FOREX Africa: In East African Community, Poor-Man’s E.U.

By Jeffrey Cavanaugh AFKI Original Published: December 4, 2013, 2:29 pm

As a frontier market, the countries of Africa represent tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.

Luckily, the ups and downs of the African currency markets aren’t one of them if you know where to look. To help with that, AFKInsider has compiled all the news you need to know now in order to slim down your currency risk in the week ahead. Let’s see what’s happening out there.

The big news this week is the signing of a diplomatic agreement between the five members of the East African Community – Kenya, Tanzania, Uganda, Rwanda, and Burundi – to take the next step in their journey together by agreeing to merge their respective currencies into a common one over the next few years.

As a consequence of and as a run-up to any future monetary union that may eventually result from this agreement, the leaders of these states have also agreed to coordinate fiscal and monetary policies and create an independent central bank that would be charged with overseeing any eventual East African single currency.

For those watching the region, the agreement is the latest in a series of steps towards greater economic cooperation and political integration. Indeed, integration between the bloc’s two major states – Tanzania and Kenya – in fact stretch back to the colonial era when early efforts to integrate their economies under British administration and tutelage eventually fell apart as a consequence decolonization and independence. Since then, there have been periodic efforts to restart East African integration, but the latest effort stems from a 1993 treaty for East African cooperation signed by Kenya, Tanzania, and Uganda that aimed to re-establish cooperative ties that collapsed in the decades after decolonization.

From this treaty, another agreement signed in November 1999 pushed East African integration further via the establishment of the East African Community, this time now including Rwanda and Burundi, which swiftly moved to establish a common customs union in 2004.

In 2010, building on this success, a common market between the five countries was created that aimed to further integrate their economies into a single, unified East African trading bloc. The single currency announcement will thus be – if it comes to pass – the crowning achievement of more than two decades of effort by East African leaders to establish one of the developing world’s most promising economic and political unions.

That all this should look very similar to the process of European integration, which created the European Union and its single currency, the euro, should not be surprising. The E.U., despite its problems, is still the go-to model for states seeking to put aside their differences by seeking greater cooperation through integration. There are, however, important distinctions that differentiate the two integrative efforts.

First, it should be remembered that the European Union, despite its economic foundations, is a political project aimed at eliminating the recurrence of war between its member states, particularly France and Germany. In this it has been spectacularly successful, and the European Union rightly won the Nobel Peace Prize in 2012 for its efforts in helping its member states avoid war with one another since the end of the World War II in 1945.

The East Africa Community, however, does not have this bloody history of interstate rivalry and conflict to fall back upon as an outstanding reason for its existence as has Europe.

Nor does it have an overwhelming political justification for its existence, either.

States, rightly or wrongly, jealously guard their sovereignty and it came as no surprise that integration failed spectacularly during decolonization and the early years of independence.

Indeed, this failure ultimately reflected the differing interests the rulers of each country had, and it is unclear whether their interests now coincide.

Kenya, a democracy, has suffered from destabilizing ethnic unrest in recent years while the ruling elites in the other EAC states all rest upon one form or another of authoritarian, one-party rule. Why they should cooperate with one another is something a mystery.

Third, and perhaps most important, the problems of monetary and fiscal policy coordination are devilishly difficult both politically and technically. Europe, despite the success of integration there, has in no way solved these issues and the political opposition to further integration on the continent is popular, deep, and widespread. Indeed, the recent Eurozone crisis which saw some of the union’s weaker, smaller members go under and which required Brussels, Berlin, and the International Monetary Fund to step in to bail them out stands as a stark warning as to what can go wrong when countries start down the path to deep economic integration.

Still, diplomacy and commerce are always preferable to the alternative, so perhaps East African economic integration isn’t such a bad idea after all.

The E.U. and the Euro aren’t going anywhere and other economic blocs – most notably ASEAN in Southeast Asia and NAFTA in North America – have become vital components in those regions’ economic growth.

With East Africa now undergoing its own economic boom, perhaps the time is ripe to start integrative efforts now, when times are good and coffers are flush, rather than later when scarcer resources may make cooperation much more difficult. As with most things, we’ll just have to wait and see.

Jeffrey Cavanaugh holds a Ph.D in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider, Mint Press News and BAM South.

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