Economic Convergence, Political Integration And Prospects Of A Monetary Union In The East African Community

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.