Economic convergence, political integration and prospects of a monetary union in theEeast African Community
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Date
2017-10
Authors
Simon, Githuku Nyokabi
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Abstract
The East African Community partner states are in the process of forming a
monetary union and it is expected to be complete by the year 2023. The idea of a
monetary union is not new in East Africa, this is because, Kenya, Uganda and
Tanzania already had a monetary union during the British colonial administration
under East African Currency Board. These countries had the East African shilling
as a common currency. However, the East African countries have been unable to
form a monetary union in the absence of a political federation. The main objective
of this study was to determine the levels of real economic convergence and
political integration necessary for the establishment of a monetary in the East
African Community. This overall objective was achieved by assessing income
convergence, business cycle synchronization, political integration and its
influencing factors in the East African Community. In the case of income
convergence, panel unit root tests of variables was undertaken to determine the
order of integration. Variables indicated that they were integrated of order zero I
(0) and one I (1) suggesting that autoregressive distributed model had to be applied
in regression analysis. Empirical findings supported the presence of conditional
convergence and that per capita gross domestic product growth was positively
influenced by physical capital and nominal exchange rate depreciation and
negatively affected by human capital and inflation rate. Business cycle
synchronization was examined using three stage least square regressions and
revealed that it is positively affected by trade integration and negatively affected
by sectoral specialization. Graphical and correlation matrix was used to analyze
political integration and factors influencing it. Study findings indicated that the
level of political integration was low and was weakly related to institutional
distance, social integration and economic interconnectedness. From the foregoing,
it can be concluded that reduction of income differences among the partner states
can be fostered through increased investments in physical capital, maintenance of
a competitive exchange rate regime and a low inflation rate regime. Increased
trade among partner states and promotion of sectoral homogeneity of the partner
states should promote synchronization of business cycles among the partner states.
Finally, low political integration can be enhanced through reduction of
institutional distance, increased social integration and increased intra-EAC trade as
captured by economic interconnectedness variable
Description
A Thesis Submitted to the School of Economics in Partial Fulfillment of the
Requirements for the Award of the Degree of Doctor of Philosophy in
Economics of Kenyatta University, October, 2017