Economic environment unit7

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Introduction to Basic Economic Theory and Concepts
The Banking Economic Systems
Pricing and Price Mechanism
Inflation
The Government and Economy
Types of Business Organizations
MODULE COVERAGE
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International Trade and Regional Groupings
At the end of this unit, you should be able to:
•Explain the basics of international trade
•Explain the different regional groupings and their objectives

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• International Trade
International trade is the exchange of goods and services across international borders.
In most countries, it represents a significant share of Gross Domestic Products
(GDP). (see module 6)
• Regional Integration
The African continent contains fifty five countries, most of which are small in size.
There is still little intra-African trade. The markets accessible to African countries
are therefore narrow and often isolated due to inefficient transportation routes
and the erection of trade barriers. To overcome this situation, numerous regional
integration agreements have been signed between African countries. The most
important of these agreements are:
1. The Common Market for Eastern and Southern Africa (COMESA)
2. The Economic Community of West African States (ECOWAS)
3. The Southern African Development Community (SADC)
4. The Central African Economic and Monetary Community (CAEMC)
5. The West African Economic and Monetary Union (WAEMU)
6. The Southern African Customs Union (SACU).
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3. THE UGANDA INSTITUTE
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Regional integration is the act of grouping several countries in the same geographic
zone with the aim of forming a larger ensemble and a wider market. Within this
space, free circulation of people, goods and capital is implemented. Companies
can therefore sell their goods on larger markets.
The various production zones in the region can specialize in those sectors of activity in
which they are most competitive, and businesses can industrialise production. In
theory, this makes it possible to lower production costs and improve the region’s
economy.
This grouping takes the legal and political form of the signature of a trade agreement
by different countries.
• The Stages in the regional integration process
Stage One: The Free Trade Zone. Countries that decide to implement regional
integration eliminate customs duties on the goods they produce that circulate
within the regional area. Each member country levies the customs tariffs of its
choice on goods from countries that are not members of the free trade zone.
Stage Two: The Customs Union. The countries that make up the free trade zone
establish a common external tariff (CET) to unify the customs regime for non-
member countries.
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Stage Three: The Common Market. The custom union’s member countries liberalize
the circulation of production factors within the zone. Workers and businesses can
freely move to any country within the common market.
Stage Four: The Economic Union. The countries that belong to the common market
take the next step by unifying their economic policies in the areas of competition,
currency, agriculture, taxation, etc. For instance, in the agricultural sector, the
member countries regulate production and the market, and harmonize prices.
Stage Five: The Monetary Union. To foster trade between the regional organization’s
member countries, some regional groups adopt a common currency. This has the
advantage of lowering the cost of trade by eliminating currency conversion
expenses.
Stage Six: Widespread Integration. The economic union’s member countries decide to
fuse politically and set up a central government for the union.
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Regional Groupings
For relevance to Uganda, we shall explore more the Common Market for Southern and
Eastern Africa (COMESA) and the East African Community (EAC).
COMESA.
The Treaty establishing COMESA was signed on 5th November 1993 in Kampala,
Uganda and its member countries are Angola, Burundi Comoros, D.R. Congo,
Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda,
Seychelles, Sudan, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe.
COMESA replaced the former Preferential Trade Area (PTA) which had existed from the
earlier days of 1981 and was established 'as an organization of free independent
sovereign states which agreed to co-operate in developing their natural and
human resources for the good of all their people.'
Its main focus is on the:
1. Formation of a large economic and trading area that is capable of overcoming
some of the barriers that are faced by individual states.
2. The promotion of peace and security in the region.
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The aims and objectives of COMESA have been designed so as to remove the
structural and institutional weaknesses in the member states by pooling resources
together in order to sustain their development efforts either individually or
collectively. These are as follows:
1. To attain sustainable growth and development of the member States by
promoting a more balanced and harmonious development of its production and
marketing structures;
2. To promote joint development in all fields of economic activity and the joint
adoption of macro -economic policies and programmes; to raise the standard of
living of its peoples, and to foster closer relations among its member States;
3. To co-operate in the creation of an enabling environment for foreign, cross-
border and domestic investment, including the joint promotion of research and
adaptation of science and technology for development;
4. To co-operate in the promotion of peace, security and stability among the
member States in order to enhance economic development in the region;
5. To co-operate in strengthening the relations between the Common Market and
the rest of the world and the adoption of common positions in international
fora; and
6. To contribute towards the establishment, progress and the realization of the
objectives of the African Economic Community.
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By agreeing to the above, member States have agreed on the need to create
and maintain:
• A full free trade area guaranteeing the free movement of goods and
services produced within COMESA and the removal of all tariffs and non-
tariff barriers; a customs union under which goods and services imported
from non-COMESA countries will attract an agreed single tariff all COMESA
States;
• Free movement of capital and investment supported by the adoption of
common investment practices 50 as to create a more favourable
investment climate for the entire COMESA region:
• A gradual establishment of a payments union based on the COMESA
Cleaning House and the eventual establishment of a common monetary
union with a common currency;
• The adoption of a common visa arrangement, including the right of
establishment leading eventually to free movement of bona fide persons.
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COMESA Achievements:
• COMESA, as well as is predecessor the PTA, has achieved a lot in the area of trade,
customs, transport, development finance and technical co-operation. Impressive
progress has also been made in the productive sectors of industry and agriculture.
• Trade facilitation and trade liberalization measures are bearing fruit. Intra-COMESA
trade is increasing and studies indicate that this can increase to about US$4 billion
annually. The challenge facing COMESA is to exploit this potential further.
• As a result of COMESA traffic facilitation measures, transport costs have been
reduced by a factor of about 25% and efforts are underway to reduce them
further.
• In the sector of telecommunications, special emphasis has been placed on
network development to enable direct telecommunication links through more
reliable infrastructure in order to avoid third country transit systems, which prove
to be very costly.
• COMESA has established several important institutions including the PTA Trade and
Development Bank, the COMESA Clearing House, the COMESA Re-insurance
Company and the COMESA Leather and Leather Products Institute.
• The PTA Bank has, over the years, been very active in promoting investments and
providing trade financing facilities.
• A decision has been taken to introduce the COMESA Dollar to replace the UAPTA.
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East African Community (EAC)
• During a one-day summit in Arusha, Tanzania on 22 January 1999, the Heads of
State of Tanzania, Kenya and Uganda resolved to sign the Treaty re-establishing the
East African Community (EAC) by the end of July 1999. The community was to take
over from the Permanent Tripartite Commission for East African Co-operation.
• The EAC strategy emphasises economic co-operation and development with a
strong focus on the social dimension. The role of the private sector and civil
society is considered as central and crucial to the regional integration and
development in a veritable partnership with the public sector.
• Establishment of an internationally competitive single market and investment area
in East Africa is accorded priority alongside the development of regional
infrastructure, human resource, science and technology.
Objectives
Countries emphasize co-operation in the priority areas of transport and
communication, trade and industry, security, immigration and the promotion of
investment in the region.
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The EAC's bid to create a single East African market entails easing travel
restrictions, harmonising tariffs, increasing co-operation among security
forces, improving communications, sharing electrical power and addressing
Lake Victoria issues.
Concrete measures toward integration include freely exchangeable currencies
(and ultimately a single currency), a common East African passport, a common
flag and a double taxation accord.
It also aims to abolish all tariffs with the aim of attaining economic and political
integration. Each member would, however, be allowed to extract a maximum
10% surcharge on some products in order to protect indigenous industries,
especially in the smaller economies of Tanzania and Uganda.
This will be achieved through the establishment of a Customs Union as the entry
point of the Community, a Common Market, subsequently a Monetary Union
and ultimately a Political Federation of the East African States.
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The regional organization aims at achieving its goals and objectives through:
– promotion of a sustainable growth and equitable development of the region,
including rational utilisation of the region's natural resources and protection
of the environment;
– strengthening and consolidation of the longstanding political, economic,
social, cultural and traditional ties and associations between the peoples of
the region in promoting a people-centred mutual development;
– enhancement and strengthening of participation of the private sector and civil
society;
– mainstreaming of gender in all its programmes and enhancement of the role
of women in development;
– promotion of good governance, including adherence to the principles of
democracy, rule of law, accountability, transparency, social justice, equal
opportunities and gender equality; and
– Promotion of peace, security and stability within the region and good
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