Capital Mobility and Investment in the East African Community for the Period 1999 - 2012
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Date
2015
Authors
Mutua, Fridah Joy Karambu
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
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.
Description
A research project submitted to the school of economics in partial fulfilment of the requirement for the award of masters of economics (finance) degree at Kenyatta University