Macroeconomic Convergence and Business Cycles Synchronization towards a Monetary Union in East African Community
Mbui, David Kirimi
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The world economy has undergone unprecedented intensification of economic and political integration since the twentieth century. Developments in trade and capital account liberalization, as well as technological innovation in transport and telecommunications, have increased the international exchange of factors of production and final products and thus, integration. For regional economic blocs envisaging to form a monetary union, macroeconomic convergence is vital for deeper integration. The East African Community member countries like other regional blocs are in the process of forming a monetary union. The regional bloc has put in place macroeconomic convergence criteria as part of the targets that member states should fulfill before commencement of a monetary union. Although the bloc has put in place the criteria for regional economic integration towards a monetary union, it was unable to enter into a monetary union in 2015 as was envisaged, necessitating extension of the deadline to 2023. Attainment of macroeconomic convergence criteria by the respective member states has been slow and with significant variations. This has raised questions on the readiness of East African Community to proceed with the arrangement of the formation of a monetary union. The purpose of this study therefore, was to analyze the macroeconomic convergence and business cycles synchronization towards monetary Union in the East African Community. The study is anchored on two theories namely: the optimum currency area theory and the neoclassical growth theory. The study used time series and a set of panel data for the period 2000 to 2018. The first objective of the study was to establish the state of income convergence among East African Community member countries and Generalized Method of Moments estimation technique was employed to achieve the objective. The second and third objectives of the study were to evaluate the state of convergence of monetary variables and fiscal variable, respectively. Panel random effects model and time series model was used to achieve the second and third objectives. The fourth objective of the study was to analyze synchronization of business cycles in East African Community countries and cointegration analysis was employed to achieve the fourth objective. The key study findings were that there was empirical evidence to support the convergence in economic growth and monetary variables in the East African Community member states. There was, however, no empirical evidence of convergence of fiscal variable in East African Community member countries. Further, the study confirmed that business cycles among East African Community member countries were synchronized which is necessary for monetary union formation. The study findings, therefore, provided some evidence that East African Community member states were converging albeit slowly. The study recommended that East African Community countries ought to develop growth enhancing policies to spur economic growth thus aiding convergence of monetary and fiscal variables. This could be done through investment in infrastructure, increased credit to private sector and a reduction in interest rates. The East African Community secretariat should also be empowered to monitor the implementation and adherence to the convergence criteria by the member states as this would ensure convergence of economic growth, monetary variables and fiscal variable. Enhancement of bilateral trade among partner states through full implementation of the customs and common market protocols is necessary.