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Inter-state economic disparities stand in the way for common market

By Abbey K.Semuwemba

There are numerous coalitions, organisations and federations that have been formed regionally and worldwide. Some have worked and others have failed. The difference with the East Africa Federation is that some states are going through serious economic and political reformation particularly Rwanda and Kenya. Uganda appears still politically immature, but is that enough reason not to promote this federation? I don’t think so. An East African Federation is good. Uganda’s problems may never be removed by Ugandans alone. We need a partner to help us fight these impediments.

Having said that, I also support a Uganda federation within an East African federation. This will be a bonus if we achieve the Uganda federation first before the East African federation. Buganda and some parts of Uganda are rightly asking for federalism within Uganda. Like Dr Kizza Besigye explained one time on radio, federalism was demanded by majority of Ugandans and therefore it’s not a Buganda issue alone.

The most important question is, have we learnt any lessons from the East African Community collapse in the 1970s? The East African Community collapsed mainly because of the economics involved. If the current architects can create good economic policies, the East African federation will be a rock for all the member states. Therefore, we need to look at why the East African Common Market or the Community collapsed in and whether those mistakes have been corrected. Otherwise we might be pursuing a futile project.

First, the common market was founded in 1917 and collapsed in 1977. This idea was started by the British colonial government to serve her economic interests and those of the British settlers in Kenya. The aim was to create a free and integrated market, sheltered by selective high tariff walls to simultaneously encourage Kenyan settler- businessmen and expand market for foreign exports into East Africa.

This meant that the gains from the Customs Union were either not reaped or the distribution between partner states was not ‘equitable’. When Uganda, Kenya and Tanganyika got independence, the distribution issue caused instability and led to the collapse of the common market. Will Kenya not again be the top beneficiary at the expense of other partner states?

Secondly, the federation is going ahead without assessment the industrial strengths of the partner states, yet this was a major factor in the collapse of the first East African Community.

Kenya, like before, has an advanced manufacturing and service sector. This industrial imbalance indicates lack of equity in the distribution of integration benefits. These mistakes were neither corrected by the ‘Raisman Commission’ in 1960 nor by the Kampala/Mbale Agreement in 1964/5. The latter was never implemented because the Kenya parliament refused to ratify it and the proposed committee of industrial experts was never set up.

After the failure of the Kampala Agreement, the cooperation became so shaky that the Philip Commission was appointed to save the common market. This culminated in the treaty that established an East African Community consisting of a common market and a wide range of common services. Again in this treaty, most activities had their headquarters in Kenya. Have we taken note of this? Is Kenya going to continue playing the role of the ‘boss’ as it was before?

Let’s take an example of the East Africa Development Bank, established with the aim of promoting balanced industrial development. A differential investment formula was proposed. It was then enjoined on the bank so that it should have loaned, guaranteed or invested over the consecutive five years slightly more than 38 percent of its funds to Uganda and Tanzania and the remaining 22 percent or so to Kenya. This failed for some reasons. Have they corrected them?

However, I’m happy that the architects of the East African Federation are rectifying some of the mistakes that led to the collapse of the first federation on July 1, 1977. For instance, having a single currency among member states by 2012 is a step in the right direction. It will somehow lead to balanced development among member states assuming other factors remain constant. The last monetary policy developed by the 1967 East African Community that involved unified exchange rates led to a situation where the Ugandans and Tanzanians preferred to keep their money in Kenyan currency because Kenya had more industrial goods for consumption. This made the Kenyan shilling a stronger currency, which sparked the creation of a black market. The Kenyan currency continued growing stronger while those of Uganda and Tanzania were becoming weaker. This eventually affected the working of the East African Community cooperation by creating the problem of ‘inter-territorial transfer of funds.’ The policy also led to a decline in reserve positions of both Uganda and Tanzania because of currency flights from these two countries, thus exasperating the need for further exchange controls.

Chapter VII, article 24 of the 1967 Treaty for East African Cooperation, provided for exchange rate harmonisation among the three partner states. Harmonised exchange rate means “the relative per values of the currencies of the member states of the common market remain irrevocably fixed while their absolute par values when changed would change in the same proportion.” The three currencies were to be exchanged without restriction at the IMF parity of shilling 1U = sh1K = sh1T. The rate of inflation was assumed to be equal since the absence of equal rates of inflation would automatically mean that a unified exchange rate situation no longer stood. The three currencies for purposes of parities vis a vis the outside were tied at different times to foreign currencies (British pound, US dollar) and to the IMF special drawing rights.

Considering that the three countries had different economic problems and strategies for solving those problems, the policy of exchange rate unification presents real problems in theory as it did in practice in the past. For example, On February 7, 1967, Tanzanian President Julius Nyerere issued a statement of party principles called the Arusha Declaration which called for nationalisation of banks and large enterprises in agriculture, manufacturing, construction and commerce. In May, 1970, Uganda also announced a leftist policy at Nakivubo. These two policies created uncertainty and hurt business confidence in these countries. Both countries imposed exchange control policies to prevent capital flight. This situation created differences in the three currencies and the policy of unified exchange rates collapsed and contributed to the ultimate fiasco of the East African Community.

Abbey is a Ugandan living in the UK

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