Last year the presidents of Kenya, Tanzania, Rwanda, Uganda and Burundi who are also leaders of the East African Community (EAC) signed into effect a common market protocol which will see goods, services and labor flow through the region unhampered.
The region is regularizing the customs union, which allows for a common external tariff for goods coming into the EAC, which was a necessary precursor to the common market.
It is hoped that the deal will lead to a greater economic clout for the region. The common market is due to come into effect by July 2010. The East African Community was launched ten years ago and has a population of 120 million.
What does this mean for the region?
This agreement will make the region even more attractive to foreign investors. In today’s world a landlocked country like Burundi with a GDP of $1bn and a population of 3 million is not attractive to an investor. However, a Burundi that is part of the East African Common market with market access to a combined population of 120 million, a combined GDP of $79bn, a service sector that serves as a hub for the region, lower barriers to trade etc. is very attractive to any investor.
The goal of this deal is that movement of factors of production, goods and services between members is as easy as within them. This will guarantee efficient resource use which will attract investment and boost economic growth.
How the deal might work!
Assume there are two countries A and B; Country A, is a labor abundant and capital deficient country, Country B, is a capital abundant and labor deficient country. Country A has a developed agricultural sector and underdeveloped computer manufacturing sector because labor is abundant and cheap and capital is scarce and expensive and vice versa for country B. Wages and the price of goods are expensive in country A’s computer manufacturing sector because of scarcity of capital. Wages and the price of goods are also expensive in country B’s textile sector because of scarcity of labor.
When both countries create a common market what will happen is that competitive forces will decrease wages and prices in A’s computer manufacturing sector. Labor will migrate from B’s computer industry to A’s where they are sure get higher wages this migration will continue until wages and salaries in A’s computer manufacturing sector decreases or equalizes with B’s at this point worker migration stops. This same migration pattern will also happen in both countries textiles sector. The common market through efficient resource allocation has achieved two things:
Kenya with its more developed finance base means that it might be a more efficient and cheaper provider of such services relative other countries in the region. What this common market will do is expose Rwanda, Burundi, Uganda, and Tanzania to competition from Kenya’s more efficient finance sector. This will attract labor from financial sectors from every corner of east Africa to Nairobi which now has an expanded market – serving the region. Eventually Nairobi will serve as a hub for finance for the region because of her ability to provide efficient and low cost services. Every country in the region will have to go through this process depending on what sectors of her economy is more developed when compared to the others.
For Tanzania it could be mining, for Uganda it could be agriculture, for Rwanda service etc. For a region whose countries has various sectors (agriculture, mining, service and industry) of its economies at different stages of development greater efficiency in resource allocation via the common market is sure to boost the maturity of these sectors and raise living standards in the long run.
