The Role of the Common Market in the EAC on Job Creation

This section looks at the evidence around the role of the common market in the EAC on job creation. Section 3.2 provided a summary of the evidence why underemployment and unemployment exists in the EAC. In this section an overview as to how the main impediments (summarised in Section 3.2.2) have been realised as a result of regional economic integration in the EAC is provided.

 Large informal sectors that are poorly integrated with the formal economy: As discussed in Section 3.2 East African economies have large informal sectors that are poorly integrated with the formal economy and large business and formal wage-paying jobs are only held by a minority of the working population. Growth in a labour intensive sector, an expansion in jobs and reduced costs (in terms of payment and time) of setting up a business would all be potential benefits of a RTA. Table 1 focuses on data on regulation and taxes across the EAC member states. Data was compiled using the most recent and oldest data available. Comparative data was available for all member states except Burundi where only the most recent data is shown. The table shows that the days to obtain and operating license have increased in all EAC member states except for Kenya. That the percentage of firms identifying tax administrations as a major constraint have increased in Rwanda and Tanzania and that the percentage of firms identifying business licensing and permits as a major constrain has increased in Tanzania and Uganda over the period 2006-2013. Job creation is discussed below.

 Job creation not keeping up with increases in the working population (in particular the youth population): According to research by World Bank (2010)58, if the scale economies of the East African Common Market are fully realised, the exports of goods and services would grow from US$12 to US$20 billion over the next decade, contributing to a doubling of formal employment and Gross National Income (GNI) per capita. However, there is a wide body of quality literature detailing how the effects of economic integration, including a common market, will not be felt evenly throughout the EAC. Collier (2007) finds that regional schemes, whether between rich countries or poor countries, benefit those member countries that have characteristics closest to the global average. In East Africa, Uganda and Tanzania lost market share to local leader Kenya. David Booth et al59 find that whilst there is a large literature on the expected revenue, trade and welfare effects of the fully implemented Custom Union the conclusions drawn are largely negative about the developmental benefits. Job creation is not explicitly referred to but increases in interregional trade are found to be the result largely of trade diversion, not trade creation, with the aggregate benefits felt in the most developed economies in the EAC (Kenya and Tanzania)

 Lack of employability and a lack of, or mismatch of, skills (in particular for youth who face an additional barrier of discrimination): The State of East Africa (2013)61 suggests that strong economic growth performance unleashed by regional integration efforts has done little to close the gap between the rich and the poor, and may not even be moving the region in such a direction. The paper lists three major areas that need to be addressed in order to improve the quality of life of East Africans. They are; the changing structure of the regional economy that is essentially devaluing the agricultural sector and pushing many people off the land into its urban spaces in search of better opportunities; the nutritional quality of the food eaten by East African children in the first 1,000 days of their lives which has lifelong effects on their brain development and learning abilities; and the quality of the schooling that is provided to East Africa’s children. The economic dimensions (competiveness, value added production, trade and investments) need to be combined with addressing the social dimensions in order to enhance equity-enhancing relative inclusiveness the authors conclude. Section 3.2.1 provides a review of the evidence on the causes for unemployment and underemployment in the EAC member states.

 Lack of access to finance facilities: In principle there could be increased access to credit through the harmonisation of legal frameworks and reforms in the areas of financial supervision and payments. There remain major issues regarding access to financial services in all EAC countries. Issues include the cost of credit, banks collateral requirements, high transaction costs, lack of formal regulated financial institutions in rural areas and a lack of medium and long-term credit providers62. As outlined by Sarah Sanya and Matthew Gaertner (2012)63 the expansion of credit to the private sector in the EAC has been impressive over the last decade – in part due to banking sector reforms, measures to liberalize state-controlled banking systems, the restructuring of loss-making institutions, and improved governance. However, access to finance remains a key constraint on growth across the region and the shift towards regional economic integration has not been the catalyst for removing barriers to credit.

 Inadequate supply of infrastructure: A RTA could lead to the enhancement of investment in regional infrastructure, such as roads and ports, as well as regulation that supports improved telecommunications, water and power supply. Such access to infrastructure would enable workers to be more productive and would enable firms to access markets more efficiently. Table 3 shows data on infrastructure constraints across the EAC member states. Data was compiled using the most recent and oldest data available. Comparative data was available for all member states except Burundi where only the most recent data is shown. The table shows the percentage of firms identifying transportation as a major constraint from the period 2006- 2013 has fallen in Uganda and Kenya, increased in Tanzania and remained almost constant in Rwanda. The percentage of firms identifying electricity as a major constraint from 2006 – 2013 has fallen across all member states. The proportion of products lost to breakage or spoilage during shipping to domestic markets have increased marginally in Kenya, Tanzania and Uganda. Kessides (2012)64 finds that regional integration in the EAC is inhibited by the inadequate and poor regional infrastructure networks that raise cross-border transaction costs. This in turn is due to disparate regional priorities, perceptions about the unequal distribution of the costs and benefits of investment in cross-border infrastructure, lingering concerns about ceding national sovereignty and the need for a resource commitment which necessitates corresponding investment from the private and public sectors.

 A lack of an enabling environment for market based development: Dobronogov and Farole (2012)65 find that as goods, capital, and labour markets open up in the EAC, economic activity is likely to concentrate increasingly in a few key areas where scale and access to global markets can be best exploited. They highlight the unique geography of the EAC (three of its fives member states and 40 percent of its population is landlocked) which is likely to restrict the spread effect of integration, resulting in higher concentration of economic activity. The paper goes on to outline how the challenge, in the EAC context, is to use the regional integration process to facilitate broad access of workers, firms, and finance to the fast growing agglomerations. At the same time there needs to be an opening up more peripheral regions to investment and expertise to enable them to take advantage of opportunities that may be available for producing goods and services within regional value chains.

Conclusion The evidence does not show that the binding constrains to job creation are a result of a lack of regional economic integration and the evidence does not indicate that regional economic integration in the EAC is resulting in job creation. The evidence above refers to the uneven impact of economic integration on economic growth, investment, job creation and access to global markets. There are gaps in the evidence on how the distribution of benefits through economic integration in the EAC effect job creation, under and unemployment. In order to further explore the impact of a common market on unemployment and underemployment the next section looks at the limiting factors in the EAC countries on growth and employment. There is no direct evidence that the EAC common market is leading to an increased number of jobs nor is there evidence that there is a decreased number of jobs.

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