Rwanda in the East African Community: More opportunities than costs

The globalization of the world economy is propelling a world-wide trend in regional economic integration as nation-states consider regional economic arrangements as imperative to facing the challenges and harnessing the opportunities of economic globalization. It is in this context that Rwanda has decided to join the East African Community (EAC). The EAC came into existence in 1999, with Kenya, Tanzania and Uganda as the three original members. Rwanda, along with Burundi, became a member of the EAC on July 01, 2007, following the signing of the treaty of ascension in June, 2007. The East African Common Market Protocol was adopted in March 2004 and came into effect in January 2005. The main elements of the Protocol are: removal of internal tariffs and all non-tariff barriers on intra-EAC trade; introduction of common external tariffs (CET); and agreement on a list of products classified as sensitive and therefore requiring additional protection. The treaty also stipulates deeper integration leading to a single regional currency and political federation by 2015. This ambitious project requires the support of the publics of member states to succeed. Some of the member states have already carried out surveys to gauge public support for fast tracking integration. This exercise is currently being conducted in Rwanda. For the exercise to be of the utmost value, it is important for the Rwandan public to understand the benefits and costs of membership in the EAC. For Rwanda, the benefits of membership in the EAC are many. First is trade facilitation. Because Rwanda is land-locked, our international trade depends on the transit of imports and exports through our neighbours and thus subject to non-tariffs barriers. For instance, the cost of transportation of goods from and to Rwanda is about 41 per cent higher than the regional average. This situation obviously reduces our competitiveness in the international market. The cooperation of member states in the development of transportation infrastructure, energy and other crucial sectors will benefit the Rwanda economy by improving our competitiveness in international trade. Second is Foreign Direct Investment (FDI), the increased attraction of which is one of the goals of regional integration. Inflows of FDI tend to increase under regional integration arrangements because of the creation of larger markets and economies of scale. Certain conditions are necessary to attract higher levels of FDI to a region and to particular states. These include: liberalization of economy, macroeconomic stability, well-functioning infrastructure, good governance etc. Rwanda has emerged as a positive model in the region, and continent as a whole, with respect to these and other important factors and is therefore well positioned to be a favoured destination for foreign investments targeting the East African market. Third is improvement of the welfare of the population. Rwanda has embarked on two ambitious programs, Vision 2020 and EDPRS, whose intent is to transform the country into a middle income country by 2020. To achieve the goals of vision 2020, six pillars and three cross-cutting areas have been identified as priorities. The pillars are: good governance and a capable state, human resource development and a knowledge based economy, a private sector-led economy, infrastructure development, productive and market oriented agriculture, regional and international economic integration. The cross-cutting areas are: gender equality, protection of environment and sustainable natural resource exploitation, science and technology, including ICT. The EAC offers good prospects for realizing Rwanda’s development ambitions and the betterment of the welfare of our population. In a small and protected market, consumers are limited in their choice of goods and services and obligated to pay higher prices. By joining the EAC, the welfare of the population will be improved because, thanks to diversification of supply sources, consumers will have access to cheaper and better quality goods and services. Fourth is enhancing economic innovation through increased competition. Because of limited competition, our small national market does not encourage innovative behaviour on the part of our business leaders. An enlarged and open East African regional market will increase the level of business competition and thus oblige Rwandan businesses to become more innovative to survive and grow. To do this, they will have to understand and take advantage of our comparative advantage in the region. Fifth is cooperation in the development of critical infrastructure. Most infrastructure projects are beyond the capacity of individual states and hence joint efforts within regional integration are an obvious answer to this problem. As a landlocked country, Rwanda will benefit from regional infrastructure projects such as roads, railways, air transport, pipelines etc, which are necessary to lower the transactions costs of international trade arising from our dependence on the Mombassa and Dar es Salaam seaports. Moreover, international donors and investors increasingly prefer projects encompassing different countries because of the superior economies of scale. Sixth and last, is the free movement of capital, services, goods and labour and associated rights of establishment and residence. The relevant provisions of the EAC common market protocol on free movements will enable the economies and consumers of member states to benefit from their different comparative advantages. There are costs and challenges to Rwanda’s membership in the EAC. As suggested by the theory and other experiences of regional integration, some of the costs of integration are common to member states while others obtain to particular states. For the EAC, the most readily apparent cost is the loss of income from custom duties and tariffs. The EAC common market protocol commits member states to elimination of tariff and non-tariff barriers to trade within the community. For some countries, tariffs are a major source of income used to finance national budgets. The challenge for Rwanda’s policy makers is to find alternative sources of revenue to compensate for the loss of income from the elimination of tariffs on intra-EAC trade. The second major challenge arises from the lack of macroeconomic convergence of national economies. This is one of the main reasons for the failure of regional integration in the developing world as it leads to the more advanced economies benefiting more than their lesser developed partners from economic integration. To address this problem, member starts have to promote the harmonization of their economies and take measures to redress economic imbalances. The EAC proposal for a development fund for the benefit of the less developed partners is a step in the right direction. Under current discussions the development fund will be supported with capital from contributions representing 0.5% of each partner’s GDP, plus 1.5% of custom revenues. The third challenge is the youth of our local industries which are less competitive compared to the industries of the larger partners. This poses the problem of their ability to compete with older and more sophisticated industries in the larger economies. This challenge needs to be and can be addressed through robust actions by both government and our business leaders to ensure that our industries become more competitive by exploiting our comparative advantages in the region. A balanced evaluation of the trade-offs will suggest that the benefits of Rwanda’s membership in the EAC far outweigh the costs and recommend that we remain a lead advocate of deeper regional integration. The structure of our economy, based on subsistence agriculture has to change, and change fast, if we are to realize our aspirations of becoming a middle income country by 2020. As elaborated in VISION 2020 and EDPRS, our lack of natural resources compared to our regional partners suggest that our path to prosperity lies in building a knowledge-based, technologically driven service economy. In effect, we need to and can become the regional hub for knowledge-based service industries. To do so, we have to prioritize the development of human resources and exploit the benefits of our reputation for having a capable and well-administered state. The lack of competitiveness of our local industries can be addressed through creative strategies, for example, joint ventures with regional and international firms with more experience, better technologies, and more capital. Economic expansion through increased foreign investments and access to an enlarged regional market will result in increased tax income, which will more than compensate for revenue lost due to the elimination of tariffs on intra-EAC trade. The free movements stipulated in the common market protocol will ensure more optimal allocation of factors of production in the enlarged regional economy to the benefit of all consumers. The writer is Senior Research Fellow, Macroeconomics and Trade Policy, Institute of Policy Analysis and Research (IPAR-Rwanda). Contact: Felicien.usengumukiza@ipar-rwanda.org