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Euro lessons for East Africa

Euro lessons for East Africa

Driving forward integration in the light of European experience

by David Kihangire in Kampala

Tue 1 Oct 2013

Economic and monetary union (EMU) in Europe provides important lessons for the proposed East African monetary union (EAMU), linking Burundi, Kenya, Rwanda, Tanzania, and Uganda. EAMU involves integrating low income countries, a marked contrast with the developed countries in the euro area. However, in both regions, support for export-oriented industries provides a major background factor.

If EAMU is to become a reality, more research is needed to deepen understanding of private sector and civil society requirements, leading to a set of far-reaching institutional recommendations on how the project can be implemented.

The desire for better integration within the East African Community (EAC) has been driven largely by the need to exploit economies of scale in production and distribution. A more integrated structure would allow the community to have a greater role in the global economy.

Motivated by the euro's launch in 1999, the EAC invited the European Central Bank (ECB) to preach the gospel of monetary union and draw lessons for EAMU. The ECB concluded that EAMU member countries would benefit from monetary integration if they achieved effective resilience to symmetric shocks and fulfilled a number of other economic criteria. These included wage and price flexibility, intraregional factor mobility, openness to trade, product diversification, and fiscal integration.

Political will and public support, too, were held to be very important. Emphasis was placed on integration of monetary and financial structures, but little attention was paid to other critical themes such as the need for harmonised and functional legal and institutional frameworks. Requirements for harmonisation and integration of fiscal policy frameworks, land reforms and integration of cultural and political diversity were relatively neglected.

As the EAC tries to understand the underlying causes of the euro crisis, critical issues come to the fore. They include:

  • What constraints does broader monetary integration pose for deeper integration?
  • What are the key prerequisites for embarking on monetary integration for economies that start with a weak economic, institutional and political setting? Should EAMU be driven mainly by political economy considerations?
  • Is monetary union always and everywhere a monetary and financial integration phenomenon? What other issues may be considered critical to success?
  • The EAC integration agenda has been founded on the principle of mutual agreement among member states, largely at a high political level. Drawing from lessons from the euro crisis, what are the other factors needed to deepen monetary integration?
  • Globalisation and the Washington Consensus, in place since the 1980s, have contributed to the growth and prosperity of many economies around the world. What else needs to be done under EAMU to consolidate this tempo?

For the moment, based on a Private Sector Foundation Uganda (PSFU) study in 2012, it is fair to conclude that many EAC countries have had difficulties meeting sustainable macroeconomic convergence criteria, especially regarding fiscal deficits and debt sustainability. A weak private corporate sector needs to be reinforced in all EAC economies, including through employment creation, to build a strong taxation base.

A meaningful and functional EAMU will require effective institutions (including harmonised legal platforms) for macroeconomic surveillance and enforcement of fiscal discipline. EAC security and political stability are top priorities, followed by infrastructure development and macroeconomic stability. Institutional and legal frameworks underpinning these factors go a long way towards contributing to private sector growth and thus assuring EAMU’s sustainability.

No meaningful policy conclusions can be drawn without undertaking appropriate research to identify all the key issues of policy and operations, as well as technical and non-technical questions addressing private sector and civil society concerns. The studies should provide decision-makers with sufficient information to justify acceptance, modification or rejection of certain aspects of EAMU negotiations. It may be useful, too, for the EAC to invite the ECB to tell us what would now be done differently, in the light of experience, if the euro project were restarted afresh.

David Kihangire,former Executive Director of Research at the Bank of Uganda, is founder of the Bureau of Economic Research and Financial Management (BERF) International Consultants and a member of the OMFIF Advisory Board.

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