fax, or through the mail:
International Monetary Fund, Publication Services
P.O. Box 92780, Washington, DC 20090, U.S.A.
Tel. (202) 623-7430 Fax: (202) 623-7201
E-mail: publications@imf.org
Contents
Contributors
Overview
1. Analysis of Merchandise Trade Integration in the EAC
Evolution of Tariffs and Imports of EAC Countries since the Implementation of the CU
Evolution of Intra-EAC Trade as a Share of Total Trade
Trade Integration in the EAC Compared with Other Regions
2. Labor Migration and Remittances in the EAC
Progress in Eliminating Legislative Restrictions to the Movement of Workers in the EAC
Recent Migration and Remittances Trends in the EAC
3. Financial Integration in the EAC
Progress in Eliminating Legislative Restrictions in EAC Capital Markets
Openness to Capital Flows in the EAC: A Comparative Perspective
An Empirical Assessment of the CIP Condition in Kenya, Tanzania, and Uganda
An Assessment of Financial Market Convergence in the EAC
Appendices
References
Appendix I. A Snapshot of Financial Markets in the EAC
Appendix II. Detailed Information on Migration and Remittance Flow
Appendix III. Capital Account Restrictions: Country-Specific Details
Appendix IV. An Analysis of Covered Interest Parity Condition for the EAC
Appendix V. Application of Convergence Concepts in the EAC
Boxes
Nondeliverable Currency Forward (NDF) Markets
Figures
1. Import by EAC Countries from the Rest of the World (ROW) and Tariff Rates
2. EAC Imports from the ROW by End-Use
3. EAC Imports from the ROW by Intermediate Inputs
4. Imports by EAC Country from EAC Country and Tariff Rates
5. EAC Imports from EAC by End-Use
6. EAC Imports from EAC by Intermediate Inputs
7. EAC Import Shares by Region
8. EAC Import Shares by Origin
9. EAC Export Shares by Region
10. EAC Export Shares by Destination
11. Emigrants from and Immigrants in the EAC
12. Emigration Rate of Tertiary Educated, 2000
13. Migration in the EAC
14. Source of Remittance Inflows (Net)
15. Emigration and Remittances
16. Financial Account Openness
17. Capital Account Restrictions
A4.1. Kenya, Tanzania, Uganda, and South Africa: Spot and NDF Exchange Rates (2011–15)
A4.2. Kenya: Actual (NDF) and Implied Forward Exchange Rates (2011–15)
A4.3. Tanzania: Actual (NDF) and Implied Forward Exchange Rates (2011–15)
A4.4. Uganda: Actual (NDF) and Implied Forward Exchange Rates (2011–15)
A4.5. South Africa: Actual (NDF) and Implied Forward Exchange Rates (2011–15)
A5.1. Various EAC Financial Returns Data Used in Convergence Analysis
A5.2. Sigma-Convergence Analysis for the EAC Countries
Tables
1. Trade Balance with EAC, Sub-Saharan Africa, and the World
2. Gravity Estimates
3. Estimated Total Migration from, to, and within EAC
4. Emigrants from the EAC by Country of Destination
5. Immigrants to the EAC by Country of Origin
6. Median Absolute CIP Deviations for Kenya, Uganda, and South Africa
A1.1. Stock Market in Kenya, Rwanda, Tanzania, and Uganda
A1.2. Holders of Government Domestic Debt in the EAC
A1.3. Domestic Debt in Burundi, Kenya, Rwanda, Tanzania, and Uganda
A2.1. EAC Migration Matrix, 2010 and 2013
A2.2. Remittances per Migrant, 2010 and 2013
A2.3. EAC: Remittances by Country of Origin, 2010 and 2013
A2.4. Intra-EAC Remittances by Country of Origin, 2010 and 2013
A2.5. Total Population in EAC Countries, 2000–14
A4.1 Summary Statistics of CIP Deviations Relative to the United States
A4.2 Summary Statistics of Absolute CIP Deviations Relative to the United States
A4.3 Summary Statistics of Absolute CIP Deviations Relative to the EAC
A5.1 Pooled and Individual Beta Coefficients of EAC Countries’ Selected Asset Yields (2011–15)
Contributors
The paper was prepared by C. Emre Alper, Wenjie Chen, Jemma Dridi, Hervé Joly (who led the preparation of this paper), and Fan Yang. The authors would like to thank Roger Nord, David Robinson, Axel Schimmelpfennig, the AFR Research Advisory Group members (Aidar Abdychev and Farayi Gwenhamo), and Dr. Pantaleo Kessy (EAC Secretariat) for useful comments and suggestions. They thank Francine Nyankiye for excellent research assistance. All remaining errors are the authors’ own.
Overview
The East African Community (EAC) aims to deepen cooperation among its member states in the political, economic, and social domains. The EAC was formally established by Kenya, Tanzania, and Uganda in 2000; Burundi and Rwanda subsequently joined in 2007.1 Economic and financial integration in the EAC has been supported by several initiatives, including joint protocols and common regulatory frameworks. It is likely to deepen further as new initiatives (for example, regional infrastructure projects) get under way. Three main protocols have underpinned the process of integration: the customs union or CU (C2005), common market or CM (2010)2, and monetary union protocol (2013). In principle, EAC member countries have pursued economic integration not only for its economic benefits but also as a stepping stone to political integration—the ultimate objective.3
The EAC as a whole is among the fastest-growing regions, but there are significant differences across countries. Growth has been strong for many years in most member countries, allowing for a significant increase in living standards.4 The situation in Burundi, however, has been less favorable, leading to large differences in per capita income across member countries. While agriculture still represents a large share of economic output and exports in all EAC countries, there are significant differences in economic structures. Kenya, Tanzania, and Uganda have had more diversified exports in recent years, for instance (see Drummond, Wajid, and Williams 2015). Kenya has a much more developed financial sector than the other EAC countries (see Appendix I). All countries in the EAC are net commodities importers, but a number of them face the prospect of becoming significant hydrocarbon producers.
This paper assesses the extent of economic and financial integration along a number of dimensions and, where possible, whether integration has increased in the wake of the major regional integration policy milestones. Since the purpose of the common market is to have free movement of goods, capital, and people, the paper focuses on these broad categories. Data availability and quality, however, are often a major limitation. For instance, there is no direct and comprehensive measure of capital flows between EAC countries, and data on labor flows are very scarce. Therefore, the objective of this paper is not to be comprehensive, but to propose a number of stylized facts and quantitative approaches allowing for at least a partial assessment.
Trade integration does not seem to have increased significantly since the implementation of the CU. External tariff rates in EAC countries have decreased significantly between 2000 and 2014, with the average external tariff rates converging to about 12–14 percent, while all EAC member states have reached zero effective tariff rates for intra-EAC trade. However, while intra-EAC trade has grown substantially in nominal terms, the share of intra-EAC imports in total imports has not increased since the implementation of the CU and remains low (single digit). On the export side, intra-EAC trade represents a higher share of total exports (about 20 percent) because the value of total exports is much lower than that of total imports. Gravity equation estimates show that the intensity of bilateral trade within the EAC lags behind that within Asia, America, and Europe even after controlling for size, level of development, culture, and distance. However, intra-EAC trade is more intensive than in any other region in sub-Saharan African, except for the West African Economic and Monetary Union (WAEMU) area.
Labor mobility in the EAC does not seem to have increased significantly either with the implementation of the CM. The analysis of available data on bilateral EAC migration and remittances in this paper shows that (1) significant migration flows occur in EAC countries, (2) these flows are to a significant extent intra-EAC flows, (3) they are more significant for the smaller countries, (4) intra-EAC migration flows do not seem to have increased in recent years, and (5) intra-EAC remittances are low and do not appear to have increased meaningfully following the implementation of the CM.
Financial market integration remains limited, too. There still exist many legislative restrictions on the free movement of capital within the EAC that inhibit or make entry into the market expensive. While Uganda, Kenya, and more recently Rwanda have achieved a higher degree of capital account openness in the EAC, Tanzania had restrictions on all assets until recently. In the absence of data on intra-EAC capital flows, the application of the beta-convergence and sigma-convergence concepts to financial market returns for various maturities provides an indirect (and imperfect) way to assess financial integration. Empirical estimates point to convergence in short-term market returns within the EAC. Yet, there is no evidence for such convergence in longer-maturity instruments.
Overall, the implementation of the CU and CM do not seem to have led to a major increase in economic and financial integration in the EAC. This paper does not elaborate on the reasons for this empirical result, which could reflect a range of very different issues. For instance, there could be measurement problems, such as the possible misclassification of transit trade or underreporting of cross-border trade in the EAC, which could affect significantly the quality of available data.5 There could also be exceptional factors at play, such as high hydrocarbon prices during a large part of the period under review or infrastructure investment efforts, both having a large impact on imports from the rest of the world, that could distort the evolution of certain ratios and lead to an underappreciation of the development of intra-EAC trade. Another factor could be the time needed for policies to change existing patterns, and the limited scope of the first phase of CM implementation. However, a number of existing studies have pointed to the incomplete implementation of the CU and CM protocols. For instance, there are still many nontariff barriers affecting intra-EAC trade. The comprehensive assessments (“scorecards”) conducted in 2013–14 and 2015–16 by the EAC Secretariat and the World Bank note that laws and regulations of the EAC countries still present barriers to increased cross-border trade and foreign direct investment into the region (EAC Secretariat 2014, 2016). Progress to eliminate restrictions has been slow, and some countries have introduced new measures despite their obligations under the CM. These factors have likely slowed the development of the common market.