Effects of Regional Financial Intergration on Economic Growth and Intra-Regional Trade of East African Community Member Countries
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Date
2013-03-22
Authors
Karagu, Samuel Muthoga
Journal Title
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Abstract
The study aimed at establishing the effects of regional financial integration
on economic growth and intra-regional trade in East African Community
(EAC) Countries. The motivation was based on the conflicting views on
the effect of regional financial integration on economic growth and
intra-regional trade. In order to achieve the objectives of the study, both
quantitative and qualitative data were used. Data for the period 2000 to
2009 for Kenya, Uganda, Tanzania and Rwanda were employed. Burundi
was not included because of insufficient data. The first objective of the
study was to establish the effect of regional financial integration on
economic growth in EAC. The second objective of this study was to
in ~!!Itig t~ th Elff@Qt f ~gi(:mlll finill'lQi I int@grlltign gn intrll-r@gi n~J
trade in EAC. System General Method of Moments dynamic panel model
was employed to estimate the cross-country growth and intra-regional
trade effects of regional financial integration. Regional financial
integration was proxied by the following three measures; squared
exchange rate of the four countries. Control variables used in the
regression included lagged economic growth rate, inflation, government
balance as a percentage of GDP, foreign direct investment as a percentage
of GDP, corruption perception index and the Rwandan dummy variable,
which took. the. value of one from the time Rwanda and Burundi joined the
EAC and Zero -otherwise. The empirical results showed that regional
financial integratiori' significantly stimulated the economic growth of the
East African Community Countries. Regional financial integration
complemented intra-regional trade among the EAC countries. The third
objective was to determine whether the effect of regional financial
integration on economic growth and trade differed among member
countries. The study found out that the effect of regional financial
integration on economic growth differed among member countries.
However, the effect of regional financial integration on intra-regional
trade did not differ among member countries. The study recommends the
EAC coordinating committee should ensure there is effective bank
supervision in the region so as to have a uniform banks spread across the
region, explore ways of issuance of common bond in the region and have
secondary markets for financial assets effected.