REPOSITIONING UGANDA WITHIN THE EAC COMMON MARKET

"REPOSITIONING UGANDA WITHIN THE EAC COMMON MARKET"




BY: HON. MULENGANI BERNARD (B. Stat, MA EPP)
Email: bmulengani@parliament.go.ug
Mob. Tel. +256772485596



ECONOMIC POLICY RESEARCH CENTRE

Kampala, December 9, 2010

1.0. Introduction
The implementation of the East African Community (EAC) Common Market was launched on July 1st, 2010. Uganda had to prepare itself for this important stage of integration. Some changes that the other Partner States had to undertake were not necessary for Uganda, as they were already in place in our country. For instance, Uganda did not have to commit on the financial market liberalization as we already enjoy a widely liberalized situation. However, in some other fields Uganda had to undertake some changes. Our work in this respect is yet to be finished, as integration is an evolving process rather than a one-off change. Apart from the reforms required to integrate our Market with that of other Partner States, we need to put in place those changes that will allow us to benefit from regional integration. We have to identify and exploit our advantages in the Common Market. For this reason, we need to work on some measures that will help us make the most out of regional integration. We therefore need to assess the current position of Uganda in the Common Market and then find a way to reposition it in order to benefit from this process.
The aim of this paper is to reposition Uganda within the EAC Common Market. By presenting the current position of Uganda in the Common Market in terms of strengths and weaknesses. We will then ask ourselves what we have done to ensure that we can reap all the potential benefits from the Common Market and what else can or should be done.
In order to do so, this paper is organized in the following way. We first explain the background to the EAC Common Market and explain the economic rationale behind regional integration. We then attempt to understand how Uganda can reap the maximum benefits from integration by finding its advantages in the Common Market and developing them. We emphasize the fact that, to benefit from this process, Uganda needs to put in place some measures that are necessary for developing the economy. We then try to assess which are the priorities to be addressed to reposition Uganda in a strong place in the Common Market.


2.0. Background
The history of economic integration in Africa shows that the objectives for integration have been evolving over time. These have shifted from the initial focus on political decolonization of Africa to the current emphasis on socio-economic integration in the post-independence era for stronger bargaining base in global fora and for mutual benefit in the form of accelerated growth and development. Regional integration entails the coming together of two or more states that may successfully go through the stages (Preferential Trade Area, Free Trade Area, Customs Union, Common Market, Monetary Union and Political Federation) of integration. The EAC comprises of five member states of Burundi, Kenya, Rwanda, Tanzania and Uganda. The EAC took the Customs Union as the entry point to integration. The implementation of the Common Market was launched on July 1st, 2010. The Common Market Protocol establishes the presence of a single external market between Partner States, where people, goods, services and capital enjoy greater freedom of movement.


3.0. Definition and scope of the EAC Common Market
A Common Market is a single internal market that entails free movement of the factors of production thus, people, goods, services and capital with a common external tariff. In the case of EAC it includes right of establishment and residence. It is intended to be used as a tool in support of the achievement of goals of accelerated economic growth and development for the region.
The institutional framework for the Common Market is governed by both domestic and regional legislation. The free movement of goods is governed by the Customs Union Protocol. Moreover, there are the Laws of the Community (Art 39); Protocol on Standardization, quality assurance, metrology and Testing and the SQMT Act 2006; Competition policy and law 2006, anti dumping measures and Future Protocols to be concluded related to Sanitary and Phyto-Sanitary requirements. The movement of goods is also affected by the presence of rules of origin for the granting of preferential treatment to goods originating from the region. Uganda also has a number of industrial inputs exempted from import duties, in order to protect domestic industries from the regional competition.
The Free Movement of Persons and Workers is guaranteed to those who are citizens within the territories of each Partner State; and non–discrimination of persons when moving around, staying within and exiting a Partner State exist. Workers are entitled to equal treatment with nationals with regard to: access to employment; remuneration, enjoyment of freedom of association and collective bargaining for better employment; and enjoyment of the rights and benefits of social security as accorded to workers of the host Partner State. The Common Market Protocol does not require removal of work permits in the EAC, but the application procedures have been simplified and will be harmonised in the Partner States.
Free Movement of services and of capital are ensured as well. The right of Establishment and Residence entitle nationals of a Partner State to set up shop in another Partner State. Right of Establishment guarantees that firms will be treatment like local firms; allowed to transfer their capital managerial and supervisory personnel restricted in accordance with the free movement of workers.
The basic principles in the Common Market are:
(i) Non discrimination of Partner States on grounds of Nationality
(ii) Treatment of nationals of EAC Partner States not less favorable than the treatment accorded to third parties.
(iii) Transparency in matters concerning other Partner states
(iv) Sharing information in implementation of the Protocol.


4.0. Opportunities and comparative advantages in the Common Market
A Common Market is intended to be used as a tool in support of the achievement of goals of accelerated economic growth and development. Some Ugandans are certainly aware of the potential benefit that can be derived from a common market: consumers can purchase cheaper goods, producers and service suppliers can access cheaper inputs and sell their goods to a larger-scale market. Workers can find employment opportunities in other partner states and opportunities of subcontracting are not limited to the national market anymore. All these newly created opportunities could allow an increase in market efficiency by spurring competition between economic actors (firms, workers). Furthermore, economies of scale can be generated, thus creating virtuous cycles of economic growth. In addition to the economic rationale, there are some political issues. For instance, a block of States can achieve larger bargaining power in multilateral negotiations and international fora such as World Trade Organization rounds and Economic Partnership Agreements.

Each EAC country has its own unique resources and strengths, which will form complementarities within the Common Market. Uganda’s comparative and competitive advantages have been indentified in the areas of education, agriculture, tourism, mining and energy.

Tourism: The tourism sector is the main service subsector since 2003. Uganda has a considerable potential in this sense. Workers in the tourism sector have pointed out that, apart from the classic strengths (gorillas, for example), our country could offer many other opportunities: the presence of mountains and water bodies could allow the development of adventure tourism. Cultural tourism and ecotourism are new fields that can be successfully exploited. However, other East African countries are also very strong in this sense. Kenya and Tanzania, for example, have a very developed touristic industry, and Rwanda is also heading towards that direction. The difference is that the other countries might enjoy some budget support. For example, tourism sector in Kenya is allocated an average of 23.5 millions USD/year. There are also some tourism development project funded by private donors, and a Tourism Trust Fund that promotes economic growth via the development of a sustainable and profitable tourism sector. In Uganda, however, the situation is quite different. The budget allocated for tourism was of less than 900,000 USD in 2009/2010, with no increase in 2010/2011. The main promotion activities are carried out by the private sector, which complains about the lack of engagement of the government. Uganda does not offer a satisfying array of mid-range accommodation. Lack of marketing strategies and critical tourist infrastructures has been identified as a problem. The presence of exclusive zones, where no accommodation has been set up, should be reconsidered in order to follow a more stringent rationale.

Agriculture: it is an important sector of the economy. It employs 77 percent of the population aged 10 years and older and accounts for 23.7 percent of total GDP. Agricultural exports accounted for 47 percent of total exports in 2007. The main exported products were coffee, tea, fish and fish products. Uganda is known to have vast areas of arable land, but the promotion of agricultural activities does not seem to be sufficient (Maputo declaration on Agric & food security - 10% of national Budget). It should also be emphasised that our agricultural activity has a low value-added (low value, loss of revenue, loss of employment and bi products), as we export mainly raw or slightly processes products. To benefit from agricultural development, we need a comprehensive policy that on the one side modernises the sector through increased mechanisation, better inputs, provision of agricultural extension, and on the other side encourages the domestic processing of such products, so that at least part of the value-addition is made in Uganda (NRM Manifesto 2011- 2016).

Education: Uganda is famous throughout the region for the quality of its education service. Uganda has been known to provide excellent education for doctors, but there has been no export so far (well laid down framework/procedures). The same applies to other professions: architects, engineers, lawyers, teachers, Statisticians, Economists, social-political scientists and accountants. Even if the supply is not adequate, there is potential for an expansion of these professions in Uganda as well as a potential for export in the Common Market. An obstacle to such an expansion is the difference of standards and qualifications in the Partner States. This problem could be solved by the adoption of Mutual Recognition Agreements for academic and professional qualifications, which is currently under discussion. There is need to operationalise Art 102 (EAC partner states to harmonise curricula, examination, certification and accreditation of Education) of the treaty establishing EAC. The Inter University Council for East Africa, has began on this process, they need to be expeditiously supported by the relevant institutions in Uganda and other member states to accomplish this work in record time.

Other potential sectors can be developed:
Mining: Uganda is a mining-friendly country that offers exploration/mining companies a favourable investment and operating environment with significant potential for new discoveries. The country is endowed with a wide variety of minerals (gold, copper, cobalt, chromite, tin, tungsten). This rich natural endowment can be exploited. As in the case of agriculture, though, we should make sure that we do not exclusively export raw materials, as this can only bring us a short-term effect without giving us the potential long-term benefits. Actually, the simple exploitation of raw materials can bring about problems for the competitiveness of the whole economy, as it happened to other countries (resource curse, Dutch disease). We need not only to extract these precious resources, and also to add some value by transforming them into processed or semi-processed materials. For this, an integrated national policy is probably needed. The National Planning Authority should reflect on these themes.

Energy: There is also considerable potential for renewable energy resources such as nuclear, biomass (in terms of fuel-wood and charcoal), bio-fuels, solar, wind, geothermal, small hydropower and biomass. The discovery of the oil and gas in Uganda presents an opportunity to establish a refinery and production of oil products for the local market as well as export. We have licensed five out of the nine potential oilfields. This rich natural resources base can also be part of the country’s comparative advantage, both in terms of export and as inputs for local production. The steady supply of energy is a fundamental pre-requisite for all the domestic economic development and Uganda could also become an exporter in the region.


5.0. Challenges presented by the Common Market
Alongside with the potential benefits, joining the Common Market can also bring about some costs. First, competition for firms and workers might increase, due to the access of regional actors to the local market. This increased competition can drive local firms and workers out of the market. Therefore, our domestic economy should be strengthened to face the increased challenges coming from a larger market. For example, to make our workers more competitive, training should be provided and emphasised (value addition).
In a Common Market it is difficult to carry out an independent trade, fiscal and economic policy, as this has to be agreed on with the other Partner States. This could lead to disputes (Mitigated under the treaty) and a sense of “loss” of national sovereignty. However, the integration process can be governed to make the citizens see it as something that happens to their advantage, not against them. In this sense, Uganda government should identify and address some of the general challenges faced by our people. It is important to engage in a continuous dialogue with civil society, in order to understand its needs and claims about the integration process.

There are some other issues hindering Uganda’s full exploitation of the potential benefits deriving from the Common Market arising from the supply and demand constraints.
On the Demand side, changes in domestic incomes and prices can potentially have a large impact on the overall demand for commodities. We need to assess the extent to which demand may constrain productivity increases in the sectors and income growth.
Uganda must address the following: supply-side constraints.

Ease of investment and setting up business:
• Many of you have certainly consulted the International Finance Corporation and World Bank Report on the Ease of Doing Business 2011. According to it, the process of starting a business is very cumbersome, especially when compared to the other East African countries. It takes 18 steps and 25 days to start a business in Uganda, while the same result can be accomplished with two steps in Rwanda, and it takes one day. Entrepreneurs willing to register a firm in Rwanda just need to fill one form, and to interface with a single agency, paying around 45USD. The result of this was that in the first six months of implementation of such procedures, 5800 businesses registered, compared to 5500 businesses in the last seven years. Obviously part of this is due to the registration of pre-existing businesses rather than the creation of new ones. However, the result remains impressive. There is no reason why Uganda could not replicate this success. Like Rwanda, we are a landlocked country, but we enjoy the presence of a larger market and have good pool of resources.
• The new Investment Climate Programme was recently launched by the World Bank, International Finance Corporation and Ministry of Finance, Planning and Economic Development. This programme will attempt the creation of a better environment for businesses and will be linked to the EAC investment climate reforms. This might be a good starting point.
• Uganda should be promoted as a destination for investments within the EAC. This also requires involvement from Uganda Investment Authority. Currently, we are trying to attract foreign investors in Uganda, but there is no policy specifically addressing investment from other Partner States. Sensitisation is needed on this topic. Investment from other Partner states will now receive national treatment. Uganda Investment Authority should therefore advertise the new opportunities deriving from this and also revisit the investment code.
• Labour: the availability of a well educated labour force could be one of the great advantages of Uganda in the Common Market. This, coupled with our extremely flexible labour market regulation, should constitute one of the main advantages when searching for an investment destination. However, Uganda’s workforce has a very low productivity. Within the EAC per unit labour cost (cost relative to productivity) of Uganda compares favourably members like Rwanda and Burundi, but is considerably higher than Kenya and Tanzania. Therefore, some measures are needed to improve our labour productivity:
1. invest in vocational and technical training, to translate the high level of education of our workforce into real work skills;
2. Invest in modern technologies. Such investments can now come from other Partner States; therefore this point is linked with the previous one.
3. Work ethics and so on.

Trade: Many factors still affect the competitiveness of trade.
• Many of the 35 Non-Tariff Barriers identified by EAC members still affect trade. Clearance time of shipments with physical inspection runs at an average of 7.5 days in Uganda, compared to 3.1 days in Kenya and Tanzania, while clearance time without inspection is also higher, at 3.9 day average, composed to 1.4 in Kenya and 3.1 in Tanzania. This obviously places Uganda in a weak position, emphasised by its landlocked geographic location. Moreover, simplified border operations and harmonisation of standards are currently under discussion.
• Transport: Uganda is also at the heart of the EAC, and could benefit from EAC internal trade. However, the transport system hinders this. According to the World Bank’s Logistic Performance Indicators 2010, the EAC witnesses the largest amount of internal trade in Africa, but this is a modest result if compared with other areas of the world. Therefore, the EAC is benefitting modestly from the trade creation effect that could be generated in a common market. The expansion of trade is also hindered by the present state of physical infrastructures, that greatly increases transport costs and times. Import and exports in the EAC take longer than in SADC, for instance. There is therefore need not only to improve our roads and railway system. We should also promote alternatives, such as water transport and air transport.
• Rules of Origin: there still seems to be confusion on RoO and on their practical consequences no regional trade. Stakeholders should receive training on this topic.
• Borders: cross-border trade still seems to take very long. Improvement is needed for the customs’ administration system (ASYCUDA). There are also misunderstandings on tax issues. When a good is imported in an EAC country from outside the EAC, it is subject to the Common External Tariff. If the good is then sent to a second EAC country, duties such as excise and VAT are collected at the second border-crossing. This happens because there is no agreement on revenue sharing. This is also causing confusion among traders, who believed that with the common Market internal duties would have been eliminated. This causes delays and complaints.
• Quality standards: each EAC country has its own set of quality standards. This hinders the free movement of goods and calls for harmonisation. UNBS should engage with its counterparts in Partner States on this topic. (The EAC standardisation, quality assurance , metrology and testing act 2006)
• Research and Development:
Energy: Energy supply is still not sufficient and the measures that should be taken (e.g. construction of the Jinja power plant) are behind schedule. As we said before, there is great potential for the production of different kinds of energy, but this production must be actually undertaken.

Movement of labour: It is a common misunderstanding that the movement of labour under the Common Market Protocol is completely free within the region. Actually, it is necessary to raise awareness on this point. People still need travel documents to move across the borders, as specified in the Common Market Protocol. Moreover, in order to work in a Partner State a work permit is required.
• In terms of travel documents, Uganda is experiencing some problems. The distribution of machine-readable IDs all the Partner States have promised to issue is yet to be started in Uganda. The production of said IDs has been contracted out, but it has not started yet. The East African passport is also currently not released.
• In terms of work permits, the Common Market Protocol has introduced some improvements, establishing that the worker applying for one has the right to receive an answer (either positive or negative) within 30 days. If the permit is denied, she/he also has the right to know the reason. However, there is still no complaint mechanism. Also, work permit fees are not harmonised among Partner States. MIA should take action on these issues.
Involvement of the private sector: the integration in the Common Market has been conceived as a market-friendly, private-driven process. For this reason, the private sector needs to revisit get engaged in the process. For instance, the Private Sector Foundation Uganda is involved in the negotiation process. Some other organizations, such as KACITA, even if not present in the negotiations have been asking for training about the opportunities offered by the Common Market. Such efforts should be intensified. We want to hear the claims and requests of the private sector about what their needs are.

Data and research: Lack of data is greatly affects our understanding of the impact of the Common Market. It is difficult to measure the changes that the Common Market is bringing about and therefore to assess and correct our actions without a proper data collection strategy. UBOS should be directly involved in this process, alongside with other Ministries, Departments and Agencies that should provide the information. For example, Uganda Revenue Authority and Uganda Investment Authority should provide information on the number of Ugandan firms establishing branches abroad, or the Partner States’ firms setting up shop here.
Sensitisation issues: there are a lot of misunderstandings around the regional integration and the CM. Sensitisation and information on these topics need to be improved. Ministry of East African Community Affairs (MEACA) is currently organising training activities for different stakeholders. It has also prepared some documents illustrating some of the most frequently encountered issues. These documents are also being translated into 5 languages (Luganda, Runyakitara, Atesot, Luo, Swahili), to facilitate its diffusion. Such an effort responds to some needs MEACA identified, thanks to the suggestions of different stakeholders. However, it is felt that there should be more engagement with the stakeholders. We would like to encourage everyone to ask questions and clarifications, as this can help improving awareness of the integration process.

Enforcement issues: the EAC has been said to be weak on the implementation side. At the regional level, the EAC Secretariat should be made stronger. This is one of the responsibilities of the negotiators. At the country level, Uganda should follow the Common Market Implementation Plan (CMIP). This document has been drafted to identify the actions to be undertaken for the implementation of the Common Market. The CMIP has the following objectives: 1) co-ordination of the implementation of the Common Market Protocol in Uganda; 2) Providing benchmarks for monitoring & evaluation; 3) Defining supporting measures needed to jumpstart the participation of Ugandans in the Common Market; and 4) ensuring that Common Market implementation is fully integrated into the work plans of Ministries, Departments and Agencies.
Strictly speaking, the protocol is superior to the national law; therefore there is no need to amend our national laws. However, amending the national legislation could allow a smoother and better transition to the Common Market. Uganda should equip the institutions that are mandated to monitor the effects of the progress of EAC integration. It is also necessary to domesticate regional laws and align national laws within the agreed protocols and Acts of East African Legislative Assembly.
Re-assessment of the development strategy: It has been noted that agriculture, education, mining, energy and tourism have been identified as potentially competitive sectors for the national economy. The contribution of these sectors is also heavily emphasized in the National Development Plan and in the National Export Strategy. However, we should focus our effort on the value addition in our production. Uganda’s major exports are coffee, fish and fish products, tea, cotton, flowers, horticultural products and gold. These exports have are in most cases not processed (No value-addition). It is true that Uganda should focus on its existing strengths, but these kinds of products are not going to push the country’s economy very far. Shifting the focus on a more industrial-based development, on the contrary, could exploit the large availability of workforce, and is also a good way to exploit the economies of scale that the larger regional market allows.

6.0. Strategies to reposition Uganda within the EAC Common Market
The Common Market is a considerable opportunity for Uganda. Uganda is already in a good position, as its fairly liberalised situation allowed our country to join the Common Market without having to undertake big changes. There are definitely many potential benefits in the economic integration. However, to turn this potential into reality, we should undertake a series of measures. Moreover, apart from the benefits that can be reaped at the level of international bargaining, we can enjoy more advantages if we identify and enhance our strengths within the Common Market. Uganda can leverage on these points and develop them to create hubs of competitiveness and efficiency not only within the regional market, but also at the global level.
However this will require strong commitment in implementing the agreed arrangements, fair mechanisms to arbitrate disputes and equitable distribution of the gains and costs of integration.

Repositioning our country in the Common Market requires analysis, identifying our strengths to enhance them, and also our weaknesses to tackle them. The review made above shows some of the points we need to address in order to be prepared and to benefit as much as possible from the integration.
Uganda has some strong points that should be emphasised. The macroeconomic environment is stable and fairly liberalised. There is a great availability of workers, and the labour market is very flexible. Uganda should leverage on this alongside with the development of new policies, laws and structures to attract both regional and foreign investments.

ASANTE SAANA

References:

For further reference, please refer to:
• Treaty for the establishment of East African Community
• Protocol on the Establishment of the East African Customs Union
• Protocol on the Establishment of the East African Community Common Market
• EAC website, www.eac.int
• MEACA website, www.meaca.go.ug
• EAC Secretariat, East African Handbook.
• World Bank, Report of the Diagnostic Trade Integration in Uganda.
• World Bank, Doing Business in the East African Community 2010.
• MEACA, East African Community Common Market: Frequently Asked Questions (FAQs)(available on MEACA website)
• MEACA, East African Community Common Market: The Common Market Protocol Explained (available on MEACA website)
• MEACA, East African Community Common Market: How to Establish a Business in the EAC under the EAC Common Market Protocol, June 2010 (available on