Agricultural Trade And Economic Growth In East African Community, 2000 - 2012

ABSTRACT

Agricultural activities contribute about 33% of the East African Community‟s Gross Domestic Product (World Bank, 2009), 80 per cent of the populace depend on agriculture directly and indirectly for food, employment and income, while about 40 million people in EAC suffer from hunger. Intra-EAC trade is very low, that is, at 9 per cent of the total regional trade, but it is on upward trend. Agricultural trade accounts for over 40 per cent of the intra-EAC trade. This study investigated the causes of intra-EAC agricultural trade, effect of EAC regional trade agreement on the regions agricultural trade by analyzing the degree of trade creation and diversion effects, and examined relationship of the regional agricultural trade with the region‟s economic growth. Several Augmented gravity models were estimated using the Pseudo Poisson Maximum Likelihood (PPML) Approach. Several bi-variate Vector Auto-Regressive (VAR) and Vector Error Correction (VEC) models were also estimated. Granger causality test and Impulse response analysis on trade and economic growth were performed using panel data from UNCOMTRADE, International Financial Statistics and World Development Indicators for the period 2000 – 2012 on the five EAC members and other 77 trade partners. The empirical findings showed mixed results for the different EAC member states. The intra-EAC agricultural exports depended on various factors, including GDP of exporter, GDP of the importer, Exchange rate, distance between the economic centres, language similarities, adjacency and population of the exporter. EAC regionalism had no significant effect on agricultural exports of Burundi, Rwanda and Uganda, while Kenya and Tanzania had reported significant effect of regionalism on their agricultural exports. Furthermore, the study findings showed that there existed bi-directional relationship between agricultural exports and economic growth in Kenya, uni-directional relationship in Rwanda, and no relationship at all in Burundi, Tanzania and Uganda. EAC secretariat in collaboration with governments of EAC member states should enhance integration among the member states, as membership to EAC had significant effect on trade volumes for Kenya and Tanzania. EAC secretariat and respective governments in EAC should also reduce currency value disparities among the member states as a means of promoting intra-regional agricultural trade. The proposed monetary union and harmonization of currencies would significantly promote agricultural trade within the region. The EAC member states should also enhance border liberalization, as this will also promote intra-regional agricultural trade. Finally, to achieve and sustain high economic growth, Kenya and Rwanda governments should promote agricultural exports to both the EAC region and beyond, this is because empirical results show that a shock in agricultural exports for the two countries have a long run positive effects on their economic growth. This study concluded that EAC regional trade agreement has a potential of promoting EAC regional agricultural trade. Intra-EAC agricultural trade can still be improved and that the regional trade promotes economic growth in Kenya and Rwanda.