Economic integration of the East African community

Student thesis: Doctoral Thesis

Abstract

This thesis contributes to the debate of the consequences of preferential liberalization through assessment of the trade and welfare effects of a Preferential Trade Agreement(PTA) on its member countries. In particular, it examines the potential and actual impacts of the East African Community (EAC), which is hailed as one of the most successful PTAs in Africa (Koami et al. 2016). The aim of this thesis is to understand how formation of the EAC affected the economies of its member countries and whether it is the best trade liberalization strategy for them. The thesis undertakes both theoretical and empirical analyses to examine the trade and welfare effects of the EAC. It is comprised of five main chapters. Chapter 1 surveys the academic literature on the welfare effects of PTAs and presents the aims and objectives of this thesis. The main goal is to provide a background for subsequent analyses. It gives a brief overview of the evolution of PTAs, examines the theoretical literature on static and dynamic effects of PTAs and reviews the ex-ante and ex-post models for evaluation of the welfare effects of PTAs. Chapter 2 gives a background to the EAC and underscores the need for research on its trade and welfare effects on member countries. It undertakes a political economy analysis of the challenges facing the implementation of the EAC Treaty. It also investigates how far the lessons learnt from previous attempts at integration among the EAC countries have shaped the current progress.Chapter 3 theoretically analyses the welfare effects from the formation of a PTA using a stylized three-country model of international trade under oligopoly. It compares the differences in welfare implications between a Free Trade Agreement (FTA)and a Customs Union (CU) on the member countries who differ in their market sizes. The findings show that both are welfare improving for the member countries provided that the difference in market sizes is not too large. Comparing the FTA and CU, the smaller partner in the trade agreement will prefer an FTA over a CU. This is because the profits gains for the firm from protection of the regional market due to higher tariffs in an FTA outweighs the forgone gains in consumer surplus and tariff revenue due to lower tariffs in a CU. On the other hand, the larger partner will prefer a CU over an FTA since its population size will lead to higher consumer surplus and tariff revenue that will outweigh forgone gains from firm’s profits. The findings of this chapter sheds light on some of the reasons why the EAC is facing challenges in its implementation. Chapter 4 empirically assesses whether the EAC countries economically benefited from trade liberalization. It quantifies the trade creation, trade diversion and the welfare effects of trade liberalization on the EAC countries using an estimation and general equilibrium simulation procedure by Anderson et al. (2015) built around the structural micro-foundations of the gravity equation.The results show that the EAC integration generated large trade creation effects for all member countries that superseded the trade diversion effects. Kenya, which is the most industrialized country in the EAC, was the only country that did not have a trade diversion effect. On the other hand, the welfare analysis indicate that the EAC led to economic gains for its member countries of between 0.01 - 0.9 percent of real GDP with Kenya enjoying the highest gains. The welfare gains for Kenya were due to producer surpluses while the welfare gains for all other EAC countries stemmed from consumer surpluses. These finding suggest that the EAC has achieved its objective of generating welfare gains for its member countries. Second, the findings also show that the benefits of trade liberalization among developing countries will be inclined to the most industrialized countries. Chapter 5 empirically
Date of Award10 Dec 2020
Original languageEnglish
Awarding Institution
  • University Of Strathclyde
SponsorsUniversity of Strathclyde
SupervisorIan Wooton (Supervisor) & David Comerford (Supervisor)

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