Capital Mobility and Investment in the East African Community for the Period 1999 - 2012
Mutua, Fridah Joy Karambu
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The East African Community (EAC) is a regional economic integration grouping which comprises of Kenya, Uganda, Tanzania, Rwanda and Burundi as member states. This trading bloc was established through a treaty and also on the account of ratification by the parliaments of the member states on ao" November 1999 and came into full force on 7th July 2001. The purpose of the EAC was to bring about economic, political, social and cultural integration in order to allow for augmented trade, investment and economic growth. In addition the EAC Industrialization Strategy for years 2012 to 2032, for instance required that the intra-regional exports relative total manufactured imports for the trading bloc to grow from 5% to approximately 25% by 2032. At the same time the growth of manufactured exports in relation to total merchandise exports from an average of 20% to 60% amongst other objectives However the East African Countries suffer from low savings rates, the bond market which is immature, a small investor base, and the secondary markets that experiences a lot of illiquidity. The ease of doing business rankings indicated that the East African countries were not an attractive investment destination in spite of the many reforms which have been undertaken. Moreover this was also reinforced by the Global Competiveness report 2013 hence the need for the EAC to develop policies that facilitate its own citizens to invest in this trading bloc. Capital mobility on the other hand is an avenue, which can be used to ascertain the above goals are achieved. Capital mobility will permit the flow of funds across countries which in turn will facilitate investments to be undertaken therefore augmenting these countries economic growth. For this reason numerous studies have been carried out using Feldstein Horioka Hypothesis as theoretical framework and with different methodologies to measure the level of capital mobility in Africa. The objective of the study was to evaluate the level of capital mobility in EAC, and to determine the drivers of investment in EAC using the data collected from the World Bank for period 1929 to 2012. The study employed the Panel data fixed effects (PCSE) model and found out that there was moderate capital mobility in the EAC trading bloc. In addition the key financiers of domestic investments are the domestic savings, foreign aid, FDI and government expenditure. Moreover openness of the economy and the level of capital mobility facilitated the absorption of new investible opportunities in the EAC.