The EAC: A Model for Boosting Intra-Africa Trade?

The Economist reports:

Since its resurrection in 2000, officials are more often found toasting its success. A regional club of six countries, the EAC is now the most integrated trading bloc on the continent. Its members agreed on a customs union in 2005, and a common market in 2010. The region is richer and more peaceful as a result, argues a new paper* from the International Growth Centre, a research organisation.

Many things boost trade, from growth to international deals. The researchers use some fancy modelling to pick out the effect of the EAC. They find that bilateral trade between member countries was a whopping 213% higher in 2011 than it would otherwise have been. Trade gains from other regional blocs in the continent are smaller: around 110% in the Southern African Development Community (SADC), and 80% in the Common Market for Eastern and Southern Africa (COMESA).

Planned infrastructure links over the next decade should add a positive shine to these figures.

Now if only regional integration had a similarly sanguine implication for democratic consolidation among the member countries of the EAC…

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Uganda chooses Tanzania over Kenya in pipeline deal

The Business Daily reports:

Uganda will take its oil to the market through Tanzania’s Tanga port, leaving Kenya to build its own pipeline to Lamu, if the positions taken at the just-ended talks in Kampala are maintained.

It turns out that Kenyan negotiators showed up without having done their homework. For example:

….. it has also emerged that the Kenyan officials participating in the Kampala talks may not have had all their facts right as they tried to address the concerns raised by Uganda over the northern route for the pipeline.

This is odd, given Amb. Amina Mohamed’s chops. Or should we be asking questions of the energy ministry?

Screen Shot 2016-04-16 at 5.04.17 PMUganda’s decision should be treated as new information on the capacity of the Kenyan state to execute large scale infrastructure projects. Kenya really wanted this deal, and the fact that the negotiators could not seal the deal with Uganda suggests that there is no there there as far as Nairobi’s capacity to execute on LAPSSET is concerned. This will undoubtedly impact the Kenyatta administration’s ability to originate new projects related to the $25b LAPSSET development plan.

The economics of the choice of pipeline appeared to not have mattered:

A joint pipeline between Kenya and Uganda would have had an initial throughput of 300,000 barrels per day (200,000 barrels for Uganda and 100,000 barrels for Kenya). This could have earned the pipeline companies $1.66 billion a year, which would be shared between the countries according to throughput.

…… If the two countries go for a standalone pipeline, Uganda will lose $300 million every year due to an increase of $4.07 in tariff per barrel, and Kenya will lose $250 million per year due to the increased tariff of $6.96 per barrel.

All else equal, this is probably a net positive development for the future of the East African Community (EAC). It is obviously a big financial and political loss for Kenya (and for that matter, Uganda) but it will dampen the idea of a two-speed EAC — with Kenya, Uganda, and Rwanda in the fast lane and Tanzania and Burundi in the slow lane.

 

More on Burundi

A commenter, Dastan Kweka, has an interesting reaction to the post on Burundi (see below).

He contends that: (i) at the time the crisis erupted only Uganda was in a position to take up the role of mediator; (ii) Tanzania’s revealed preference for president of Burundi seems to be Nkurunziza (unless they are sure of an amenable replacement); and (iii) that the EAC is already robustly involved in Burundi and that my characterization of the body is inaccurate (“a pure invention”). Here is his reaction in full:

I have been following and researching the crisis in Burundi for a while now (more than 6 months) especially in relation to the role of the imbonerakure militias. I feel that i am in a position to make informed comments. Therefore, i will point out a few things that the author has either overlooked or chosen to ignore as follows:

1. The analysis is not situated within the context under which the crisis was born and which to a larger extent conditioned EAC`s response. When the crisis unfolded in April 25th, Tanzania was preparing for a (political) transition. Kenya was preoccupied with Al Shabab and internal corruption allegations involving senior political figures especially cabinet secretaries. Also, ICC issues especially for the deputy President. Rwanda has always been undesirable when it comes to responding to the situation in Burundi mainly because of the historical animosity. So, the only country that was relatively well positioned to respond at the time was Uganda. And it did respond through EAC. Prior to the appointment of Museveni, EAC consulted with Burundi authorities several times and asked for postponement of elections. As a result, Burundi Presidential elections were rescheduled twice. From June to July 15 then to July 21st. Museveni was appointed to lead the EAC mediation effort in mid July and was endorsed by international parties (ICGLR, AU,UN). It is quite obvious that EAC acted swiftly in a bid to address the then unfolding crisis in Burundi, although the mediation efforts, at the time, failed.
The situation changed in October when election fever engulfed Uganda, which is scheduled to hold Presidential elections in February 2016. When Amama Mbabazi and Kizza Besigye won nominations to run for President of Uganda in the upcoming election, Museveni knew things weren`t going to be business as usual. He therefore sought to commit more time to campaigning and thus delegated mediation efforts to his Minister of Defence, one Kiyonga. Until this stage, mediation efforts were going well. Looking back, we can now agree that delegating was a strategic mistake, but it was necessitated by the context. Mr Kiyonga has failed to even obtain a single inclusive meeting of the conflicting parties. By the way, to what extent is a mediation effort led by a defense minister high-level?
Mr Opalo has argued that “EAC has avoided any kind of direct intervention in Burundi to end what is a singularly political crisis ….“. Isn`t the effort above an example of direct (political) intervention? What kind of intervention is he talking about or would he want to see? In his analysis, he tends to move (covertly) from political intervention to military intervention, without any clarity.
Current information shows that EAC has upgraded the readiness of its standby force and is carrying out necessary preparations in case a need for deployment arises. EAC/AU have military and human rights observers on the ground in Burundi and are working in collaboration with UN in putting together an immediate inclusive dialogue. There is no evidence that they (EAC members) are seeing any difficult in (military) intervention. Isn`t the intervention argument as advanced by the analyst, a pure invention?
2. Intra-regional politics. On this aspect, i somehow agree with Mr Opalo that the region does not have a consensus on the outcomes of the mediation effort. Kagame would want Nkurunzinza to go. Tanzania, i think, wants him to stay until the country can be sure about the stance of a person that will replace him (that is being able to influence his replacement). Uganda and Kenya may be neutral for not having serious interests in Burundi.
Why do i think Tanzania wants him to stay? When the crisis was about to unfold in Burundi in March, 2015, Tanzania made its position clear that the constitution and terms of the Arusha agreement had to be respected. But when Nkurunzinza decided to go ahead with the election, the country, i believe, reneged on its position and sent election observers. Many other countries and international bodies did not. I believe this move signaled a change of position. But, i think, Tanzania remains in full support of the resolution of the conflict through inclusive dialogues.
In my opinion, i think, EAC/AU – through Uganda, was responding well and had the situation under control until, at least, September. In October, Museveni`s attention shifted and mediation efforts faltered. Intra-regional politics are playing a role in slowing down the mediation effort especially as some regional forces strive to boost the position of the sides they are backing so as to, considerably, tilt the political settlement in their favor during negotiations.

Whether or not the EAC has responded “well” to the Burundian crisis, as Mr. Kweka suggests, should be judged by the outcomes. There were meetings and preparations and the appointment of a mediator, yet the body count continues to increase. The EAC should have done more.

One of the reasons for having an international organization like the EAC is so that it can address issues that individual countries may be incentivized to ignore due to domestic political considerations.

Also, it looks like the African Union has approved a possible peacekeeping mission to Burundi (subject to the invitation of the government of Burundi). This is probably a way out of the problems of intra-EAC politics that I highlighted in the earlier post. Unless, of course, Burundi decides to stall the peacekeeping mission by forum shopping between Addis and Arusha.

Why isn’t the East African Community doing more on Burundi?

The situation in Burundi is deteriorating, fast.

Armed-forces-in-Burundi-340x230There are strong signs of ethnic violence. More than 300 people have been killed since President Pierre Nkurunziza successfully violated term limits to stay in office for a third term early this year. The ensuing violence has forced over 220,000 to flee the country, while scores remain displaced internally. Over the last week alone more than 80 people have been murdered in what is increasingly looking like a civil war rather than mere civil unrest met with heavy-handed repression. The African union has used the word “genocide” in reference to the Burundian situation.

For a background on the current Burundian crisis see here, here, here and here.

So given the clear evidence that things are falling apart in Burundi, why isn’t the East African Community (EAC) doing more to de-escalate the situation?

The simple answer is intra-EAC politics (which serve to accentuate the body’s resource constraints).

The EAC is a five-member (Burundi, Kenya, Tanzania, Rwanda and Uganda) regional economic community (REC) that is arguably the most differentiated REC in Africa. Based in Arusha, Tanzania, it is a relatively robust institution replete with executive, legislative and judicial arms.

Like is the case for most African RECs, the EAC member states conceded precious little sovereignty to Arusha. For example, the  EAC treaty does not directly empower the REC to intervene in a member country even in cases of gross violations of human rights (like is currently happening in Burundi). So far regional cooperation within the EAC has mainly focused on economic issues that do not pose substantial threats to sovereignty. It is for this reason that the EAC has avoided any kind of direct intervention in Burundi to end what is a singularly political crisis — both within Burundi and at the regional level.

That said, Article 123 of the EAC treaty provides a loophole for intervention.

The Article stipulates that the purpose of political cooperation among EAC member states is to, among other things: (i) strengthen the security of the Community and its Partner States in all ways; and (ii) preserve peace and strengthen international security among the Partner States and within the Community. In my view these clauses mandate the EAC to protect both the internal security of Burundi as well as intra-EAC security.

It is important to note that so far the norm has been to treat vagueness in African REC treaties as a call to inaction. But vagueness also provides willing interveners with a fair amount of latitude over interpretation. Furthermore, since 2000 the trend within African RECs has been to dilute the infamous OAU non-intervention clauses (see the AU treaty, for example) especially with regard to security matters.

It is not hard to see how the conflict in Burundi poses a clear and present danger to both Burundi’s internal security as well as peace and security within the EAC.

We know from history that an all out civil war in Burundi would threaten the security of the region. Burundi’s ethnic make up roughly mirrors that of Rwanda. Ethnic conflict in Burundi would inevitably elicit an intervention from Rwanda, thereby regionalizing the conflict (with an almost guaranteed knock on effect in eastern DRC). In addition, even though Kagame may not be a fan of Nkurunziza, he lacks the moral authority to criticize him given recent moves to scrap term limits in Rwanda.

If Rwanda (overtly) intervenes in Burundi, it is not clear which side Tanzania — a critical player — would take (especially because of the implications for the stability of eastern DRC). Kigali and Dodoma do not always see eye to eye. In addition, the new Tanzanian president, John Magufuli, is not particularly close to his Kenyan counterpart on account of his closeness to Kenyan opposition leader Raila Odinga. This may limit the possibility of collective action on Burundi by the EAC’s two leading powers.

And then there is Uganda. President Yoweri Museveni is currently the designated mediator in the Burundian negotiation process. But he is currently preoccupied in his bid to win an nth term in office (who’s counting?) His legitimacy as a mediator is seriously in question on account of his political record back home. Recall that the proximate cause of the current crisis in Burundi was Nkurunziza’s decision to violate term limits. Museveni scrapped term limits in 2005 and has systematically squeezed the Ugandan opposition into submission through heavy handed tactics that are direct violations of human rights.

Sadly for Burundians, the current state of inter-state relations within the EAC is strongly biased against any robust intervention to stop the violence that is increasingly becoming routine. Nkurunziza knows this, and will likely try to make an end run on his perceived political opponents before the wider international community begins to pay closer attention.

Lastly, the other possible interveners — the  UN and the EU — are also not likely to intervene in Burundi any time soon, despite the country’s heavy dependence on foreign aid. Europe is hobbled by the ongoing refugee crisis and the war on ISIS. As for the UN, it increasingly launders its interventions through region or sub-regional IOs (see for example AMISOM in Somalia, under the AU). This kind of strategy requires a willing regional partner, something that is lacking in the case of the EAC (or the AU for that matter).

In the next few weeks there will probably be attempts at mediation and calls for a ceasefire. But my hunch is that things are likely to get much worse in Burundi in the short term.

The Crisis in Greece (Lessons for the EAC and UEMOA)

Screen Shot 2015-06-28 at 10.06.13 PM

An abandoned venue from the 2004 Athens Olympics. Source: Guardian.

Greece is on the brink of a financial disaster. Banks and the stock market are closed. Capital controls have been imposed. The country will hold a referendum on July 6th, which could decide whether Greeks keep the euro or go back to using drachmas.

There’s not been a shortage of analyses of Grexit. From adoration of its game theorist Finance Minister, Yanis Varoufakis; to this odd piece in the Journal that says “Greek Prime Minister Alexis Tsipras began leaning toward a risky referendum after creditors covered his proposed policies in red ink” (incidentally, marking papers in red can “damage students”). Barry Eichengreen blames the current crisis on political incompetence – on the part of both Greece and its eurozone creditors, with more blame on the latter. See here for a concise take on Greek fiscal history over the last four decades.

I hope folks at the EAC and UEMOA, the two entities most likely to realize monetary unions, are following the events in Greece closely. The big question on their minds should be: can there be a stable monetary union on the Continent without a fiscal and political union?

Lastly, regardless of how the next few days and the referendum play out, I hope Tsipras’ move will embolden leaders in the developing world to democratize their relationship with the IMF, the Bank, and other creditors. A reasonable democratic involvement in such matters would not just be an easy way to default and blame it on democracy. It would also incentivize creditors against lending money to governments like Greece’s. Obviously voters should not be allowed to decide whether or not they pay their debts (we know how that’d turn out), but they should be consulted before being saddled with crushing debt.

How Eastern Africa can avoid the resource curse

This post originally appeared on the African Development Bank’s Integrating Africa Blog, where yours truly is a regular contributor. 

Eastern Africa is the new fossil fuel frontier (for more check out this (pdf) Deloitte report). In the last few years Kenya, Uganda, Tanzania and Mozambique have discovered large quantities of commercially viable oil and gas deposits, with the potential for even more discoveries as more aggressive prospecting continues. There is reason to be upbeat about the region’s economic prospects over the next three decades, or at least before the oil runs out. But the optimism must be tempered by an acknowledgement of the dangers that come with the newfound resource wealth. Of particular concern are issues of governance and sound economic management.

We are all too aware of the dangers of the resource curse. This is when the discovery and exploitation of natural resources leads to a deterioration of governance, descent into autocracy and a fall in living standards. Associated with the resource curse is the problem of the Dutch disease, which occurs when natural resource exports (e.g. oil and gas) lead to an appreciation of the exchange rate, thereby hurting other export sectors and destroying the ability of a country to diversify its export basket. The new resource-rich Eastern African states face the risk of having both problems, and to avoid them they must cooperate.

In many ways Eastern African states are lucky to be late arrivals at the oil and gas game. Unlike their counterparts in Western and Central Africa, nearly all of them are now nominal electoral democracies with varying degrees of institutionalized systems to ensure transparency in the management of public resources. Across the region, the Big Man syndrome is on the decline. But challenges remain. Recent accusations of secrecy, corruption and bribery surrounding government deals with mining companies suggest that there is a lot of room for improvement as far as the strengthening of institutions that enforce transparency (such as parliaments) is concerned. It is on this front that there is opportunity for regional cooperation to improve transparency and resource management.

While it is easy for governments to ignore weak domestic oversight institutions and civil society organizations, it is much harder to renege on international agreements and treaties. A regional approach to setting standards of transparency and accountability could therefore help ensure that the ongoing oil and gas bonanza does not give way to sorrow and regret three decades down the road. In addition, such an approach would facilitate easier cross-border operations for the oil majors that are currently operational in multiple countries, not to mention drastically reduce the political risk of entering the region’s energy sector. It would also leave individual countries in a stronger bargaining position by limiting opportunities for multinational firms to engage in cross-border regulatory arbitrage.

The way to implement regional cooperation and oversight would be something akin to the African Peer Review Mechanism, but with a permanent regional body and secretariat (perhaps under the East African Community, EAC). Such a body would be mandated to ensure the harmonization of laws to meet global standards of transparency and protection of private property rights. The body would also be mandated to conduct audits of national governments’ use of revenue from resources. The aim of the effort would be to normalize best practices among states and to institute a global standard for states to aspire more – more like the way aspirations for membership in the European Union has been a catalyst for domestic reforms in the former Yugoslavia and Eastern Europe.

Regional cooperation would also provide political cover to politicians with regard to economically questionable fuel subsidies. The realities of democratic government are such that politicians often find themselves forced to concede to demands for fuel subsidies from voters. But history shows that more often that not subsidies come at an enormous cost to the economy and instead of benefitting the poor only benefit middlemen. In addition, as the case of Nigeria shows, once implemented such policies are never easy to roll back both due to politics and the power of entrenched interests. Regional agreements capping any fuel subsidies at reasonable levels would be an excellent way to tie politicians’ hands in a credible manner, while at the same time providing them with political cover against domestic criticism.

Beyond issues of governance, there is need for cooperation on regional infrastructure development in order to reap maximum value for investment and avoid unnecessary wastes and redundancies. Landlocked Uganda and South Sudan will require massive investments in infrastructure to be able to access global energy markets. The two countries’ oil fields are 1,300 km and 1,720 km from the sea through Kenya, respectively. One would hope that as these projects are being studied and implemented, there will be consideration for how to leverage the oil and gas inspired projects to cater to other exports sectors – such as agriculture, tourism and light manufacturing – as well. KPMG, the professional services firm, recently reported that transportation costs eat up as much as 20 per cent of Africa’s foreign exchange earnings.  There is clearly a need to ensure that the planned new roads and railways serve to reduce the cost of exports for all outward oriented sectors in the region. Embedding other exports sectors (such as agriculture, timber, domestic transport, etc.) in the process of developing new transportation infrastructure will minimize the likelihood of their being completely crowded out by the energy sector.

In isolation, each country’s resource sector policy is currently informed by domestic political economy considerations and regional geo-politics. There is an emerging sense of securitization of resources, with each country trying to ensure that the exploitation of its resources does not depend too much on its neighbours. Because of the relatively small size of the different countries’ economies, the risk of ending up with economically inefficient but expensive pipelines, roads and railways is real. South Sudan is currently deciding whether to build a pipeline through Kenya (most likely), through Ethiopia, or stick with the current export route for its oil through Sudan (least preferred due to testy relations). For national security and sovereignty reasons, Uganda is planning on a 30,000-barrel per day refinery in Hoima, despite warnings from industry players that the refinery may not be viable in the long run. Some have argued for the expansion of East Africa’s sole refinery in Mombasa to capture gains from economies of scale, an option that Uganda feels puts its energy security too much in Kenya’s hands.

In the meantime, Kenya and Tanzania are locked in competition over who will emerge as the “gateway to Eastern Africa,” with plans to construct mega-ports in Lamu and Tanga (Mwambani), respectively. While competition is healthy and therefore welcome, this is an area where there is more need for coordination than there is for competition among Eastern African governments. The costs involved are enormous, hence the need for cooperation to avoid any unnecessary redundancies and ensure that the ports realize sufficient returns to justify the investment. Kenya’s planned Lamu Port South Susan Ethiopia Transport Corridor (LAPSSET) project will cost US $24.7 billion. Tanzania’s Mwambani Port and Railway Corridor (Mwaporc) project will cost US $32 billion.

Chapter 15 of the EAC treaty has specific mandates for cooperation in infrastructure development. As far as transport infrastructure goes, so far cooperation has mostly been around Articles 90 (Roads), 91 (Railways) and 92 (Civil Aviation and Air Transport). There is a need to deepen cooperation in the implementation of Article 93 (Maritime Transport and Ports) that, among other things, mandates the establishment of a common regional maritime transport policy and a “harmonious traffic organization system for the optimal use of maritime transport services.”

The contribution of inefficient ports to transportation costs in the regional cannot be ignored. Presently, the EAC’s surface transportation costs, associated with logistics, are the highest of any region in the world. According to the African Development Bank’s State of Infrastructure in East Africa report, these costs are mainly due to administrative and customs delays at ports and delays at borders and on roads. Regional cooperation can help accelerate the process of reforming EAC’s ports, a process that so far has been stifled (at least in Kenya) by domestic political constituencies opposed to the liberalization of the management of ports. The move by the East African Legislative Assembly to pass bills establishing one-stop border posts (OSBPs) and harmonized maximum vehicle loads regulations is therefore a step in the right direction.

Going back to the issue of governance, more integrated regional cooperation in the planning and implementation of infrastructure development projects has the potential to insulate the projects from domestic politics and patronage networks that often limit transparency in the tendering process. Presently, Uganda is in the middle of a row with four different Chinese construction firms over confusion in the tendering process for a new rail link to South Sudan and port on Lake Victoria. The four firms signed different memoranda with different government departments in what appears to be at best a massive lapse in coordination of government activities or at worst a case of competition for rents by over-ambitious tenderpreneurs.  This does not inspire confidence in the future of the project. A possible remedy to these kinds of problems is to have a permanent and independent committee for regional infrastructure to oversee all projects that involve cross-border infrastructure development.

In conclusion, I would like to reiterate that Eastern Africa is lucky to have discovered oil and gas in the age of democracy, transparency and good governance. This will serve to ensure that the different states do not descend into the outright kleptocracy that defined Africa’s resource sector under the likes of Abacha and Mobutu in an earlier time. That said, a lot remains to be done to ensure that the region’s resources will be exploited to the benefit of its people. In this regard there is a lot to be gained from binding regional agreements and treaties to ensure transparency and sound economic management of public resources. Solely relying on weak domestic institutions and civil society organizations will not work.