Lessons from the Eurozone & why EAC is the way forward

As the 100 days of the commemoration of the 1994 Genocide against the Tutsi draw to a close and much as we have got to keep the memory alive, as a nation, we are also required to ponder the direction of our future. Come July 1, 2011, Rwanda will celebrate a concrete step into our future; almost four years as members of the East African Community. Our individual country heritage aside, we need to focus on the way forward, expend and expand our vision into the mainstream global economy. 
EAC can export more than 10 percent to the AGOA market. (File Photo)
EAC can export more than 10 percent to the AGOA market. (File Photo)

As the 100 days of the commemoration of the 1994 Genocide against the Tutsi draw to a close and much as we have got to keep the memory alive, as a nation, we are also required to ponder the direction of our future. Come July 1, 2011, Rwanda will celebrate a concrete step into our future; almost four years as members of the East African Community. Our individual country heritage aside, we need to focus on the way forward, expend and expand our vision into the mainstream global economy. 

Gleaning the following lessons learnt from the Eurozone experience and moving forward with the regional bloc’s reality is one way to ensure that we are on the same page with our international partners.

Greece’s Debt Crisis:

After Greece and Ireland, Portugal is the third EU member that is facing the possibility of a financial bailout. Bailouts become necessary when economies of member states are not able to sustain their expenditure against their income or, the performance of their respective economies. It is basically a case where annual income or GDP is consistently less than necessary expenditure. For instance, production of the Greeks continued lagging behind and the Greek government kept subsidizing its budget (hence consumption) by borrowing against its reserves until the reserves ran out and the government could no longer afford to continue running.  

According to The Economist, May 12 2011, in an article explaining the imminent stand-off between the European Central Bank (ECB) and Germany –the largest contributor and player in the Eurozone, even the bailout anticipated turn-around is not happening. ECB’s bailout plan relied heavily on Greece’s ability to tap into private capital markets by 2012.  However, both the Greek government and it’s rescuers (ECB, IMF- yes IMF lends money to developed countries too) agree that the plan has no hope – liken it to the Government of Rwanda selling 20 percent of its Banque de Kigali (BK) shares and nobody’s willing to buy.  

There remains about three alternatives for Greece; they either get more funding from ECB to keep their economy afloat, a very short-term solution or restructure its debt,  quite long-term as it would probably mean slightly undervaluing the country’s current assets to encourage more capital investments while ensuring profitable future returns should the economy pick up. There are several technical solutions that ‘serious’ economists have in mind to implement that option.

The third option is unthinkable but plausible; kick Greece out of the Eurozone, this is an option ECB’s President, Mr. Jean Claude Trichet would not want on his venerable CV. Daunting as the task may be, he will do everything in his power to save Greece and the others.

In effect, for all intents and purposes, Greece would not have survived this long without the Eurozone which, by the way, has been in effect for more than a decade. International and/ or regional co-operation blocs like the East African Community (EAC) are inherently the way forward. A regional approach to security, economic, environmental and of course, fiscal concerns to mention a few, fosters protracted, long-term solutions that catalyze growth and development.

Economies of scale

Enough said. High school economics class belabored this point and rusty as my high school memory maybe, I recall that due to an expansion in output, the average cost per unit produced reduces. Much as it was a microeconomics tenet, the larger picture in this context is that economies of scale justify free trade policies.  For instance, if I want to invest and manufacture 500K TVs per month, the Rwanda market of about 10 million people would be too small – I could potentially supply every Rwandan with a TV within a year. However, if I have access to supply over 135 million East Africans, these economies of scale would tip in favor of making such an investment.

Perhaps the biggest advantage of the EAC is its size. It is not too big as to be administratively ungainly but it’s also not too small as to be economically unviable. In a totally unrelated analogy, we can draw from how manageable Rwanda Inc. has proven to be as compared to Kenya Enterprises Unlimited, despite remarkable growth in both countries, the World Bank Doing Business report took notice of Rwanda largely because, I believe, the impact of the reforms is more visible and ascertainable in a smaller economy thus, the EAC would have an opportune chance to exponentially shine in comparison to other regional blocs worldwide.

Noteworthy, is the fundamental backbone for regional blocs- large populations.

According to Jim O’Neil, a global economist at Goldman Sachs, the underlying common factor for the emerging global economies like BRIC (Brazil, Russia, India and China) countries is their population. Those four countries account for more than 40 percent of the world’s population. The Eurozone has about 500 million citizens compared to the almost 140 million East Africans. With Rwanda as the most densely populated country in Africa and Uganda having the highest fertility rates as well, side effects notwithstanding, one can scientifically arrive at the conclusion that “the population factor” is on the EAC’s side.

No more AID

Several people and causes have spoken and asked this question; how long is Africa going to be dependent on foreign Aid?

Rwanda’s President Paul Kagame, also the Entrepreneur President, is internationally known to advocate for the self-reliance of our nations; prominent journalist Andrew Mwenda took the stage on the high-profile TED Talks 2007 and decried his polemic stance against continued Aid to Africa; Dambisa Moyo, a Zambian Harvard, Oxford educated economist published “Dead Aid” claiming financial aid to Africa should stop within 10 years while at the same time attacking, quite mercilessly, the likes of Bono and other celebrities who take pictures with malnourished African kids and advocate for “the cause” – unsurprisingly these self-reliance advocates got immediate invitations to come to Rwanda and talk about their ideas; even the Christian groups – World Vision, Christian Aid, Catholic Relief Services and several evangelical missions are beginning to wonder when the proverbial “dry well” will fill with water.

Much more aid, suggests Prof. Paul Collier – Director, Centre for the Study of African Economies at Oxford , should be in non-cash form: in peacekeeping, security guarantees, trade privileges and governance.  Once civil society starts questioning motives, it is not long before policy makers start doing the same and the tone has changed at Davos, World Economic Forum and other such forums. This trend is not necessarily going to stop the flow of aid to Africa but its surely going to reduce and the little that comes our way will be more carefully watched or better still not given to the Governments per se but to accountable professional institutions – think Trademark East Africa. 

This paradigm shift particularly highlights the need for a vibrant East African Community in two ways; the first is that it is time for responsibly targeted aid relief with implementation being left to accountable and independent or supranational agencies; the second is that global economics depends not on the dictates and relative performance of individual countries but rather hinges on regional blocs generally cooperating to ensure systemic interdependent participation in the global market. With such notions fueling the decision-making of international players, the EAC has every opportunity to reap the fruits of their economic integration and outlive the supplicant role of foreign aid dependence.

EPAs, IST-Africa Initiative, AGOA, et cetera

Ever since the Cotonou Partnership Agreement (2000) until 2007 the European Union (EU) granted non-reciprocal trade preferences to African, Caribbean and Pacific (ACP) countries. This policy did not comply with the World Trade Organisation (WTO) principle of most-favoured treatment and was only temporarily covered by a WTO waiver which expired in December 2007. Partner countries are requested to open to some extent their markets to EU products in return for their access to EU markets. The long-term goal is quasi duty-free and quota-free market access on both sides and simplified rules of origin in the EU. However, the ACP countries (including EAC) have to open their markets to a smaller extent than the EU does (on average 80 percent within 15 years). Incredibly, these agreements date back even before 1975, while we cannot cry over spilt milk, this presents unprecedented lee-way for concerted efforts of the EAC.

On June 9th to 10th, 2011, Zambia hosted the 2011 African Growth and Opportunity Act (AGOA) Forum, the centerpiece of the United States government’s trade policy with Sub-Saharan Africa.  The 2011 Forum marked the 10th year that government officials, business leaders, and civil society from African countries and the United States convened to promote trade, business, and investment opportunities that sustain economic development in Africa.  The 2011 Forum’s theme is “Enhanced Trade Through Increased Competitiveness, Value Addition and Deeper Regional Integration.” 

These are just some of the many trade agreements that will soon eclipse financial aid. While we all fondly relate to Macy’s stores selling Rwandan baskets and Kenyan art pieces, the grim reality is bleaker. For instance, in the last 10 years that AGOA has been in effect, Sub-Saharan Africa (SSA) exports to the U.S have mainly comprised of a whopping 80 percent in fuel and petroleum products.
In 2010 alone, petroleum products continued to account for the largest portion of AGOA exports with a 91 percent share of overall AGOA exports. Where is the coffee, cotton, tea, sugar, textiles, pyrethrum or, horticulture (fresh flowers)? Where is the surplus of commodity markets flowing in the “land of milk and honey”? Surely we can export more than 10 percent to this AGOA market? 

Since these opportunities have been available for a while without significant performance by individual EAC countries, the EAC production base can be the next logical premise to maximize these opportunities with each partner state’s contribution enhancing our overall economic output.   

Doer transformation - turn us into doers

By joining the EAC, we open our borders to stiffer competition, higher standards, and more accountability. The results will show and EAC members have to work extra hard to keep up. Even though Eurozone members started with a relatively equal footing (equal opportunities, EU projects’ benefits, laws, infrastructure, etc), Germany’s exports are surprisingly almost equal to China’s ($1.2 trillion) while partners like Greece are struggling. We have to transform ourselves into doers and actually walk the talk, not being ‘all mouth and no trousers” as the British are wont to say. 

According to the Business Week East Africa, negotiations between the East African Community (EAC) and the European Union (EU) on the establishment of Economic Partnership Agreements (EPA) stalled due to disagreement on how to use a $3.48m grant from a Swedish agency- SIDA. The negotiations are aimed at promoting regional integration, economic cooperation and good governance in the EAC and fostering the structural transformation of EAC economies, but most importantly they contain market access offers made by both the EAC and EC to each other.

The East African Legislative Assembly(EALA) stalled the funding arguing that, “… funding from SIDA would not only compromise the negotiations to the partner states’ detriment but would as well prejudice and weaken any stronger stance the latter may adopt on the negotiations.” It is a known fact, that when a conman buys the lunch and pays for the cab to a meeting, chances are that his scheme will succeed. I am not equating SIDA to the conman, but I am inclined to agree with the august EALA – it would make it impermissibly hard to ignore the desires of the agency that is bankrolling all the “negotiations”.

Since East Africa has laid down a road-map in public – promising to transform accordingly – we are left with no choice but to become “doers”. As a solution, the EALA recommended to a Council of Ministers charged with these negotiations – that met recently in Kigali, Rwanda – to directly allocate funding from their national budgets. The Council deliberated and told the EALA to reconsider the SIDA grant. Now, much as it may be too early to start refusing financial aid, if we want to become major players in our integral future, our transformation will inevitably turn us into doers and financing such obviously important negotiations by ourselves should no longer be subject to debate.

“We need to stop yapping with the puppies and start barking with the dogs,” is a gloriously brave saying.
A case in point, are the recent revelations regarding the proposed railway link from Mombasa to Kampala, which was jeopardized (well almost) by a memorandum of understanding signed between the Chinese and then Kenyan minister of transport. The Chinese promised to do a “free” feasibility study for the Kenyan part only; coupled with a condition that if adopted the expensive contract would be awarded to the China Roads and Bridge Corporation. The Kenyan government unbelievably gave the Chinese feasibility surveyors the go-ahead and gave the red light to an independent Italian firm that had been jointly selected by both countries.

The Kenya Railway Corporation (KRC) soberly advised the government against going with the Chinese. The KRC also sensibly pointed out that the proposal by China Roads was too expensive and that standard gauge railway line on the Northern corridor can only be feasible if it is approached regionally by looking at traffic to Uganda, Rwanda, Burundi and Eastern Congo.

I honestly think it would not require a high school diploma to see the folly of such an option. The only thing that makes sense for a railway project is to put into consideration the regional impact even if it was an individual country’s initiative. In line with the “doer” mentality, our leaders would rather be grappling with ensuring level ground (i.e equal partnership) in EU negotiations, re: barking with the dogs, than jumping at a “free” feasibility study, re: yapping with puppies – at the expense of the way forward in the East African Community.  

Western world has backyard issues

Most nations big and small were affected by the “credit crunch” –the almighty financial institutions that were “too big to fail” came crumbling like a pack of cards. The Western “donor” countries are structuring and restructuring their straggling economies, unemployment rates are hiking, governments are supporting humongous deficits, neighbouring consumer nations are realizing they cannot hide beneath the Eurozone hood forever and are being forced to adopt “austerity budgets”, politics are at their weakest point and many are realizing how overrated they are, education levels are dropping (while developing country nationals take advantage of their fine institutions), terrorism and financing counter-terrorism, things are generally getting tight.

And then there is China. And Brazil. And Russia. All these point to the fact that soon there will be no more room or time to consider, “what should we do to help Africa?” After all, they have issues in their own backyards. Needless to say, creating strong cooperation links and systems like the EAC is the way forward.

The New Times Opinion on June 8, 2011, reacted bravely to the British citizens’ cry to stop aid and wisely pointed out how the incensed citizens were crying over 0.56 percent of UK’s GDP. Again, it’s only a matter of time before their backyard issues take centre stage and we (EAC) may only be able to further our interests if we have something to offer economically, socially or otherwise, through our cooperation.

Best practices

It is not far-fetched to think of the United States when considering the EAC –after all a single monetary unit is in the pipeline as well as an EAC presidency, the major difference and gist of this article is that the U.S –as an undisputed economic super power - ensured this status from the formation of the Union, ab initio – from the outset. Just as un-farfetched is the notion that the Eurozone idea was inspired by the U.S economic success. Cooperation through regional blocs has a proven track record. 

The notion of regional blocs has been in existence for centuries, empires and dynasties of old have culminated into the EU, the Association of South-East Asian Nations, SADC, and even the OPEC Countries and Arab Leagues of today.

Paraphrasing the aforementioned Goldman and Sachs thesis regarding the BRIC countries, cooperation is hypothesized to be a logical next step among these nations because Brazil and Russia together form the logical commodity suppliers to India and China. Thus, the BRICs have the potential to form a powerful economic bloc to the exclusion of the modern-day states currently in the Group of Eight status. These are the lines (mind frame) we should be thinking along, at least, China – Africa’s foremost current economic partner, is thinking along those lines. We should optimize our advantage of the above reasons and be more strategically ready to perform economically – after all it won’t be long before 100 million East Africans will desire to purchase a plasma TV, even if it’s only a half of that with the purchasing power to back that desire.

Bearing in mind the realities and disparity of our respective economies, East Africa has all the necessary tools to adapt these best practices; even those that can be gleaned from the Eurozone experience, to the EAC context can make the regional bloc economically viable and most importantly, make East African nationals prosperous in real life terms. Fortunately, so far, we are on the right track and it’s undeniable that our future looks bright. 

The author is a Rwandan Lawyer living in the U. S specializing in immigration, international trade and tax law. 

musinguzimartin@gmail.com