Effect of East African Community Integration on Intratrade Volume over the Period 1980-2012

Abstract

This study empirically explored the effect of East African Community (EAC) integration on intra-EAC trade, as reflected by the level of exports, of the East African Community member states over the period 1980- 2012. This time period captured the pre and post EAC eras. Most empirical studies on Regional Integration investigate whether the Gravity Model hold for trading partners. Others investigate the effect of tariffs and other trade barriers on trade but this study considered the influence of FDI. This study therefore sought to complement the existing evidence majorly focusing on developing nations. This is due to the fact that East Africa Community integration members are faced with; low levels of economic growth; minimal share of exports and world trade; low rates of development in human capital and infrastructure, as well as; excess challenges from external pressures. The research sought to: examine the Intra-regional trade patterns both before and after the revival of the EAC; to examine the effects of EAC integration on the performance of intra EAC trade and to determine the influence of FDI on EAC trade. This study was based on Gravity model. The study used secondary data obtained from different sources that included Kenya National Bureau of Statistics (KNBS), EAC Offices, World Bank and respective countries’ Ministries of Trade (1980-2012). The Levin-Lin-Chu and Engle-Granger approach were used to investigate the properties of the data with respect to Panel Unit roots and Cointegration respectively. The results show that EAC has significantly increased trade among the member countries. FDI inflow has a positive and significant impact on trade (exports). From a policy perspective based on the study findings, it can be concluded that EAC member states can increase their trade by improving their infrastructure so as to reduce transport costs and encourage FDI which the study found to promote trade. Policies aimed at increasing the GDP are also encouraged among the EAC member states.