Effects Of Regional Financial Integration On Economic Growth And Intra-Regional Trade Of East African Community Member Countries

ABSTRACT

The study aimed at establishing the effects of regional financial integration on economic growth and intra-regional trade in East African Community (EAC) Countries. The motivation was based on the conflicting views on the effect of regional financial integration on economic growth and intraregional trade. In order to achieve the objectives of the study, both quantitative and qualitative data were used. Data for the period 2000 to 2009 for Kenya, Uganda, Tanzania and Rwanda were employed. Burundi was not included because of insufficient data. The first objective of the study was to establish the effect of regional financial integration on economic growth in EAC. The second objective of this study was to investigate the effect of regional financial integration on intra-regional trade in EAC. System General Method of Moments dynamic panel model was employed to estimate the cross-country growth and intra-regional trade effects of regional financial integration. Regional financial integration was proxied by the following three measures; squared exchange rate of the four countries. Control variables used in the regression included lagged economic growth rate, inflation, government balance as a percentage of GDP, foreign direct investment as a percentage of GDP, corruption perception index and the Rwandan dummy variable, which took the value of one from the time Rwanda and Burundi joined the EAC and Zero otherwise. The empirical results showed that regional financial integration significantly stimulated the economic growth of the East African Community Countries. Regional financial integration complemented intra-regional trade among the EAC countries. The third objective was to determine whether the effect of regional financial integration on economic growth and trade differed among member countries. The study found out that the effect of regional financial integration on economic growth differed among member countries. However, the effect of regional financial integration on intra-regional trade did not differ among member countries. The study recommends the EAC coordinating committee should ensure there is effective bank supervision in the region so as to have a uniform banks spread across the region, explore ways of issuance of common bond in the region and have secondary markets for financial assets effected.