Last month, the presidents of Kenya, Tanzania, Rwanda, Uganda and Burundi signed into effect the East Africa Community (EAC) 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 greater economic clout for the region. The common market is due to come into effect by July 2010. The EAC was launched ten years ago and has a population of 120 million.

What does this mean for businesses and investors?

This agreement will make the region even more attractive to foreign investors and businesses because of a larger potential consumer base.  In today’s world, a landlocked country like Burundi with a GDP of $1bn and a population of three million typically does not attract much investment.  However, a Burundi that is part of the EAC common market with access to a combined population of 120 million, a combined GDP of $79bn, a services sector that serves as a hub for the region, and lower barriers to trade present a stronger investment potential picture.

What does this mean for the EAC region?

The goal is that movement of factors of production, goods and services between member countries is as easy as within the countries themselves. This will guarantee efficient resource use, which is a competitiveness factor that can attract investment and boost economic growth. 

Let’s take an example.  Assume there are two countries, Achol and Beulah.  Achol is a labor abundant and capital deficient country. Beulah is a capital abundant and labor deficient country.  Achol has a developed agricultural sector and underdeveloped  computer manufacturing sector because  labor is abundant and cheap, but capital is scarce and expensive.  It is the opposite for Beulah.

Wages and the price of goods are expensive in Achol’s computer manufacturing sector because of scarcity of capital. Wages and the price of goods are also expensive in Beulah’s textile sector because of scarcity of labor.

When both countries create a common market, it allows for competitive forces to decrease wages and prices in Achol’s computer manufacturing sector.  Labor will migrate from Beulah’s computer industry to Achol’s where they are sure to get higher wages.  This migration will continue until wages and salaries in Achol’s computer manufacturing sector decreases or equalizes with Beulah’s computer industry.  At this point, worker migration stops.

This same migration pattern will also happen in both countries’ textile sectors. The common market through efficient resource allocation has achieved two things:

• Raised the living standard in both countries since consumers have access to low cost goods and workers can freely migrate to seek a better life and pay for their skills.
• Increased efficiency boosted productivity and economic growth in the region since both countries can specialize and produce goods where they have comparative advantage.

In the EAC, Kenya has a stronger financial sector than the other countries.  So, Kenya should be a more efficient and cheaper provider of financial services than the other countries. The EAC common market will expose Rwanda, Burundi, Uganda, and Tanzania to competition from Kenya’s more efficient financial sector. This will attract labor from financial sectors in each EAC country to Nairobi.  Nairobi itself has an expanded market as a regional financial hub.

Every country in the EAC can follow suit in sectors in which they have comparative advantage.  For Tanzania, it could be mining.  For Uganda, it could be agriculture.  And for Rwanda, it could be services. 

In the end, the EAC common market benefits the economies and sectors, which are at different stages of development.  It will catalyze greater efficiency in resource allocation, which will contribute to the maturation of the sectors and raise living standards in the long run.

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