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A Case for Zambian entry into the East African Common Market Spring, David Mayer 1970-12-31

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A CASE FOR ZAMBIAN ENTRY INTO THE EAST AFRICAN COMMON MARKET by DAVID MAYER SPRING A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF M. A. in the Department of Economics We accept this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA MAY, 1970 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the Head of my Department or by his representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department The University of British Columbia Vancouver 8, Canada j This thesis covers the subject of economic integration in the East African setting. Following a review of custom union theory literature, a closer examina tion is made of the historical and economic background of the East African Common Market. A case is then made for Zambian entry into the Common Market with particular emphasis put on the effect it would have on the growth of G.D.P. (impact effect) and the development of industry. An empirical examination of the impact effect indicates that Tanzania will be the largest net gainer. A model is also presented that shows the effect of integration on the time horizon of industrial growth. Finally, the thesis concludes that there are net gains that can be enjoyed by all parties if integration is implemented in a rational manner and industrial planning is executed by an inter-country industrial planning board that would allocate industry among the member countries based on sound economic criteria. TABLE OF CONTENTS Introduct i on Chapter I Chapter II -Chapter Ml Chapter IV Chapter V Chapter VI Concluding Remarks Custom union theory and it's relevance to the developing world.. Past history of economic co-operation in East Africa. Zambia as part of the EACM. Impact effect of Zambian entry into the Common Market. The effect of integration on the time horizon of industrial development. Cost considerations of proposed integration 1 "The concept of economic cooperation offers to member States of the East.African sub-region a great potential for advancement towards our common good of sustained economic growth." Dr. Kenneth Kaunda President of'the RepubIic of Zambia 1 INTRODUCTION It is most appropriate that this quotation of President Kaunda's introduces the theme of the thesis. For it is the effects of Zambian entry into the East African Common Market (EACM), that will be of main concern in the following chapters. At present the only members of the EACM are.Kenya, Uganda and ". Tanzania. These countries have shared a common market since 1927 and over the years have co-operated in developing common services and organ izations. • Other countries of the sub-region have expressed an interest in participating in the EACM, and are therefore interested in what prob lems might arise from the extension of the common market. 2 Zambia in particular is interested in associating with the EACM, since it is a landlocked nation which finds itself in a rather precarious economic and political situation. It is, therefore, appropriate for us to examine the case of Zambian entry into the common market, and also to hope that our findings and approach will be of benefit to other states that are contemplating simi Iar action. A complete examination of third country entry into a common market must consider the effect integration will have on such things as capital formation, national income, industrialization, foreign investment, agricultural production,' monetary and fiscal policy, consumer price level, factor mobility, balance of payments, international relations, educationpoIiticaI stability, and finally, the social and cultural attitudes of the nation. Such a study would be a Herculean task involving not a thesis but a book-length study. For this reason we shall focus our attention on a few of.the major factors such as national income, the rate of industrialization, and the general course of economic development. Only cursory mention will be made to the other factors insofar as they relate to our main topics. The body of the thesis wi I I.contain, (1) a theoretical and historical perspective of the situation (Chapters 1, 2 and 3), (2) an empirical study of the short run effects of the proposed integration (Chapter 4), (3) a theoretical model suggesting how the study might be extended (Chapter 5), and finally, (4) the summation and drawing together of our conclusions. It is hoped that the thesis will give the reader an insight i nt.o the problems facing the East African Common Market, and the effect the "proposed integration" will have on the continued operation of the communi ty. CHAPTER I Custom Union theory and it's relevance to the develop i ng worId. In the introduction we pointed out the a I I-encompassing nature of the question. There has developed a body of. economic theory dealing with the very question of economic integration. The next obvious question is, "To what extent can this body of theory provide us with tools to evaIuate.the effects of Zambian entry into the East African Common "Market. Custom Union theory has been a late arrival to the general body of economic theory. It wasn't until the early 1950's that economic integration became a popular topic. Jacob Viner opened the whole question of custom union theory in 1950 with his pioneering work entitled, "The Custom Union Issue". Viner was concerned with the generally accepted hypothesis that since a custom union was a movement towards free trade and since free trade increased potential global welfare, then any movement in that direction would increase welfare. The Vinerian model is quite simple and can best be used to show the contributions he made to Custom Union theory by dispelling the prev ious I y he Id mi sconcepti on . Table '1.1 presents the relevant data. Money price (at existing exchange rates) of a Single Commodity X in Three Countries  Country A B C Price 28<t 24$ 20£ If country A levies an import duty of 50% on commodity X, it would be sufficient to protect its local production. If A forms a custom union with B or C and drops the tariff, then country A would buy commod'iTy X from a lower cost producer. This is trade "creation". If country A-levied a 25% import tax then it would buy commodity X from country C, the lowest cost producer. If a custom union was created between A and B then A would buy from B at 24<£ rather than C at 20<£ plus 5$ tariff. This is Viner's example of trade "diversion" since A buys from a high cost partner producer rather than from the lowest cost producer. Viner' concluded that because trade diversion represented a shift from the lowest cost source of supply to a higher cost source, that it represented a move ment from a more to a less efficient allocation of resources. Viner further concluded that the greater the overlap of commodities produced and protected by both countries, the greater wi I I be the gains from in tegration. Viner's ana Iysis of the custom union issue stirred the interest of other economists who were anxious to contribute to the discussion. Vinerian analysis set the direction for future investigation and for over a decade refinements were added to his analysis. .-• The emphasis of these investigations was placed upon the welfare gains and the conditions necessary to bring them about. Drs. Makower 2 and Morton concluded from their study that the greater the difference between the. cost ratios of the over Iapping commodities of the partner countries, the greater would be gains from trade creation. Implicit in Viner's analysis was the assumption that commodities were consumed in some fixed proportion independent of the structure of relative prices. This weakness in Viner's theory was picked up quite 3 4 5 independently by Lipsey , Meade and Gehrel. All three realized the importance in most cases of the substit ution effect and the implications it carried for custom union theory. 5. ! Fi qure 1.1 Commod i ty A The main gist of the argument is as follows: consumers are assumed to determine their consumption patterns based upon the relative price of commodities. Professor Gehrels restricts his analysis to two commodities which we will assume are subject to a substitution effect. Figure 1.1 shows country A producing commodity Y and trading with country B which produces commodity X. The slope of line A.B represents the terms of trade between X and Y when A trades with B. The free trade equ i Ii br i um poi nt will be when A.B is tangent to the hi ghest i nd i fference curve U If a tariff is imposed by A on commodity X then the relative price in terms of good Y will be' higher, as indicated by the slope of I i ne A'B'. The new equ i Ii bri um wi I I be where the A'B' cuts A.B and is tangent to JJ '' at point H. This is the point where the domestic market rate of transformation equals the free trade market rate of transformation which is tangent to 1'". Under these conditions it is possible to est ablish a trade diverting custom union and increase welfare. Such is the case of a union with country C with a market transformation line of A.C. The new equilibrium is at point E where A.C is tangent to indifference curve I''-.. Thus, there has been a gain in welfare. Although a case may be made by Gehrels in a 2 commodity model, Lipsey^points out that when other commodities are considered at the same time the results are not so profound. Under these circumstances it cannot be presumed that there will always be gains from union. '- " Professor Meade^ tackles the same problems. . He directs most of his attention to criticism and extension of Vinerian analysis and make's a positive contribution by clarifying many of the uncertainties. He re-examines most of the Viner theory using Belgium and the Netherlands as examples of potential custom union partners. He concludes that a custom 8 union is more likely to increase economic welfare: .7. (1) If the economies of the. partner 'countries are actually very competitive or similar but potentially very comp I ementary. or d i ss imi lar. (2) The higher are the initial rates of duty on imports into the partner countries. (3) If each is the principal supplier to the other of the products which it exports to*the other and if each is the principal market for the other of the products which it imports from the other. (4) The greater is the proportion of the world's production, consumption, and trade which is covered by the members of the union. (5) The lower the rate of import duties in the rest of the I ' -world but the greater the number of independent customs areas into which the rest of the world is divided. (6) If world trade barriers take the form of fixed quantitative restrictions rather than of taxes on imports. (7) The greater is the scope for economies of large-scale prod uction in those industries within the union which are now enabled to expand by undercutting similar industries in other parts of the union. (8) If there is a partial, all-round reduction by partner countries rathern than a total elimination of those duties. Professor Meade concludes that there is a general prejudice in favour of custom unions. 9 Again, Lipsey points out the weaknesses of the theory. Meade's hypothesis may hold in a situation of a marginal change in tariff rates but in most custom union situations there will be large tariff reductions with the result of changes in supply and demand conditions. The results will then not be so obvious and you cannot cone Iude that there is a general prejudice in favour of custom unions. After concluding a general survey.of custom union theory Lipsey offers three of his own propositions concerning welfare: (1) "when only some tariffs are to be changed, welfare is more likely to be raised if these tariffs are merely reduced than if 10 they are completely removed." (2) . "given a country's volume of international trade, a custom union is more likely to raise welfare the higher is.the proportion of trade with the country's union partner and the lower the proportion of trade with the outside world." (3) "a custom union is' more likely to raise welfare the lower is the total volume of foreign trade, for the lower is foreign trade the lower must be purchases from the outside world relativeto purchases of domestic commodities."^ DiscussiOn ,of the topic did not end here. Throughout the liter-12 ature different aspects of Vinerian analysis were discussed as well as empirical attempts being made to estimate trade creation and trade diversion for given country groups.^ These theories were mostly developed with the economies of developed countries in mind. The obvious question then arises: What help can these theories offer when considering the situation of developing countries? . One common characteristic.of the theories previously mentioned (henceforth referred to as the Classical theory of Custom Unions) are that they are static models, concerned with the welfare effect generated by trade diversion and trade creation. This is certainly a legitimate con cern for developed countries where the structures of the domestic economies concerned are already formed and display a certain amount of rigidity. As Professor Lipsey most aptly points out in the introduction to his "Survey Article", most of the attention of custom union theory has been placed upon welfare gains arising from specialization of production while the welfare gain accruing from a change in the rate of economic growth is "not being dealt with at all".^ is this very source of we I fare'gain that is of dominant importance to the developing world. The emphasis of the classical theories, therefore, has limited their use as analytical tools in the developing world. The fixed and static assumptions of classical theory are variables in the dynamic , process of development. The assumptions of fixed factor proportion, full employment of resources, competitive pricing, given industrial structure, for example,are all assumptions that do not hold for the developing world: they are the variable factors that are looked to to create an increase in the rate of economic development. We must, therefore, find a theory that takes into consideration these factors when;-presenting a theory of economic integration as an engine of growth. Seeing the need for such an approach Drs. Cooper and Massell developed a. theory that would take into account some of these factors. The main contribution of their model is the realization that developing countries desire industrialization. This follows the Prebish-UN thesis that developing countries must look to increased industrial development and eventual export of manufactured goods in order to narrow the income disparities between the 'have' and 'have not' countries. In order to undergo the dynamic changes in the structure of their economies, the Cooper-MasseI I model accepts industrialization as a legitimate policy goal. An interesting feature of their model is that it shows the trade-off between industrialization and national income. This might reflect the many developing nations which export primary products. One drawback of their model is that after presenting a convinc ing argument regarding the inappropriateness of classical theory, they 10. proceed to make some of the,same assumptions (i.e. full employment, . constant costs, competitive pricing and constant terms of trade). But it is perhaps initially necessary to,retain some of these assumptions in order to construct a determinate and comprehensive theoretical model. The model accommodates the governments desire for industrial ization by constructing a demand curve D.D which shows the level of indus trial production desired at differing levels of cost of protection. This demand curve is negatively sloped, indicating that at a high cost of protection a smaller amount of industrial production will be desired by national planners. In its original form the model labels the vertical axis as the marginal cost of industry; I have Changed the vertical axis to read as the marginal cost of protection for in fact the cost of pro tection is not the marginaI.cost of the industry but the difference be tween the marginal cost and world market price. This change is there fore consistent with the rest of the model. . The supply curve S.S is stepped since each different desired in dustry requires differing degrees of protection. The industries are arranged in ascending order of,costs of production. Since the national pfanners'desire for industrial production D.D and the supply of industrial production S.S the equilibrium point is where the two curves intersect at poi nt P. in f i gure 1.2. All i ndustr ies to the right of V wilI not be protected and those to the left of V will be protected at a total cost (or loss of national income) of O.S.P.V. It is assumed in this model that the country considered, has a comparative advantage in primary goods export, i.e. corn. If it wanted to maximize national income it should engage in the economic activity with the highest return in this case corn production. Any diversion of economic resource from corn producton will mean a decrease in national iu. a. Fi qure 1.4 Marg i naI Cost^of Protect i on! ius „ S^syf.jLXS. L Coat, •Surfs Surfs $/>i><S C M /V P Industrial Production income. There is, therefore, a conscious trade-off made between industrial production and national income. This situation is illustrated in figure 1.3 by a production consumption curve MN. If no industrial production is undertaken then national income will be maximized at point M. As industrial production increases national income- falls until it reaches point N where all national income is derived from industrial production. The shape of the indifference curve I.I. indicates the national planners' preference, for example, a ho izontaI I.I. would show infinite preference for corn production as a method of maximizing income. With such an indifference map the corner solution M would result and corn production would be the only economic activity. Point P in figure 1.3 corresponds to the point of intersection of D.D and S.S in figure 1.2. Similarly the level of industrial production O.V correspond in both d i agrams. . '. . When a custom union is formed between two countries of which each has an intra-union comparative advantage in at least one industry, then both will gain from integration. Assuming that both countries A and B have a desired industrial production OM (figure 1.4) then by forming a union, each country wi II specia Iize in its lowest cost industry. In the situation depicted in figure 1.4, A produces hats and B produces coats for the combined market. The increase in welfare from the national -planners''"poi n-t .of view can be shown by figure 1.5. The original production consumption curve for the country A is M.N and the desired level of industrial production OV is indicated at point P where I.I is tangent to M.N. Curve R.S. rep resents the situation for A when in union with B. Point R is lower than M which indicates that even if A undertakes no industrial production it 12. must share' the cost of protection of industry in B. Similarly, if A undettakes just industrial activity it will have a higher national income (indicated by point S) as part of a union, since half of the burden of protection wi II be borne by Country B. The intermediate case where both specialize in their lowest cost industry shows that with the same level of industrialization O.V that A- is on a higher in difference curve I'l'. Using the basic model, Cooper and Masse I I examine different possible situations facing potential partners and conclude: "The potential gain from CU will be larger if: (1) there is a.steeply rising marginal cost of protection in the two countries. (2) the economies have a strong preference for industry. (3) the countries are complementary. (4) neither country dominates the other in industrial production generally." ^ What can this model tell us about the possible welfare gains from our proposed integration? From the information available some potential gains from CU wi II be forthcoming since there is a strong preference for industrial development. The countries involved are potentially comple mentary and the hope is that future development will bring each country's industrial sector to a level where no one partner country will dominate the other. Thus two of the above four conditions are fulfilled. The Cooper-MasseI I model has come closer to providing an economic tool with which to study economic integration in the developing world. It has made a positive contribution to custom union theory if only to refocus the direction of investigation of this topic. With regard to the question of Zambian entry into the East African 13. Common Market our inquiry follows the same direction. The tools—that------we shall use will also incorporate the countries' desire for industrial ization. They deal more specifically with the effects on the industrial process itself and how such a process wi II affect the rate of economic development of the region. . We are, therefore, focusing our attention on the very source of welfare gain that Lipsey has pointed out is missing from the classical theory. 14. CHAPTER 1 I Past history of economic co-operation i n East Afr i ca. Before we address the main question of'the thesis it will be beneficial to have a brief look at the history of economic co- . operation of the area. Thus it is the purpose of this chapter to briefly review the main events leading up to independence and the problems presently facing the EACM. • Although the potential benefits from integration might be great for a particular group of developing countries, not all areas can take, advantage of such a union. There are certain preconditions that must be met prior to integration: adequate inter-territory infrastructure, a degree of political stability, planned development, and a sufficient measure of co-ordination and harmonization of certain economic policies. Within the East African context most of these preconditions were satisfied. The main reason explaining the existence of such a conducive atmosphere was that all three countries were under the same colonial rule since World War I. British Colonial policy dictated the development of the three territories on an integrated basis. In order to facilitate such a policy, a transportation system was developed linking the major market areas in the region. Although this system is not highly developed compared with advanced economies, it is adequate enough to provide cheap transport between the major population centres. The basis for.the consumer goods transport is the rail system, the main line linking the principal port area, Mombasa, with Nairobi, Kampala, and the north and west part of Uganda. A second Iine links 15. Dar-es-SaIaam with the interior of. Tanzania and a third line connects the port of Tanga with important agricultural areas of Moshi and Arusha and with Mombasa. The railways are complemented by a road system that is very good in terms of standards of tropical Africa. With the major rail links completed in the early 1900's, a common market was established between Kenya and Uganda in 1917, while Tanzania participated in stages. In 1922 common external tariffs were established, by 1923 there was free trade of domestic goods and by 1927 internal tariffs on imported goods had been eliminated between the three territories. .It wasn't until 1949 that Tanzania's department of customs was amalgamated with the other two. In 1926, the first Conference of East African Governors was held, and in 1932, it was agreed by the Secretary of State for Colonial Affairs that the governors of Tanganyika, Uganda and Kenya would meet annually to discuss matters of common interest, and that a permanent secretariat would be established. During World War II, the three territories pooled their resources to help in the war effort and became self-sufficient in food . production. In 1945, the Colonial Office proposed that a permanent body called the High Commission, replace the Conference of Governors. This body would deal with the increasing responsibility of the territories. After a revision of the original proposal, on January 1, 1948, the High Commission was created with seven executive offices: administrator, commissioner of transportation, postmaster-general, legal secretary, financial secretary, commissioner of customs and chief administrative secretary. 16. The legislative arm of the EACM was' the Central Legislative Assembly (CLA) that consisted of a Speaker, the seven ex-officio members (mentioned in the previous paragraph), six nominated members and twenty unofficial members. The three governors each nominated two members, appointed three unofficial members and the territorial legis latures elected three unofficial members. The remaining two unofficial members were local Arab citizens appointed by the High Commission. The CLA had limited powers and was a rubber stamp body that was to support the decisions of the High Commission. No bill could be introduced into the assembly unless its introduction had received approval of the High Commission. The High Commission could assent or refuse assent to bills at its discretion and it also had the power to declare passed a bill which the assembly failed to pass. The CLA's power was limited to legislation on-appropriation of funds to different common agencies. Along with these two joint establishments came the formation of the Common Services Organization. This body was to run a co-ordinated program in transportation, communication, revenue collection and research services. (See Appendix I A). This arrangement allowed for the most economical dis tribution of ski I led administrators. The main Iimi tation on the EACM was that it did not, until 1961, have its own source of revenue. It depended on the territorial councils and the British Colonial and Welfare Offices for its operating expenses. Following the Raisman Report^ recommendations, a distributive pool was established under the administration of the High Commission to finance common services. The fund received 40% of income tax from corporations, 6% of Customs and Excise duties collected in East Africa. The fund paid 17; the cost of collection, and the remaining revenue was used to finance / the services with the remaining amount being divided equally among the three territories. In that same year the High Commission was trans formed into the East African Common Services Organization (EACSO). This was not simply a change in name alone.but was an official shift from colonial to independent rule. The executive body was made up of representatives of the three territorial governments which, for example,even had the powers to amend the constitution. At the same time the CLA was enlarged and made to consist wholly of members elected by the legislatures of the three countries. The Authority was run by Committees on which ministries of the three individual countries were represented and which covered Finance, Communic ation, Commerce and Industry, Social and Research Services and Labour. The decisions of these committees must be made on a unaminous basis thus limit ing their effectiveness to matters on which there are no major divergences of interests among the three countries. These institutional changes came at an opportune time when it was politically essential to shed the yoke of the British colonial rulers. This reorganization of the EAHC formalized the break between Britain and East Africa, but maintained the important organizational tool for continued co operation. 18. A further incentive for continued economic integration was the existence of a common currency for the three territories.' In 1919 the East African Currency Board was established by the British Colonial Office. Like other Currency Boards its main function was to act as a ; currency authority, exchanging East African shillings for pounds sterling on the basis of 20:1. Under this early system the EACB had limited powers and local .money supply was limited to the requirements of the balance of payments. In 1955 the EACB was authorized to hold portfolio securities of the local government to the extent of 10 million pounds. This amount had gradually increased to 35 million pounds in .1964. This I provided an additional degree of monetary flexibility and permitted a degree of deficit financing to the three governments, which until recently has not been taken up. -.. Thus the EACB served a useful purpose i n the pre- i ndependence times. It was logical that with political independence and the talk of federation this body would be converted to a Central Bank authority having the power to determine credit policy rather than leaving it to the discretion of the commercial Banks. (The fact that this natural evolution never took place will be d iscussed later i n the paper.) Reflecting on the early institutional arrangements of the East Africa Common Market everything seemed to be set for a successful transformation from colonial rule to independence and continued economic integration. Even under such favourable conditions the EACM was beset with prob lems that came to a climax in 1964 when Tanzania threatened to withdraw from the organization. Examination of inter-territorial trade reveals some basic charac-Table 2.1 Inter-territorial trade Of East Africa Kenya Uganda Tanzania Combined Ug.& Tan. b Exports 1 mports • •• Exports Imports Exports Imports Exports 1mports 1959 Food, beverages and .tobacco 6,560 2,796 . 2,929 3,704 . 1,423 4,412 . 4,352, 8,116 Raw materi a Is and mi neraI fueIs . 388 1,862 1,342 342 880 406 2,222 748 Manufact.goods and chemicals 5,284 826 . 953 2,448 268 3,231 .. 1,221 5,679 d TOTAL .12,232 5,484 5,224 ' ,6,494 2,571 8,049 7,795 14,543 1966 Food,Bev., tobacco 7,306 3,420 2,755 4,134 1,433 3,941 .4,188 . 8,075 Raw mat. & mi n.fueIs 5,209 2,100 . 1,430 2,958 936 2,518 2,366 5,476 Manuf.goods & chem. ••• 16,277 5,588 6,245 9,312 2,268 9,888 '8,513 19,200 28,792 11,108 •10,430 16,404 4,637 . 16,347 15,107 32,751 Kenyan Inter-territorial ex ports as % of Combined Uganda and Tanzania inter-ter.Imports Kenyan Inter-territorial Im ports as % of total combined Inter-ter. exports of Ug. & Tan. 1959 Food,bev. tobacco Raw mat. & min. fuels Manuf.goods & chem's TOTAL 1966 Food, bev. tobacco Raw mat. & mi n. fuels Manuf.goods & chem's 80.8 51.8 93.04 84. 1 90.4 95. 1 84.7 87.9 64.2 83.7 67.7 70.3 81.6 88.7 65.6 73.5 a b c d SITC cat. 0 & SITC " 2 -SITC " 5 -ExcIud i ng SITC category 9. Source: I.M.F. Surveys of African Economics Vol. II, p.80 20. teristies that have led to discontent. By leaving industrialization" to market forces alone, it was natural that a manufacturing industry would develop, in the most conducive area. It happened that Kenya was the most developed territory of the three. Nairobi, now the capital of Kenya, was the colonial administrative centre for the entire region. Adequate infrastructure, a developed financial market and close proximity to monetized local markets made it the ideal location for industrialization. This meant that Nairobi became the growing point of the area. Industries would locate in Kenya and export their products to Uganda and Tanganyika. Similarly most imports to the area passed through the import houses of Kenya. Transfer of imported goods from Kenya to Uganda and Tanganyika 2 rose from 18$ in 1956 to 23$ in 1963. Inter-territorial trade has'in creased s i x-foId from 7 m i I Ii on pounds in. 1949 to 44 mi 1 Ii on in 1966. ~* In terms of value on inter-territorial trade Kenya has been the major source of supply as well as the principal market within the region. (From table 2.1)'." • In 1966 Kenya furnished 29 million pounds or 88$ of Tanganyika and Uganda's total inter-territorial imports. Also in 1966 Kenya produced 85$ of manufactured goods and chemicals imported by Tanzania and Uganda from E. Africa, 95% of raw material and mineral fuels, and 91$ of foodstuffs, beverages and tobacco. On the other hand, Kenya, in 1966, provided a market for 74$ of Tanganyika and Uganda's 9 million pound combined inter-territorial export of manufactures and chemicals, 66$ has been exported to . Kenya of 2 million raw materials and mineral fuels 89$ exported to Kenya and of 4 million pounds worth of foodstuffs, beverages and tobacco, 82$ go to Kenya. A further indication of the inequitable distribution of regional production is the composition of inter-territorial exports. Among Kenya's inter-territorial exports in 1966, the leading commodities were petroleum 21-products, clothing and footwear, pulp and paper products, soap and cleaning preparations, wheat, synthetic fabrics, cement, margarine and shortening, milk and cream, perfume and cosmetics, butter and ghee and cigarettes. Uganda's leading exports were cotton piece goods, animal and vegetable oils and fats, raw tobacco, iron and steel bars, margarine and shortening. Those of Tanzania were animal and vegetabIe oils and fats, aluminum products, blankets, raw tobacco, clothing and footwear. This composition of inter-territoriaI exports further affirms our suspicion that Kenya possesses a large share of the manufacturing sector of the region. Because of this situation Kenya has•come to rely more heavily on inter-territorial trade than either Tanzania or Uganda. From - 1959-1966 Kenya's total inter-territorial exports rose from 37$ of external domestic exports to 50$. -The cumulative effect.of: (1) the growing imbalance of inter-country trade, (2) the resulting locational distribution of industrial ization, and (3) the growing discontent of Tanzania and Uganda, led'to a serious evaluation of the distribution of costs and benefits of integration. There are three basic questions involved in such an analysis: 1. Would some countries have gained from not belonging to the EACM? 2. What gains and losses would be involved for the members of the union if it were to be broken up? 3. What would be the long run gains and losses of each member of EACM if the common market broke up? It would be an impossible task to answer the first question since it requires an assessment of what development would have been for individual countries without EACM. Even if .economic ana Iysis couId give us this historical perspective it would be no guide for the future to countries 22. already participating in the common market. The third question also requires some type of historical perspective. Although it is an im portant question for future policy decisions it involves taking into consideration' problems that are passed over in a comparative static analysis. Therefore most of the effort has been spent on a quantitative analysis of the distribution of costs and benefits of the EACM with ref erence to the second question. The first attempt was made by A. J. Brown 4 5 in 1961, followed by D. P. Ghai in 1964. A third attempt was made in 6 1965 by W. T. Newlyn and in 1966 important comments were made on the works of Ghai and Newlyn by A. Haze I wood.^ Presentation of these theories in Appendix IB show.that even though it can be can be shown under certain assumptions that Tanzania and Uganda might gain from a breakup of EACM, these theories are criticised or invalidated by the very assumptions on which, they are based. But one thing , 'commonly understood from all these analyses is that Kenya has certainly been the net gainer from the EACM and that steps must be taken to rectify the s ituati on. Such was the purpose of the Kampala experiment. In 1965 the three governments agreed to measures that would try and equalize the situation (see Appendix IC). But this arrangement was soon to break down for several reasons. Kenya had mildly assented to the new measures on the assumption that the EACM would continue to operate on a common currency. When Tanzania announced plans to open their own central banks, Kenya withdrew its support • from the agreement and retaliated by withdrawing its support of the planned Rover assembly plant for Tanzania and the industrial reallocation schemes. Tanzania retaliated by imposing restrictions on imports from Kenya. 23. It became apparent within a few months that the agreement would not be honoured. . With this realization came the need for re-examination of the whole common market set-up. Therefore, in 1965, a three country Ministerial Commission under the chairmanship of K. Philip of Denmark was established to examine the arrangements of the EACM and make recommend ations on a number of aspects of . its operations. The results of the Philip's Commission was the drafting and accept ance of the East African Treaty for Economic Co-operation. In June of 1967 the three heads of state signed the Treaty which, for the first time, legalized the existence of the common market. The goals were broad and aimed at preserving the institutions of the common market which had contributed to the development of the region and at the same time tried to resolve some of the problems which had beset the commu n i ty. The administrative structure of the EACM remained relatively unchanged. The only change was that, the three territorial members of the Authority were to hold ministerial posts in their local governments and be part of the cabinet with no other portfolio. Secondly, of minor economic importance was the decentralization of the headquarters of the common service organizations. Ra i I ways remain in:Nairobi, harbours and the headquarters of the community itself go to Tanzania, and post and telegraph and the new East African Development Banks (EADB) will be set up in Uganda. Although there may be some loss of administrative economies the decentralization was politically expedient. Now turning to the main problem facing the EACM we will examine those changes which try to tackle the problem of unequal distribution of costs and benefits discussed earlier. Two new concepts were introduced into the Treaty to remedy the 24. situation. First the setting up of the East African Development Bank—=----— and, second, the introduction of a transfer tax system on inter-territ orial trade. -The Bank was set up with the express purpose of aiding, the lesser developed 'have not' countries of the EACM. All three countries contr i buted. I I y to the 56 million dollar capital stock, but both Uganda and Tanzania have drawing rights of 38 3/4$ while Kenya can draw only 22|? of the total investments, guarantees and loans. Priorities are given to industrial development projects in the lesser industrialized countries and the projects financed by the EADB will be designed to make the countries economies more complementary. i 1 The transfer tax system in essence is a limited inter-country trade restriction. It is designed to help the deficit countries develop local manufacturing without having to compete with Kenyan goods in the initial period of production. The tax applies to locally produced articles of a deficit country in inter-territoria I manufactured goods trade, and can be applied up to a period of eight years. The privilege would be forfeited once the country reduces its deficit by 80%. The tariff rate itself cannot exceed 50% of the ad velorem third country rate on simi lar imports, and local production must have a value of $100,000. or supply ]5% of the domestic market. Although the Treaty tried to improve the distribution of benefits and costs of integration it resorted to methods of second best solution. The transfer tax in particular is of a short run, stop gap nature. It will be argued later in the thesis that the only 'long-run solution to this problem is the enactment of a regional industrial development plan. This is what Uganda and Tanzania have been asking for and it is the premise of this thesis that under the proposed integration this fact is more likely 25. to become a reality. Thus the history of the area shows a good record of economic co operation. With the independence of the three countries and the growth of national interests, the road to continued integration is not so easy. Problems have arisen and solutions proposed but the future of the EACM will be determined in the next decade and it is the contention of the author that Zambian entry into the common market will increase the probability of success. I hope the following four chapters will con vince the reader to be of this same opinion. 26. ; CHAPTER III Zambia as part of the EACM. Having investigated the early history of the East African Common Market and the problems which, we now turn to the main premise of our thesis, 'Zambian Entry into the EACM'. In order to logically present our arguments we must first consider how Zambia fits into the existing economic structure. ' ' . . Because this' question is of paramount importance, this chapter will be devoted to an examination of different aspects of the enquiry, such as: (1) similarities and differences in the basic structures and development of the four economies, (2) export orientation of all four countries and implications of our proposed integration, and finally, (3) 'the likely benefits accruing from our proposed integration. Comparative examination In order to have a look at the setting of the four countries, I have drawn up table'3AI,which briefly summarizes some of the basic characteristics under the headings of "geography", "demography", "climate", and "economy". Although this chart does not give us enough information for a detailed analysis, a few basic observations can be made. First, the obvious differ ence in sizes of domestic population: the population of Zambia is only a little more than half that of Uganda. Second, we observe that all four countries are export oriented: that is to say that they rely heavily upon exports as a major source of foreign exchange, and a large portion.of their G.D.P. is devoted to export production. Thus, even a very cursory look at the economic setting reveals two very important characteristics. To take our analysis one step further, we wi I I examine the make-up . of G.D.P. in the countries involved. Table 3.2 shows the gross domestic Setting Geography Climate Kenya. Uganda 225,000 sq. mi les N & S tor. 560 mi Ri ft val ' two ma i n Tunu and , 280 equa-mi . of es wide, ey in West, rivers -Gal ana. 91,134 sq. mi., 400 •mi . N-S, 350 E-W, Mt. Elgon 14,178'.. 1/7 swamp and lake. L. Victori a 3rd in world. On plateau 4-6,000' Ii fting to the N. Tropical vegitationon Coast. Half country arid lowland. Natu ral vegitation of poor grass and barren desert. Rest of K. highland, 2-9,000'., Mt. Kenya ,17,000' with 100" rianfali, de-to 10" in the N. 55° creasing average at 9,0.00' and 80° F at the coast. Grassland at middle altitude. SW corner of country best farmland in Africa. 65-85° F. 40-50" rain anuaIly Rainy season Apr/May & Sept/Oct Good conditions for agriculture and Ii vestock. Tanzan i a 363,000 sq. mi. 6$ water covered. Zan zibar 640 sq. mi. Low coastal strip rising to 4,000'. Mt. KiI imanjaro -19,565! Mt.:Meru 14,979. Rufiji & Ruvuma main rivers. Lake Tangany i ka in west at elevation 2,534'. 79° F. mean temp, inadequate and poorly distribu ted rainfall. Tropical storms. 50" in low areas, so perrenial crops. 30" or less in Central Plain. 10$ is cultivated. Demography Economy Pop. 9.9 mill, in 1967. African, 2$ Indian. 42,000 Europeans, 39,000 Arabs, 4,000 others. Main African groups Kikuyus, Luo, Luhya, " Language engI ish or swah iii. Nai rob i i s. 270,000 (capital) Mombassa, .180,000 (port) . populat ion. 6-7% urban Agricultural base.;' 75$ in: agri c. Gi ves 35%' of GDP and 50% of Foreign earning: Manu. of food stuffs and raw' mater i als. Pop. 7.7 mi I I.(1966). 2.6$ increase anually. 98$ African. 80,000 Asian. I 1,000 Europeans Kampala, 80,000 (capital) Agri cuIturaI base. Cotton & Coffee. 90$ of pop. in agric., 60$ of GDP, 80$. of export earnings, Pop. 11.3 mill. (1967) less then 1$ non-African. Africans mainly Bantu. Lang, is Swah iii. 1/4 are Mus Mm. Dar es Salaam 272,500.(capitaI) Moshi - agric. centre. Agric. base, cotton, coffee, s i saI, Di amonds, 80$ of pop. in agric, 80$ of foreign ex., 50*$ of'GDP, and 50% of agric. output i s from subs i ste farmers. nee Zambia 290,587 sq. mi. high plateau, 3,500-4,500 ', rising to 7,000 '. savannah shrub. three distinct seasons, cool, dry season, May-Aug. 50-80°. Hot, dry sept-nov. Hot, rainy Dec-Apr. 34" annual rainfalI. 50" in N., 20-30" in S. 4,065,00 (1968) 3% annual growth rate. 82,700 non-Africans. Pop. concentration in N. cities of Kitwe, Ndola, Kufulira, Luanshya. Lusaka, 138,000 (capital) \9% of pop. is urban. 73 different tribes. mining industry base. 50% of GDP; export earnings are 90-95f> derived from copper. World's 3rd largest copper producer, copper is source of 2/3 of government revenues. CD Gross Domestic Product (at factor cost). (3.2) Currency: $ U.S. Zambia1 Tanzania2 Kenya3 Uganda AgricuIture 1964 1966 1964 . 1966 1964 .1966 1964 1966 74.62 84.70 392.70 406.69 331.65 363.87 169.39 187.60 Forestry & •Fisheries 13.59 16.25 6.72 7.56 Mi n i ng & Quarry i ng . 309. 12 336.14 16.94 . 19.74 4.06 4.62 14.84 18.20 -Manufactur i ng 39.48 84.28 27. 16 39.62 94.82 118.07 24.08 49.28 Bu i i d i ng and Construction .28.00 75.06 21,56 24.22 35.29 46.78 9.80 12.89 E lectricity and Water 7.00 10.36 4.90 6.72 19.47 21.85 8. 12 10.64 Trans. & Communication 45.36 27.58 34.57 70.45 89.22 17.36 20.44 Wholesale and Reta i 1 trade 64. 12 109.62 84.00 107.24 96.36 135.90 54.88 67.76 Banking, insurance and real estate 15:68 37.38 33.47 42.57 Rent 31 .08 37.38 52.94 58.68 10.92 13.44 Government Services 29.68 49.98 115.27 131.09 25.06 .27.16 Misc. Services 54.88 68.88 71.25 86. 10 48.89 58.26 39.20 55.44 TOTAL G.D.P. at Factor Cost 669.45 902.30 677.16 762.14 915.86 1064.85 546.27 652.95 Sources: 1 Economic Report 1968 Republic of Zambia 3 Surveys of African Economies, Vol.2,p.214 2 Surveys of African Economies, Vol. 2, p.214 4 " " " " pi296 30, product at factor cost for they years 1964 and 1966. We can see that, even with Zambia included, Kenya sti II leads with the highest G.D.P. in both years. In 1964 Zambia ranked third behind Tanzania but in 1966, because of high copper prices,^ her G.D.P. rose to rank second only to Kenya. By scanning the figures in table 3.2, another basic difference between Zambia and the other countries becomes apparent. For the EACM countries the leading sector of the economy is agriculture while in the Zambian economy the major sector is mining and quarrying. - In both cases these, sectors are the leading export sectors. Although the agricultural sectors of the various countries differ in size they share a number of common features in their historical devel opment. Appendix II presented a detailed analysis of the economic devel opment of the agricultural sectors of Uganda, Kenya and Tanzania. I propose here only to consider a few of the highlights that are relevant to the question of Zambian entry into the Common Market. As mentioned earlier, for all three East African countries the agricultural sector has been the leading sector. In the case of Zambia the agricultural sector has been developed in response to local demand. With the development of the copper belt in the 1920's there was created a local demand for basic food stuffs. The mining companies paid part of their wages in kind and it was cheaper to encourage local production rather than importing. With the mines coming into full production in 1930, dom estic consumption of maize rose from 106,000 bags in 1928 to 300,000 bags in 1930. Cattle purchased by the mines likewise increased from 5,000 to 18,000 head between 1926 and 1930. 2 Number of Manufacturing Establishments 1965 Tanzan ia Zambia Number of Estab-Ii shments Emp1oyment . Output Thous. Sh. Number of Estab.l ish ments EmpIoyment Output Thous. Sh. Food Manufacturing 125 9,223 345,883 66 . 4, 122 13,524 'Beverages Tobacco manufacturing •11-! 3 64 • 1,097 49,276 19,307 29 .2,194 11,226 Texti Ies Footwear & wearing apparel 158 10 21,911 .1,083 533,095 23,164 70 3, 154 4,665 Manuf. of wood except furniture 73 3,492 37,732 Furniture & fixtures 17 • 440 7,664 Paper products, . pri nti ng & pub I. 22: 813 20,027 25 1,218 2,056 Leather products 8 242 '. 32,808 Rubber products 5 • " 104 3,229 ChemicaI & chemi caI. products 18 • • ••; 709 59,677 , Non-metaI Ii c mi neraI products .9 22,754 Assembly and repair.of . transportation equip. 120 3,476 • 3,760 Other manufacturing 213 12,042 20,342 TOTAL 459 40,065 1,242,052 523 26,203 . 55,573 32. Until 1924, Northern Rhodesia was administered by the British South African Company. It was their purpose to maximize their share holders profits. Mining was the most profitable activity and agricul tural development was only encouraged to give the mine employees a cheap source of food supply. Rather than rely on local African production they encouraged European settlers to immigrate to choice lands that would be allocated to them. Thus by 1958 there were about 1,200 European-farmers employing 45,000 Africans and farming more than 5,000,000 acres. ^ Most of this land was along the railroad line and therefore had easy access to the copper belt markets. In 1960 the European farmers marketed over 11% of totaI.marketed agricultural production. Native African farmers lived in Native reserves and Native tract land which made up 94$ of the' totaI' area of Zambia but only 1% of which was classified "good" for agricultural crops. At present the government is undertaking a program to improve the lot of the African farmer by introducing new farming techniques, fertilizers and modern, so i I management. In this respect, therefore, there is a marked simi larity between Zambian and Kenyan development. .. Turning now to the manufacturing sector we can see a great deal of similarity between the four regions. All have relatively small industrial sectors, with Kenya leading with the highest level of manufacturing output. From table 3.3 we see that Zambia has almost the same number of industrial establishments as Tanzania, yet employs only half the number of workers. In spite of this Zambia produced only 20% less output (by value) than Tanzania. The reason for the small manufacturing sector is twofold. First, most of the economic activity has been placed upon the copper industry • Table 3.4 Agricultural Exports as Percentage of Total Trade (Outside EACM) 1961 1962 1963 1964 1965 1966 Kenya: "Agricultural Exports 27.4 30.4 34.4 35.4 32. 1 41 . 1 (in mi 11ions of pounds) Tota1 Exports . 35.3 37.9 43.8 47. 1. 47.2 58. 1. Agricu1ture as $ of Tota 1 77$ 80.2$ 78.5$ 75.1$" 60$ 70.7$ Tanzania: Agricultural Exports 36.8 39.4 50.8 53.8 46.3 58.8 (in mill ions of pounds) Tota1 Exports 48.7 51.2 63.6 70. 1 62.8 79. 1 AgricuIture as % of Total 75.6$ 76.9$ 80$ 76.7$ 73.7$ 74.3$ Uganda: Agricultural Exports 35.0 32.5 46.1 56.6 52.6 ' 1 57.4 •(in mill ions of pounds) Tota1 Exports 39.1 37.5 51.5 64.4 62.7 •  '65.9-Agricu1ture as $ of Tota 1 89.5$ ' 86.6$ 89.5$ 87.8$ 83.8$ 87.1$ 34. and the inputs demanded for such a mining operation require capital-intensive production and enjoy large economies of scale. Thus, local production is generally not possible. Local manufacturing production is, therefore, limited to products for local final consumption. This brings us to the second limiting factor: the size, of the local market. With such a limited market, local production must be confined to small scale production of local consumer goods and simple food processing in dustries. This again is reflected in the breakdown of the manufacturing sector shown in table 3.3. Thus in the spectrum of East African indus trial development, Zambia can be listed as a 'have not' country. As will be discussed later, expansion of market size represents one of the 'obvious benefits from integration. ' -v Export Orientation of Economies As mentioned earlier, all four countries rely heavily upon primary goods exports as an important source of foreign exchange. Considering East African trade with countries outside the EACM, table 3.4 indicates the relevant situation. Because of this heavy reliance on agricultural exports all three countries are extremely vulnerable to such exogenous variables as climactic conditions, disease and world price fluctuations. Unfortunately the EACM countries have at one time or another in the last five years been plagued with one or other of these plights. The most devastating example of this phenomenon in recent history affected the sisal industry in Tanzania. Sisal exports have traditionally been the main export of Tanzania and subsequently she has been producing 2/5 of the world market supply. This industry has been forced to near bankruptcy for two reasons. The first is the decline in the world price of sisal. From the 1964 price of 2,220 Tanzania shi I Iings (T.Sh.) per ton to an all time 4 low of 1,290 T.Sh. per ton in 1967. This has meant a fall in export 35. revenues from a 1963 level of 22.7 million pounds to 10 million pounds 5 in 1967, and likewise export tax revenue fell from 1.5 million pounds in 1964-65 to .61 million in 1965-66.^ This fall in price was precip itated largely by the increased use of synthetics and increased compet ition from more modern plantations in Brazi I. The second factor precipitating the near collapse of the industry is the inherent character of sisal production itself. The production of sisal requires a very large initial capital investment in the form of curing houses and processing pl-ants. Initial capital expenditures were estimated in 1956 to be at least ±200 to. produce one ton., of fibre annually on approximately 2.6 acres of land."'' Combined with this large investment is a high wage expenditure that was estimated in 1956 to consist of 38$ of the total cost. With the subsequent increases in African wages in the past 10 years the wage share of costs will have increased greatly. A further complicating factor is that sisal production must be planned well in advance since the growth cycle is about 10 years. This inelasticity of supply explains why in 1967 even with low prices and high labour costs, sisal production did not decrease by more than 4$ from the 1963 production level of 220,000 tons. • Sisal is not the only crop, which has been adversely affected. The coffee crops have been hit by disease as well as having to face oscillating world prices. Kenyan coffee production fei I 11$ in 1965 as a result of berry disease. As well coffee prices fell from an all time high in 1960 of 7,940 E.A.Sh. per ton to 5,660 Sh. per ton in 1963 and back up to 6,900 in 1966. 8 We-see that the East African countries are vulnerable to a number of exogenous threats to the main source of their foreign exchange. A well 36. known limiting constraint to development is the avai Iabi Iity of . foreign exchange and when this source of supply is in a precarious position then the whole process of development is endangered. How wi II Zambian entry into the Common Market lessen the severity of this problem? Zambia too, depends upon the export of one particular primary good, copper. Zambia is the third largest world copper producer. Although this export also is subject to world price fluctuations, it has a more stable resource base. With Zambia included as a member of the EACM it is in effect a process which w'idens the exportable resource base. True, each country will continue to rely on their own foreign exchange source but in time of crisis each side can call on the others for assis tance, directly or indirectly, through the East African Development Banks. Thus, in time of crop failure, Zambia can be called upon for assistance, while in a.time of sagging copper prices, Zambia may turn for assistance to one of her two neighbours. . A more important result of the countries' export oriented nature is their mutual desire to lessen this dependency by developing more effective manufacturing sectors. It is to this subject we will now address our selves. Benefits from Integration When integration is discussed as a method of economic development, certain traditional arguments invariably appear. Such considerations as increased economies of scale, increased competitive efficiency, improved allocation of resources and strengthened bargaining power viz-a-viz third parties, are put forth as arguments for integration. In the East African situation also they can be argued to be relevant considerations, operating to improve the engine of growth. But we can take our argument further, 37. and show that certain peculiarities within the East African setting make economic integration an even more attractive proposition. First, let us deal with the traditional arguments. As mentioned earlier in this chapter, Zambia is a country of only 4 million people. Out of the entire population, only 336,828.or 8.5% 9 are in the wage earning labour force. Seventy-five percent of the population are small scale subsistence farmers.^ For this reason one of the greatest obstacles to the development of a manufacturing sector is the limited size of the domestic market. Unfortunately there is a limited domestic linkage effect associated with copper, as the "leading sector" of the economy. Once the ore has been smelted and electrically refined, there is very little additional value added that can be. contributed since most importing countries possess their own processing industries which they also protect. Because smelting and refining is a highly technical operation, the domestic backward . I inkages from the earlier stages.are also very limited. The only significant, noticeable effect is the establishment of small scale engineering firms to service the equipment of the mining .11 -. companies. • Manufacturing industry, therefore, has been limited to small scale production of food processing, beverages, textiles and printed materials which in total makes up 9% of the total G.D.P. or in absolute terms 12 63,031,000 Ks. Because local manufacturing developed as a response to local demand, industries which had large economies of scale could not be locally undertaken and therefore were imported.^ It is true that not all imported goods could be produced within the extended EACM, but by Zambia entering the union the market for her local production would increase from the present market of 4 mi I I ion to a potential market of 33 mi I I ion. Existing Zambian industry may have to compete with EACM products, thus Table 3.5 K t'000 • 1 !K t'ooo 2U t'000 3 T t'000 . K'000 Source: Kenya Uganda Tanzan i a Zamb i a 1966 1967 1968 1966 1967 1968 1966 1967 1968 1966 1967 1968 Imports U.K. % of tot. 37752 33.61 34983 . 32.84 36110 31.46".. .11 103 33.84 15679" 38.36 15498 36.06 16850 31.55 20600 30.32 1 9200. 28.56 54435 22. 1 . 62860 17.2 76231 23.4 • E.E.C. % of tota1 8056 7. 17 10560 . 9.91 91 12 7.94 5970 18.19 7052 17.25 8395 . 19.54 12850 24.06 14600 21 .49 17200 25.59 20142 8. 18 37485 12.2 41240 12.8 . U.S.A. . • % of tota 1 11275 10.04 .7764 7.29 7922 6.9 1372 . 4. 18 1937 4.74 1650 3.84 2025 3.80 4800 .7.06 6850 10. 19 27151 11.03 32899 10.7 33349 10.2 TOT.IMP. 112304 106534 1 14764 32807 40870 42947 53400 67950 67225 246116 306350 325184 Exports U.K. % of total 13511 21 .80 14781 24.92 15879 25.23 8006 12.43 10697 17.05 12271 18.61 19100 29.09 24300 29. 14 23605 28.7 160171 32.4 128336 .27.3 160337 29.3 E.E.C. % of total 14524 23.43 9871 16.64 1 1797 .18.74 • 1 1416 17.72 12325 19.65 8288 12.56 12050 18.35 1 1200 13.43 12500 15.2 167522 33.9 125079 26.6 174185 31.9 U.S.A. % of total 5384 8.69 3828 6.45 4202 6.67 , 18239 28.3 14092 22.47 17039 25.84 .5850 8.91 8450 19. 13 5850 7. 11 179 23923 5.9 10805 19.8 TOTAL EXP. 61989 59308 62935 64430 62714 65936 65650 .83400 82250 593458 470009 544415 EACM Sources: .1 Economic Report J969, Kenya, p. 40,45 2 Uganda Statistical Abstract, 1967. p.. 20, 24 3 Background to the Budget, 1968, 69. p.23 39. forcing local producers to be more efficient, but since all four countries j have relatively small manufacturing sectors, much potential still lies in the future for the establishment of new industries. The degree to which Zambia is able to capture regionally based industry will determine to what extent she will enjoy the benefits of increased economies of scale. We saw in the last chapter how the sharing of such benefits has been a problem in the past and we shall carry this discussion further. By agreeing on some kind of regional plan, advantage could'be taken.of location and specialization. Although some consumer goods might be economica l-ly produced for local markets, intermediate goods such as production machinery, chemical products, agricultural equipment require a larger market base. For this reason the argument has been strongly upheld by the Economic Commission for Africa since the industrial 14 product recommendations of.the E.C.A. have been made on a regional basis. The last of the traditional arguments deals with the effect of .integration on bargaining power. Table 3.5 shows that all four countries share the same major trading partners, most notably the U.K. This is not . surprising since both the EACM and Zambia are part of the British Common wealth trade preference agreement. Entrance of Zambia into EACM might increase the bargaining power of the.common market with Britain and there fore secure better considerations for their export interests. , . Additional features that make East Africa particularly amenable to further integration include arguments both of a political and an economic nature. We shall deal briefly with political aspects first. Zambia (known as Northern Rhodesia in preindependence times) was economically tied to Southern Rhodesia and South Africa. Her infra structure was part of a north-south network and all exports were sent via 40. the southern ports. In 1964, 34$ of Zambian imports came from Southern Rhodesia and 20$ from South Africa. With Rhodesia's unilateral declaration of independence (UDI) in 1965, Zambia was left in a precarious economic and political position. The Zambian railroad:, which had previously been operated by the Rhodesians was put into the hands of Zambian officials. .But these rail lines were almost completely useless since they led only to the southern part of Rhodesia. When S. Rhodesia declared independence, Zambia resolved to terminate trade with the south as soon as. possible and, therefore, Zambia was left a completely isolated and land-locked nation. Not only.were her communications cut with the outside world but also her source of raw I materials was cut off. . Zambia relied heavily upon Southern Rhodesia for coal and fuel' oi-1 and with UDI had to look for alternate sources of supply. Local coal fields were developed and the two Zambian coal fields, Nkandabwe and Maamba, increased their output. . By 1968 Zambia was self-sufficient in coaI production. In search of a new transportation route, Zambia looked to her eastern neighbour, Tanzania. To relieve the immediate transportation problem, a road was constructed from Zambia to Dar es Salaam. This road represented Zambia's only new link with the outside world. In order to relieve the fuel problem, a pipeline was also built from Dar es Salaam, 1,058 miles into Zambia. On September 2, 1968, the line was opened by Presidents Nyerere 15 and Kaunda. Prior to the opening of the pipe line the bulk of fuel was carried by tank trucks over the above mentioned road. This method was very costly and fuel was rationed in Zambia for 2\ years. With the completion of the pipeline the rationing was discontinued and more trucks were freed 4.1 to carry consumer goods inland from Dar es Salaam. Needless to say, trucking is an expensive means of transport, especially for bulky materials, and for this reason a rail link is being constructed from Dar es Salaam to Zambia. The construction of the "Tan Zan" railroad is being undertaken by a Chinese Technical Aid program. Survey work has been completed and 1975 is the date set for completion. The train of events of the past few years thus indicates why Zambia has an urgent desire to strengthen her ties with East Africa. Up until now there have been physical ties in the form mentioned above but there is good reason to believe that a genuine desire now exists to strengthen these bonds into stronger economic and political associations. A strong political argument can be made here to support our general thesis. Without going into a detailed analysis of the politics of the .entire continent it is easy to see the political insecurity involved in being surrounded by countries such as Southern Rhodesia, Portugese East Africa, and Angola. All three are very much part of a colonial type political structure and follow similar domestic policies, that are peculiar to Southern Africa.. Zambia has chosen a political structure that is on the other side of the poiiticaI spectrum. Zambian domestic policies are more in line with those of Tanzania. Both countries are .following the path of "African Socialism". Basic changes were introduced in the economy by the "Malungushi Declaration". President Kaundi announced in April 1968 the government take-over of 25 private firms, tighter control on the outflow of profits, restrictions on credit extension to non-Zambians and the limitation of retail licencing to Zambians alone. This declaration has a familiar ring to it. Just a year earlier on February 1, 1967, President Nyerere of Tanzania made the "Adrusha Declaration" which announced 42. the nationalization of the banks and most of the large industry. Thus, it makes sense that Zambia would desire a closer association with East Africa simply to strengthen her political stand in aa otherwise hostile political environment. Turning now to economic considerations of the proposed integration, we need not look far for further supporting arguments. Zambia, as most developing countries, is faced with a skilled manpower shortage. It is true that within the copperbelt there are a large number of h i girl y'tra i ned expatriates, but I am speaking more of the general level of education amongst the local inhabitants. This problem was further complicated when Rhodesia declared U.D.I. Most of the administrative headquarters for transportation and communic ations were in the south. As part of government policy to sever relations .with Southern Rhodesia, the administration of these services were decentral ized and local people were needed to man these new posts. ^ One of the benefits offered to Zambia by the EACM is the sophisticated administrative network which exists as part of the common market. The ser vices of the "East African Common Service Organization" (EACSO) could easily be extended to Zambia and thus relieve some of her administrative pressures. This would free a certain proportion of skilled manpower that cou.ld be beneficially used in other sectors of the economy. A final benefit that would be enjoyed by Zambia as part of the EACM would be the increased accessabi Iity to the markets of the European Economic communi ty. The EACM has been an associate member of the EEC since the 26th July, 1968. Shortly after the renewal of the Yaounde Convention negotiations begun between the EEC and EACM to extend the association to 1975. The Yaounde Convention is an extension of the Treaty of Rome which was devised 43. to give preferential treatment to former colonies of the six members of the EEC. The eighteen associate African states would receive duty-free entry of their exports into the six community countries.. In return, duties would have to be dropped on EEC imports unless necessary as a revenue source, or as protection of local infant industry. The associate members would receive development aid from the European Development Bank in return for EEC's "right of establishment whereby nationals and companies of the Six are entitled to invest in and to establish, commercial enterprises in the Eighteen on the same basis as nationals and companies of the former colonial power and on a basis as favourable as that on which any third country nationals may invest". This "right of establishment"^ has over tones of what Nkrumah so aptly calls "Neo-col.oni a I i sm". For this reason both Nigeria and the E. A. countries undertook separate negotiations with the EEC which concentrated mostly on trade preference and bypassed those parts which had political inferences. Under the new agreement signed in Brussels on July 9, 1969, it stated: "East African countries will remove all customs duties on imports from EEC except such as are necessary to meet 18 the development needs or intended to contribute to their budgets". This means the EEC will receive tari ff concessions on some 60 items at rates ranging from 2% to 9%. Based on the 1968 statistics this will cover only 1% of 19 E. Africa's total imports and 11$ of its imports from EEC. Association with the EEC will not be an obstacle to Zambian entry as it is written into the agreement"that there is freedom to establish customs unions, free trade areas and economic co-operation agreements among them-"20 selves. The agreement covers preferential treatment of E. Africa's agricultural 44. products but with the inclusion of Zambia, amendments can be made to" the treaty for the inclusion of those goods relevant to Zambia. A'few agricultural products such as tobacco, maize, and timber, are exported by Zambia.- Preferential treatment of those products might be a great aid in stimulating the agricultural sector and thus advancing the governrnent-des i red policy of diversification. ' Up until now, we have been mentioning the benefits that will accrue to Zambia from our proposed integration. For a moment let us look at it from the E.A. point of view. There is the obvious benefit to the EACM that the market size for their products would also increase.. Since the EACM enjoys a more diversified manufacturing sector it will' enjoy most of the initial benefit from integration. In the next chapter this subject will be deaIT w i Th in deta il and itwill be shown that a substant i a I increase in G.D.P. might result from the initial integration. But what of the more subtle implication of proposed integration.' How will Zambian entry affect the political balance of power? Earlier in the chapter we established that Zambia was a 'have not' nation with respect to industrial development in the region. Up until now Uganda and. Tanzania have been unable to extract from Kenya an agreement for planned regional allocation of industry. As will be argued later in the thesis, with Zambia's voice added to the cry of the 'have not' members perhaps the balance will be tilted in their favour. The similar ideologies held by Zambia and Tanzania, also confer advantages on Tanzania which has been the only country supporting African socialism within the EACM. New support from within an extended common market would be a welcome relief for her. We cannot overlook such polit ical and ideological problems of,the region sjnee often these aspects may override economic considerations in making decisions that determine the future success of the region. 45. In the next chapter we will consider the immediate benef that will be enjoyed by Tanzania and Kenya from our proposed integration. 46. CHAPTER [V Impact effect of Zambian entry into the Common Market. In Chapter I we discussed the approach of the classical custom union theories and concluded that the direction of their investigation gave them limited application to the developing world. Our major : criticism was that the static assumptions laid down by these theories could not be accepted as a.valid analysis of most developing countries. Further more, we recall that most of the theorists were concerned with the conditions trade creation and trade diversion and with the welfare implic ations of such situations. The purpose of the present chapter is to examine existing!trade flow and the effect integration will have on the future pattern. But/ unlike the classical theoriest we will direct our attention not the question of trade diversion vs. creation, but the actual increases in volume of trade that are likely to occur between EACM and Zamiba. The 'new trade' in some cases wi I I be trade diverting from a low cost producer to higher cost member country producer. This would most certainly be the case for Zambian trade that was previously conducted with Southern,Rhodesia, since terminated by the government of Zambia for political reasons. Before the proposed in tegration, imports from EACM, South African and Southern Rhodesia were subject to simi lar tariff treatment and competed freely within the Zambian domestic market. Therefore, we can assume that in the pre-integration situation, Zambia was purchasing its imports from the lowest cost supplier. Therefore, the short run cost of integration would be the higher price of imports as well as the loss of tariff revenue. We will discuss this in more detail later in the thes is. 47. The format of the remainder of this chapter will be therefore: (1) to examine the conceptual and theoretical problems encompassed by our study, (2) to state the assumptions we must make, (3) to postulate the conditions under which integration wi I I proceed, (4) to.offer a general statement of the model and data to be used, (5) to apply the model to the individual countries involved, and finally, (6) to calculate the impact effect upon both EACM and Zambia. Conceptual and Theoretical Problems In order to examine the change in volume of trade likely to result from changes in the tariff rate, we must determine some of the basic charac teristics of the demand for imports. More specifically, the. price elasticity of demand for different imports must be-made explicit. It is fair to assume that the price elasticity of demand for imported food stuffs is low compared to the elasticity of demand for non-essential im port goods. That is, an increase in 'the price of imported foods would not markedly affect the quantity demanded in the short run. In the long run there would be increased pressure to develop greater agricultural self-sufficiency. Since it is the aim of the Zambian government to do just that, this increased incentive might be a welcome result of our proposed integration. Turning to consumer-goods imports, the picture is of a different nature. Certainly it is an accepted axiom within interantionaI trade theory that an increase in the price of import's will tend to induce a higher rate of import substitution. But for our 'proposed integration' the results will differ from this norm. As part of the integration program, Zambia will be allocated certain industries that will then supply the entire East African market. These new industries will include consumer goods which were previously imported by the EACM. Therefore, those consumer goods imported by Zambia at a higher price because"of trade diversion will not necessari Iy 48. be produced by Zambia as part of an integrated plan. Because of this peculiarity we shall in general assume that the elasticity of demand for imported consumer goods is relatively low. Thus, under these conditions an increase in price of consumer good imports will not generally be foll owed with a great reduction in volume imported. The elasticity of demand for imported fuels •• and raw materials will be low because of the apparent absence of such resources within the country and low elasticities of substitution between such materials and other inputs. Most capital and intermediate goods will not be affected bythe proposed integration. Those goods that are not produced within the EACM will not be covered in the Treaty. As a capital goods industry develops within the region, appropriate protection will likely be provided, but hopefully Zambia will also benefit from this protection for her own regionally based industry. Therefore, we can assume that the demand for alI four types of imports are relatively inelastic within the Zambian market. A second problem facing us is the quality difference between im ported goods. Certainly there is quality variation within each import category but in order to make this theory workable we must make the assump tion made by most theorists that imports are composed of homogeneous products. On the supply side we will assume that elasticity is infinite over the relevant range. That is, increased quantity will not mean higher unit costs. For our particular situation this may not actually be the case. Increased production within the EACM may for example decrease unit costs " by taking advantage of increased economies of scale. Although this might be likely, the magnitude cannot be estimated ex-ante and we wi I I therefore assume infinite supply elasticity (i.e. constant costs). 49. Assumptions Therefore, we begin our discussion with four- basic assumptions: (1) Inelastic demand of imports into Zambia from EACM. (2) Infinite elasticity of supply of exports from EACM. (3) Excess capacity within the industrial sector of the EACM. (4) Imports within their categories are homogeneous products. Conditions of Proposed Integration In'order to examine the impact effect* of integration we must explicitly state the conditions under which, integration will be likely to proceed. They are as follows: (1) Zambia will become a fuII member of the EACM and therefore all trade barriers between the two markets will be eliminated. We make this assumption for the sake of simplifying the model. Of course, the path of integration is not likely to be that smooth. A basic adjustment period will be required for the transition to take place,, and certain institutional changes wi I I be required. (A subsequent chapter wi I I •examine the Treaty, for East African Co-operation and the question of accession of new members, but for the moment we will assume total member ship of Zambia within the EACM.) ~ (2) Zambia in pre-independence times was known as Northern Rhodesia and was naturally strongly connected with Southern Rhodesia both economically and poiiticaIly. All of Zambia's rail lines were previously part of the larger Southern Rhodesian network and the natural flow of trade was north-south. After the uni lateraI declaration of in dependence of Southern Rhodesia in 1965, however, the Zambian government made the political decision to terminate trade with Rhodesia as soon as possible. For this reason we will assume that Zambia will try to sub-* we define 'impact effect' as the increase in GDP, as a result of increased trade caused by integration. 50. stitute wherever possible EACM goods for those goods previously imported from Southern Rhodesia. (3) On similar grounds Zambia would also like to terminate its trade with South Africa. Policy statements have been made recently to back up this desire. (See footnote 9 of this chapter). For this reason we will make the assumption that Zambia will substitute wherever possible goods from the EACM, for commodities that were previously im ported from South Africa. Under the three conditions postulated, we will next proceed to estimate the changes in volume of trade which might be expected from the proposed integration of Zambia and the members of the EACM. ' . Sources of Data Unfortunately the present research suffers the universal ailment of .most development work: lack of sufficient and up to date statistical data. The most recent trade statistics available were a 1966 four digit 2 S.l.T.C. classification of imports and exports for the four countries. From this source I have transcribed over 1500 observations of different import and export items and from this am able to derive some interesting resuIts. MethodoIoqy • The basis of our model involves a comparison of imports and exports of the EACM and Zambia. To determine the 'new trade' potential a cross section examination was necessary to determine which of those goods were being imported by Zambia from Southern Rhodesia, and from South Africa, which were also being exported by the EACM countries. This should give some in dication of the direct impact that will be likely to result from integration. In order to examine the full impact effect of this 'new trade' we considered not only the absolute increase in exports but also the estimated 51 Iinkage affects which could occur within each country. Fortunately, a model exists for the East African economy that provides us with this information. Paul C. Clark pioneered in model building in this area."' Using available data from 1954-1962, Clark constructed a national accounts model consisting of 37 variables, 21 functional equations, .11 accounting identities and 5 autonomous variables. 4 It was not long before criticism appeared in the literature. Clive S'. Gray of the Kenyan Ministry of Economic Planning took issue with Clark over the conceptuaI'probI ems of development planning. Gray.argues that the role of a development economist in East Africa is not macro-economic models, he concludes, '...moreover, these relation ships are subject to great instability due to changing conditions at home and abroad, predictions of which are subject to enormous margins of error'. Rather, he suggested a project-by-project approach to planning. The portion of the Clark model which we shall use in our calcul ations, however, has been lauded as a great contribution to development planning in East Africa even by Clark's critics. Gray writes, for example that 'Clark has made a useful contribution in calculating 'import (and export) multipliers' corresponding to unit increase in agricultural export volume, export prices, import substitution, or manufactured exports and government current expenditure'.^ Having arrived at a reasonable estimation of the impact of integ ration based on the 1966 trade statistics, we have expressed these values as a percentage of the individual countries' 1966 GDP figures. UGANDA Uganda is the most remote country in relation to Zambia and is the country in the EACM most unlikely to enjoy increased trade as a result of our proposed integration. In the past, Uganda has carried on very little 52. trade with Zambia. In 1966, Uganda imported $510,000 (U.S.) from Zambia and exported only $16,000 worth of commodities. The obvious reasons for this phenomenon is the competitive nature of East African exports and the higher transportation costs for Ugandian goods deliv ered c.i.f. to Zambia. The only existing commodity route lies through Kenya and then doubling back through Tanzania to Zambia. Ugandian exports therefore, cannot usually compete with similar products of other East African countries within the Zambian economy. Construction of an alternative route would seem at present to be phys i caI Iy i mposs i bIe. It wouId i nvoIve bu i Id i ng a road or ra i I Ii ne around the eastern shore of Lake Victoria through Tanzania to Zambia. Because.of the swampy, mountainous regions of the route it would be economically unfeasible. A second alternative would be a ferry service across Lake Victoria to Tanzania and then transport by rail or truck to Zambia. In both cases I am sure that the existing round-about route is still more economic than these two alternatives. Furthermore, the relevant commodities that fall into the 'potential trade category' are also exported by both Tanzania and Kenya. Therefore, unless Uganda possesses exceptionally large absolute cost advantages in one of these exports, it wi I I not be able to compete in the new export market. For the above reasons we will make a further qua Iifying assumption that the 'potential trade' resulting from Zambian entry into the EACM will be realized only by Tanzania and Kenya. The benefits that Uganda receives will not be in the form of increased trade but will be of a more indirect nature. These indirect effects may include increased industrial production within the EACM, but we will reserve comment on them until later in the thesis. 53. KENYA AND TANZANIA . Let us now turn to the results of our empirical, study. "Because of data limitations, our investigation began with an examination of two digit S.l.T.C. statistics of goods being imported from Southern Rhodesia and South Africa by Zambia and at the same time being exported by Kenya and Tanzania. There were 38 different classes of such commodities that were 'potential trade'' candidates (see table 6.3). The value of Zambian imports from South Africa was $72,744,000 (U.S.) and from Rhodesia ',$45,475,000. These values, however, rep resent the upper limit, for on such a broad commodity classification there are going to be commodities which share the same two digit class ification but are completely different goods. For example, Zambia imports commodity 71 which is 'Machinery, non-electric' while Kenya exports conrnodities 712.2, 715.1, 717.3, 718.2, 718.3, 719.1, 719.8 and 719.9. All of these commodities are in the broad category 71 but they will not exactly correspond to the four digit commodities that are being imported by Zambia. For this reason a closer examination of the four digit breakdown is essential to establish the lower limit estimation of the impact effect. The results show 74 commodities being imported by Zambia and exported by EACM (see table 6.2). The dollar value of these commodities are lower but perhaps more realistic, $27,627,000 from South Africa, and $27,166,000. from Southern Rhodesia. In order to use the multipliers provided by Clark's model,^ these values must be broken down further into agricultural exports (E(a) = 0,1,2,4 SITC) and manufactured exports ( E. . - 3,5,6,7,8,9.SITC). Estimation of the Lower Limit of the Impact Effect of Zambia joining EACM Reg i on E(a) MuIti p1ier • Impact effect= of E, , (a) E(m) Mu1ti p1ier Impact Effect of E(m) Tota I Impact Effect GDC (1966) Impact Effect % of GDP Kenya & Tanzan i a comb i ned 14,840 2.23a 33,093.2 39,953 1.80b . 71,915.4 105,008.6 1,827,990 5.74$ Kenya ' 6,975 2.44 17,019 18,778 1.89. 35,490 52,509 1,024,340 5.12$ Tanza ni a 7,865 1.94 15,258 21,175 . 1.64 34,727 55,402 762,140 7.33$ .... Table 4.2 Estimation of. the Upper Limit of the Impact Effect of Zambia joining EACM Kenya & Tanzan i a comb i ned 19,331 2.23 43,108 98,888 1.80 177,998 • 221,106 .1,827,990 12.09$ Kenya 9,086 2.44 22,1-70 46,477 1.89 87,842 110,012 1,024,340 10.73$ Tanzan i a 10,245 1 .94 19,875 52,411 1.64 85,954 105,829 762,140' 13.88$ a Computation of this figure as follows: 7( 1.94) + 10(2.44) 17 b Computation of this figure as follows: 7(1.68 + .10(1.89) 17 55. Table 4,3 Kenya's Share of EACM Exports to Zambia Zambian 1mports ^ from East Africa Kenyan Exports to Zambia . Kenyan imports as $ of total East Africa i n trade 1964 389 182. : 46.78$ 1965 1,402 684 48.78$ 1966 3,013 1,833 • 60.83$ 1967 . 16,693 5,341 4 31.99$ Sum of Averages 47.09$ • 4 years — Currency in thousands dollars U.S. Source: 1 Foreign Trade Statistics of Africa, Series B, Trade by by Commodity, United Nations, 1966-1967 2 Foreign Trade Statistics of-Africa, Series A, 1964 3 Zambian Monthly Digest, September 1969, p. 21 4 Kenyan Economic Report, 1969. p.45 56. S. Rhodesia & S. Africa Exports to Zambia (Lower Limit) E(a) E(m) TOTAL South Africa 4,939 22,688 27,627 Southern Rhodesia 9,901 17,265 27,166 14,840 39,953 54,793 The question now arises as to how .th i s trade wi 11 1 tween Tanzania and Kenya. We will deal with this question by taking two different approaches. The first approach will be to consider Tanzania and Kenya as one economic unit and study the impact effect on the combined region. Secondly, we will try to divide the 'potential trade'.between Tanzania and Kenya based on the historical division of East African trade w i th Zamb i a. . -Fi nd i ngs * The results of our empirical study have been summarized in table 4.1. Using the first approach of combining Tanzania and Kenya as one. economic unit we find that the lower limit impact effect would be a 5.74$ increase in the GDP of the region. To arrive at this figure we weighted the individual country's multiplier according to their respective size of GDP. Once the total impact effect was determined it was expressed as a percentage of the combined GDP of the two countries. In order to consider each country separately we must first determine how the potential trade might be divided between the two of them. By examining the division of Zambian imports from East Africa between Kenya and Tanzania over the past four years it will give us a pretty good indic ation. Table 4.3 shows'Kenyan share of Zambian trade, the residual will be taken Tanzania's share. • True, there is some trade between Zambia and Uganda but the amount is so insignificant that it can be ignored in our 57. calculations. Our results are what we might have suspected: Tanzania stands to gain the most, with a 7.33% increase in GDP, and, secondly, Kenya with 5.12$. The most obvious reason for this is that Tanzania holds a com parative advantage over Kenya because of the difference in transport ation costs. The only supply route from East Africa' to Zambia is.a road from Tanzania to Lusaka. At present, a rail line is under construction from Dar-es-SaIaam to Lusaka but even with this new link Kenyan goods will still have to pass through Tanzania before reaching the Zambian market. As we have mentioned, the calculations that appear in table 4.1 .are the lower limits of the estimates of the impact effect. To give us some indication of the upper boundaries, we turn back to the two digit S.I.T.C. classification. Having expressed earlier the limitations of these figures they still can provide us with quite a reliable upper limit. Using the same.method as discussed above we arrive at a new set of figures as shown in table 4.2. Having done both sets of calculation we now have a range within which the impact effect is IikeIy to fa I I. These percentage changes are once-and-for-aI I changes that will occur the year the proposed integration takes place. The implications of these findings are very interesting and are of particular importance to the con tinuance of the EACM. As we discussed earlier in the thesis there has been discontent on the part of Tanzania as to the sharing of the costs and benefits of the EACM. Tanzania has felt that it was a net loser in the early years of the common market and-as a result concessions were made to her outlined in the Treaty for East African Co-operation. But the position of Tan zania within the EACM is sti I I quite tenuous. Under this proposed integ ration Tanzania stands to gain the most with a total impact effect of Table .4.4 Sources of Zambian Imports Southern Rhodesia E.E.C. South Africa 1965 99,507 21,730 57,930 1966 64,904 28,198 81,855 1967 45,129 52,479 101,040 1968 31,593 57,869 120,758 . AbsoIute change from -67,914 +36,139. +62,828 1965-68 Currency thousands $US Source: Zambian Monthly Digest, September 1969 converted from k'sto US$ at $1.4 = 1 K 59. 7.33$ to 13.88$.. Kenya also.stands to gain from 5.12$ to 10.73$. But what seems more important to the continuance of the EACM is that Tanzania's position will be improved within the new expanded Common Market. Projection of Model • Our calculation of the impact effect has been based on the most recent detailed foreign trade statistics available (1966). Having made these computations what can be said about the impact effect if integration were t.o take place in 1970? To make any kind of statement we must examine the trade flows of the last few years and try'to establish the trend the' statistics are taking. In 1966 Zambia still relied heavily upon Southern Rhodesia, but with UDI the government moved to terminate . trade .with her. The results of this policy decision has been a redirec-tion of trade in the past three years. Zambian imports from Southern Rhodesia have been reduced from the all time high in 1965 of $99,507,800 down to $31,593, 800 in 1968. To which countries has this trade been diverted? "A brief look at table 4.4 will give the answer.. Over the relevant years imports from Southern Rhodesia have diminished by $67,914,000 but this slack has almost totally been taken up by South Africa. How does this affect our model? Since there has been a shift of .this nature it will not affect our calculations to any great extent. But, it seems ironic that South African trade has increased as a result of Rhodesia's UDI. The conditions which caused the termination of trade with Rhodesia exist equally in South Africa. Obviously this shift in trade has only been an interim solution to the problem. As the lines of communication develop in an east-west direction the Zambian government will move away from South African imports and will substitute other sources, of supply 60. wherever possible. This belief was confirmed on April 1, 1969, when the Zambian government made a poIicy.statement extending its .list of imports 9 which were prohibited from entering the country from the south. We have incorporated this policy decision into our model by assuming that Zambia will substitute wherever possible East African goods for commodities that were previously imported from South Africa. Up unti I now our discussion has been centred upon the impact effect on the EACM countries and little has been mentioned about the effect on Zambia. But there has been good reason for this. Zambia is an export oriented economy based on one major export - copper. 93$ of Zambia's export revenue is derived from the export of unwrought and worked copper. The East African countries have a very limited demand for copper and Zambia has found markets for these exports in the deve | oped countries.^ The amount that is imported by the EACM is insignificant. The benefits that Zambia will derive from joining the EACM are more of a long run nature. The opening up of a larger market for Zambian industry will certainly be a stimulus for economic development. The manufacturing sector has been sadly lagging far behind the rest of the economy and it has caused great concern for the government. One of the main obstacles to this sector has • 11 been the size of thedomestic market. Entry into the common market would increase the market size seven times and thus should be a tremendous impetus for increased economic activity. Because of the paramount importance of industria Iization, both to Zambia and to the EACM, the next chapter will deal directly with this topic. 61. CHAPTER V The effect of integration on the time horizon of industrial development. In the previous, chapter we dealt with the impact effect of integ ration and found that Tanzania was likely to be the largest gainer. As we pointed out earlier this impact effect was a once-and-for-aI I increase in the. G.D.P. Certainly this effect is an important consideration of integration but is not the only effect of economic union. A more import ant aspect of economic integration is the long run influence it will have on the industrialization of the region. For most developing nations,and East Africa in particular, this consideration is of paramount importance. Therefore, this chapter wi II consider the effect our proposed integration will have on industrial development of the area. The format of the chapter wi I I be (1) to give a brief summary of the past industrial deveIopment.of the area, (2) to examine the likely effects which Zambian entry into the Common Market will have on future development, (3) to present a model of industrialization that will indicate the effects of integration, and finally, (4) to show how the model might be applied to the East African Common Market situation. Historical Background All four countries in the region have traditionally had very small industrial sectors within their economies. The economic development of the area was dictated by the same colonial policies. Therefore, Figure 5.1 ' Net value of factor cost of manufacturing output* Thousands of pounds 1954 1955 1956 . 1957 1958 1959 1960 1961 1962 . 1963 1964 1965 1966 1967 E 15,030 18,720 19,540 21,060 21,750 21,350 22,710 23,580 23,870 " 25,270 27,320 39,100 43,900 45,900 N t of Y * 51$ 52$ ' 53$ . 54$ 52$ . 50$ 50$ 50$ 52$ 53$ 50$ 52$ 53$ A u G. 6,164 7,842 8,203 7,594 7,565 7,871 7,910 8,372 8,811 9,600 13,200 17,700 18,500 A Q f0°l\ 2]% 22$ 22$ 19$ 18$ 18$ 17$ 18$ ]9?° 20<7° 24$ 24$ 22$ A T . ' • ' * 8,335 . 9,145 9,040 10,711 12,936 13,672 14,511 14,964 12,842 12,509 14,343 17,750 21,200 23,400 Z -A  . *j t °J . 28$ 26$ 25$ 27$ 30$ 32$ 33$ 32$ 29$ 27$' 26$ 24$ 25$ I tota I A TOTAL 29,529 35,707 36,783 34,365 42,251 42,893 45,181 47,316 45,528 47,379 54,863 74,550 83,600 Sources: 1954-1964 Data from Clark, P. Development Planning in East Africa, p.30-36 1965-1967 Data from Survey of African Economics, p.141, 214, 296 • Tanzanian 1967 Data from Background to the Budget: An economic survey 1968-69. p.9 * Note: these calculations included mining. 63.. emphasis was placed on the export of primary products and the import of manufactured goods. Kenya,.Uganda, and Tanzania were exporters of agri cultural products while Zambia exported copper. This was the accepted path for economic development in the early stages of colonial rule. But, as the ..economic and educational level of the territories improved, there developed a market for, and desire to produce, certain basic consu mer goods. Because all three territories.were under the same colonial ruler (although there were three seperate colonial, governors) the terri tories were administered as one economic unit. For this reason regional distribution of industry was left to marke-t forces. As the prospects of continued colonial rule diminshed and independence could be seen on -the horizon, examination of the . locationaI distribution of industry found Kenya with'the greatest portion of the industrial development. As indicated in table 5.1, Kenya has traditionally produced over half the manufactured and mining output of the area. If we were to exclude mining from the manufacturing sector, Kenya's share of production would be.even greater.I The main reason for this type of development was that Nairobi had become, for climatic and geographic reasons, the admini strative and financial center for the entire area. In 1957 over 40$ of " " ' 2 all those engaged in manufacturing in Kenya were employed in Nairobi. As this disparity grew larger Uganda and Tanzania both complained bitterly. The situation reached crisis proportions in 1964 when Tan zania threatened to pull out of the EACM. The obvious and most lasting solution to this problem would be to set up a comprehensive regional industrial development plan, whereby each country is guaranteed an agreed upon share of the industry. Kenya ppposed such a plan and favoured a market force determination of the location of industry. The reasons 64. were obvious since Kenya posessed a comparative advantage when it came jfo industrialization. But under the threat of Tanzanian withdrawal, Kenya offered a second best solution in the form of the Kampala Agreement. As pointed out earlier, this agreement was of a makeshift nature promi sing certain industries to Uganda and Tanzania and placing quantitative restrictions on'the flow of trade. It was only within a few short months that the agreement was broken by Kenya (who had initially given half hearted agreement). This action was then foilowed by import restrictions on Kenyan goods entering Uganda and Tanzania. The outlook was gloomy for the EACM. It was not until June I, 1967, with the signing of the "Treaty 'for East African Co-operation", that the future of the EACM was made clear. Again'the question of regional planning of industrial development was sidestepped, though. Instead a transfer tax system was introduced which was designed to promote industrial development within the defi-cit countries Article 20 presents this as "....a measure to promote new industrial development in those Partner States which are less developed industrially." The structure of the transfer tax is straightforward, and is de signed to encourage industrial development in Tanzania and Uganda. An-y partner state is allowed to impose the transfer tax on another member state if it has an overall' trade deficit in manufactured goods with that same country. The size of this tax cannot exceed one half the ad valorem tariff applied to outside countries, and local production of thegood must follow within three months. Within the year local production must supply 15$ of the domestic market or have a value "of $100,000. Once -30$ of the protected commodity is exported the transfer tax on that particudSr good must be eliminated. The overall limiting when the value of 65. commodities being protected exceeds the amount of the trade deficit in manufactured goods. At this point the country forfeits all rights to further use of the transfer tax privileges.'-The purpose of this scheme was to aid the deficit countries in establishing small scale product ion.without having to compete with lower cost Kenyan imports. Protection of any one particular commodity could last only eight years or until the level of production stated above was . reached, and the overall programme was to last for only 15 years. As good as the intentions might have been there are serious impIi-cations in this programme that will have the long run effect, if not countered in some way, of encouraging economic seperation rather than i ntegrat i on. The most obvious result of this tax system would be duplication of industry within the regions and an increase in emphasis placed on small scale production. Such a trend would decrease the chances of speciali zation and therefore the loss of important economies of scale. If this trend was allowed to continue unchecked it would defeat the purpose of integration, since the strength of its argument lies i n the fact that, important economies of scale exist that could only be taken advantage of in the larger regional market. Proponents of the system have argued that large regionally based industries would locate in the deficit countries since they would be quaranteed the local market. But the arguement is invalidated on two points. First, if the industry is based on a regional market, within a short time it would have to forfeit its transfer tax privi leges'once 30$ of its production is exported to another member country. Secondly, this short period of protection may not justify the extra costs involved 66. in locating in remote areas of the region. As mentioned earlier, Nairobi is the industrial and financial- centre of the region, and a central point to all the markets. The problems involved in moving from this area most likely would discourage any type of major industrial spread. The second problem of the new tax system is a feature general to any protective tariff. Within the protected areas there is the constant threat that inefficient industry will develop. The structure of the tax makes this problem an even greater threat. The transfer tax is applied not only to Kenyan value added but also the import content. If the transfer tax applies only to the value added portion of the commodity, the impo sing country receives effective protection which equals nominal protec tion. Therefore effective protection based on the imposing country's value added the import content becomes larger. 4 A study of this sort has been conducted by Peter A. Diamond who has calculated the effective protection afforded Tanzania by the transfer tax under varying combinations of tariff, rates and import content. Chosing the most appropriate combination of variables by assuming input tariff = 0 and final good tariff = 30$;.'then as import content increases from 0$ to 70$ the effective protection rate increases from 15$ to 39$.'' Under such an urnb re I I a of protect i on it is difficult to conceive that none of this protection will be built into production costs. The situation for Kenya is just the opposite. Up until the imple mentation of the transfer tax system, Kenyan producers had enjoyed a protected market for the entire EACM. Now, faced with new intraterri-torial trade restrictions, local firms will be forced to become more competitive in order to secure their share of the local market and at the same time compete with locally produced goods in the Ugandian and 67. Tanzanian markets. Increased competition within the Kenyan market would make it even more difficult for Tanzanian goods to be sold there. This actually was the case in mid-1965 when Tanzania raised import restrictions as a result of the breakdown of the Kampala Agreement. Thus it is a real problem that will face Tanzania in the future. With these two forces at work the whole future of the EACM wi I I be put in jeopardy. As the 15 year life of the agreement reaches maturity there is likely to be great pressure to continue intraterritoria I trade barriers or in the most extreme case, a call for complete separation. What precautions have been taken to prevent this situation from arising? The solution seems obvious. What is lacking in the East African Treaty for Co-operation is a firm commitment to implement a regional plan for industrial development. Only lip service is paid to this idea in Article 23 of the treaty that states, "...the Partner States agree to continue-the industrial licensing system formulated in the.three East African Industrial Licensing laws how in operation in the Partner States."6 The beginning., of the licensing system goes back to 1948 when the three individual territories legislated identical industrial licensing ordinances to be enacted in 1952-3. The objectives were to induce indus try to locate in East Africa by guaranteeing monopoI istic- powers for a stated period and secondly to issue Iicences to industries and direct them to sites that, were part of a general development plan. But by 1949 any intention to develop detailed pIans;concerning location of industry had been abandoned. As it became apparent that the three territories were developing at different. rates, the two territories that were developing at a slower rate were less agreeable to approving new industries to the 68. licensing schedule. The Raisman Commission of 1961 concluded on this issue that "The scope of the licensing system has therefore been small, it has not achieved the objects for which it was established, and now serves very little useful purpose in relation to industrial develop ment in East Africa as a whole.'7 ' Little improvement on this situation has been made in the past nine years.- An attempt was made in 1965 as part of the Kampala Agreement to -improve the industrial licensing acts and to expand the function of the East African Industrial Council. Agreement was reached by the three governments to appoint a committee of industrial experts to study the problem of regionally planned industrial development.8 Unfortunately, the Kampala Agreement was abandoned before any action could be taken. As we have seen, the Treaty for East African Co-operation has done little to change the nature of the licensing system. It has increased its rigidity by-stating in paragraph 2 of Article 23'."...that the industrial licensing system shall continue until, the expiration of twenty years from the commencement of the said East African Industrial Licensing laws." Both Tanzania and Uganda, are vitally interested in reactivating the East African Industrial Council but until now have been unsuccessful' in pressuring Kenya to accept. On two earlier occasions they have accep ted second best solutions, firstly in the Kampala Agreement and secondly through the transfer tax. '• Zambian entry into the EACM would have the effect of offering Uganda and Tanzania a third chance, and this time the probabi I i.ty of success should be increased. As mentioned earlier, one of the precondi tions to Zambian entry into +he EACM should be the assurance of some regio nally based industries. This assurance couId come as part of a larger 69. regional plan for • industria I development. With' the additional weight of Zambia,-enough' pressure might be exerted on Kenya to make her agree to the reactivation of the Industrial Council and acceptance of a regional comprehensive plan. Kenya depends most heavily upon East African trade in manufactured goods, and for this reason will have the most to lose if the EACM is disbanded. Zambia's entry into the EACM, therefore, may be the event that will save the organization from disaster. It might tip. the scales in favour of the 'have not' countries and assure the continuation of the union on a more equitable basis. Tire Mode I In the previous chapter we concluded that Zambian entry could have a certain impact affect measured in terms of increase in 6.D.P. Third, country entry into the EACM will also have an effect on industrial devel opment and for this reason a .theoretical model is presented that will iIiustrate-this effect. This model has been developed with the hope that it will have uni versal application to any group of developing countries.that are consid ering economic ' integration as possible engine of industrial growth. The purpose of the model is to show how integration will effect the time horizon of industrial development. The approach used will deal with individual industries and will focus on the effect of increased mar ket size on the process of industrialization. Demand Side For any given commodity there exists within the domestic market a cer tain level of.demand. The quantity demanded will depend upon the nature of the product as well as upon price, taste, distribution faci Iities, and 70. other factors. In the developing world the income elasticity of demand— for basic.consumer goods is larger than the demand for the same good in the more developed world. The nature of commodity demanded is highly correlated with the stage of development, as indicated by the level of per capita income. As Professor Harvey Leibenstein notes, one of the characteristics, of underdeveloped areas is "that a major portion of expend itures are made on food and necessities".^ As per capita income increases demand shifts to more sophisticated.consumer goods, and to intermediate capital goods as well. Therefore, in the early stages of development the country might be a net exporter of primary products and import all of its manufactured goods. In a later stage, the country is likely to develop a manufacturing sector and therefore substitute domestically produced goods in place of consumer good imports. At this point of development the nature of imports would change and there would be increased imports of cap ital and intermediate goods. . ' Simi larly, local government policy might dictate the types of pro ducts demanded. Public works projects aimed at developing an infra-structure of social overhead capital will dictate a certain type of demand whije govern ment policy emphasizing agricultural production wi I I derive a demand for still, other products. For this reason the model has been developted to take account of these peculiarities. The model does not make use of the classic demand function of plotting price against quantity. We are interested in examining the quantity demanded of a particular product over time. We will assume that the relative price is constant. This assumtpion is less wie.ldy in a developing country situation since the price level of domestically produced goods wi I I be protected by 71. Figure 5.I Quant i ty Demanded Y(t) 72. Figure 5.2 73. import tariffs and tus guarantee local producers the domestic marketT" ~~~ With price constant the vertical axis.will measure quantity de manded and the horizontal will measure income. In the lower quadrant of our diagram (figure 5.1) the relationship between income and time is indic ated. We assume that income grows over time at a constant rate (e.g. 5%). We define Y as a function of time. Thus, we can read off our diagram the relationship of quantity demand 'at different levels of Y to the time period in which it occurs. Figure 5.1 shows the expenditure function for the particular commodity 'i' which is defined as: Related to the previous year: , . or related to base year o where b = income elasticity of demand for commodity 1i1 y ' = the percentage change in National Income D = quantity of good 'i' demanded in year 'n' . • The shape and slope of the curve is determined by. 'b' and since income elasticity will differ from product to product then it will be reflec ted in the shape of D(t). For example, in the early stages of development luxury, goods would have a low income elasticity while for basic consumer goods it would be much higher. This phenomenon is depicted in diagrams 5.2(a) and 5.2(b). Supply Side Turning now to the supply side of our model we will again part from the classical approach. Rather than plotting price against quantity we will plot income on the horizontal axis and Industrial Capacity on the 74. vertical axis. Therefore we are deriving a potential capacity function (P.C.). An important part of our analysis is the implementation of a term developed by Joseph S. Bain in his well known book Barriers to New Corn-pet i t i on. He develops the concept, of 'Minimum Optimal Scale' which he defines as "the smallest scale at which a plant or firm may achieve the lowest attainable unit cost." Of course the minimal optimal scale (MOS) will vary between indus tries depending upon the economies of scale of the different productive processes. Let us assume that the MOS of a particualr industry is X. If we assume that all the plants to be constructed were to be of X capacity we would have adiagramme which consisted of a series of horizontal lines parallel to each other and X units distance apart (see figure 5.3). If we assume that industry develops one firm at a.time then there wiI I be a step function. The positioning of these steps will indicate the timing of industrial expansion. Ultimately demand conditions will determine the shape of the P.C. curve. An implicit assumption made here is that each plant will only produce up to the MOS capacity. This is a simplifying assumption and it will be relaxed later in our analysis. We are now ready to combine the demand and supply sides of our analysis to indicate the time horizon of industrial development. We will consider three different methods and then choose the method that best suits our purpose. CASE I. In the first case we will assume that the government prefers to construct an MOS plant only when demand has reached the appropriate 76. level. By combining figure 5.1 and 5.3 we have the situation depicted in figure 5.4. This di agram shows that in year t the f i rst pI ant will be constructed and wi I I continue to produce at X capacity unti I t', when a second plant will be constructed in response to increased demand. CASE 2 Figure 5.5 shows, an alternative planning decision that as soon as demand is greater than present MOS capacity a new plant wi I I be construc ted. Under these conditions there would always be excess capacity and unless these, goods are exportable there will be a waste of resources. CASE 3 * This final situation, as depicted in figure 5.6, is a compromise between the two cases mentioned above, and also the most plausible of the three. But the question then arises as to what point in time should the next plant be constructed. Between the time of construction of the nth and n=l plant, demand will have to be met by imports. This is paid for out of .the country's foreign exchange reserves. The problem then becomes a question of a trade-off between depletion of foreign reserves and excess capacity production. At what point is it worthwhile to stop importing and commence domestic production. We must remember that the developing country has a . preference for domestic industrial production and this preference has been built into our model. Of course, each situation wi I I differ in. each country but our model presents a criterion to be used as a guideline in making the decis ion. First we will assume that the demand conditions indicate that within a certain time period, (e.g. ten years) the quantity demanded of the commodity will increase an amount equal to the MOS of an additional plant. The question is when should this plant be built? Throughout this 10-year period there will be a flow of costs involved 77. in supplying this commodity to the market. In years when the good is ^imported, the cost will be simply the costs of imports. Once local prod uction is undertaken, consideration must be given to the cost of the initial investment' plus the variable costs of operating the plant. There fore we are faced with ten alternative cost flows depending upon, the timing of construction of the plant. The decision criteria suggested by this mode] is to choose the year for construction that wi II generate the lowest present value of the stream of costs. For example, assuming full operation of the plant is undertaken in the year of construction, alternative I is construction in the first year: alternative 2 is construction in the second year: ' a \7 - + t .. v> ' * *. —14— alternative 5 is construction in the fifth year: and alternative 10 is construction in the 10th year: where: Pvh is the present value of the stream of costs if the construction is undertaken in the n th year. Mn is the.value of imports of commodity in the n th year. I. is the initial cost of construction. Vn is the variable costs of the n th year.* '. ' ' i is the rate of discount. * Variable Cost is a net calculation as well as the operating costs of produc tion, the cost of protection must be included as well as the cost in local currency of imported inputs. From these costs must be subtracted the benefits from domestic industrial production such as the externalities. enjoyed by the society. Therefore, represents the net costs of local industrial production. If P.V.7 gave us the lowest present value calculation we would undertake construction of the next plant in seven years. This mechanism is the basis of our model but further consideration 78. must be given to the calculation of these variables. In'order to give a closer estimation of the true situation in developing countries we must consider different cost variables in various ways. To give the real cost of local factors of production we will use a shadow price system. Be cause the factors employed in the industrial sector usually have a very low opportunity cost, the cost to society is not reflected in the wage they receive. Therefore by using shadow pricing the cost of l.ocal variables will, be less and 'w i I I , therefore, bias our'ca leu lations toward earlier construction. Those inputs which must be imported are of course not subject to shadow pricing. •.• Quite the opposite is the case. When foreign exchange is used to purchase imports the cost to society is not usually reflected by the official foreign exchange rate. The existence of a foreign currency black market in most developing countries demonstrates the dis-crepency between the official.and actual rate of exchange. When calcu lating this cost stream in terms of local currency then the actual exchange rate should be used. This means that if local production of the commo dity involves a import component the tendency will be towards later construction. "" . Finally, any external ities that will result from local production must be considered in our calculations. Such things as increased skills of the. labour force, increased entrepeneuriaI skill, and Iinkage effects must be considered as benefits and in some way be deducted from the costs. The existence of such positive externalities will encourage early con struction of the plant. The final decision, therefore, depends upon many variables. On the one hand, we may. cone Iude that an industry with a low initial investment, small import component, and high priced final product which generates positive externalities will favour early construction. On the other hand, industry requiring a large initial investment to produce a low valued final product with a high import component will tend to discourage construction unless the positive externalities are so great as to counter the high real costs of production. Based on this criterion, figure 5.6 indicates the timing of indus trialization. The intersection of D(t) and P.C. curves at points t' and 2 t indicates the appropriate time for constructions of the second and third plants. Effect of Integration Let us assume that a second country is introduced to our model. Assuming that country previously imported commodity X to satisfy its domestic demand, the effect of integration wi II be to move the D(t) function upward to D(t)' as in figure 5.7. This in effect is increasing the size of the domestic market and the quantity demanded increases from D(t) to D(t)'. This will accelerate the rate of industrial development. Country A would have constructed plants 1, 2, and 3 in years t°, t', and t respectively. But now with combined expenditure function D(t) , con-o 2' struction of the same plants will take place in years t and t ,. with an 3' additional plant in t . Under the integration scheme it is unlikely that all three plants would be built in country A. The firms of the industry will be divided between A and B and it is quite I ike Iy that B wi I I receive industries that it would otherwise not be able to support. Country A wi I I enjoy a larger domestic market and a shorter time horizon for its indus trial development. 81 . Figure 5.8 82. Modifications of Model' As we mentioned earlier our simplifying assumption of constant pro duction at MOS capcity will now be dropped. In Bain's studies he indi cates that there is a range within which a firm can operate to produce at the lowest attainable unit cost. How will this affect our P.C.curve? We will maintain the lower MOS bound of x units but now extend the upper limit. There is a certain range of production beyond which costs will begin to rise and it is at this point that we will stop further produc tion. A case could be made that even though unit cost will rise after a certain level:of production is reached, it would sti I I be worthwhile to produce rather than use foreign reserves to purchase imports. The strength of this argument depends on the local government's foreign reserve posi tion as well as government policy concerning the trade-off between effi ciency and production. For our purpose, we shall assume that the company will produce only within the range of lowest attainable unit cost. This modification can be seen in figure 5.8. The P.C. curve has changed its shape but has not changed our analysis. What in effect it does is to infer that the MOS is 50$ larger and there- . fore fewer plants are required to satisfy the same level of quantity deman ded. Using this P.C. curve and introduction of a second country, the model will give the same results; .. ; increasing the rate of industrial growth. Application of Model to East African Case , To utilize the model there is certain information which must be available. In this section we will discuss this problem. First, from the supply side of the model the most pertinent data is the Minimum Optimal Scale information. Bain has provided us with MOS statistics for 20 industries in the U.S.A. His calculations were based 83. i on a 1949 census of American industry.; There are obvious objections raised to the use of such data when dealing with developing countries. Differing levels of technology and quality of the labour force make these calculations less credible. 11 For this reason we turn to a similar study done by M. M. Metwally which deals with the Egyptian economy. In his study he considers a n number of manufacturing industries and estimates (1) the most efficient scale of production which he defines as "that quantity of the product which must be produced to enable the plant to work at full capacity when using the best available techniques of production", and (2) minimum economic scale of production defined as "the scale of production at which the article can be produced domestically on a competitive basis". This output is determined by the point at which the cost output curve cuts the import price line. These values were calculated from studies done in the U.S.A. and then "transposed to Egypt through appropriate ad-12 justments of relevant data". Table 5.2 shows the minimum economic scale of production for 55 manufacturing industries in Egypt. When we turn to the demand side of our model the task is much harder. Recalling our Expenditure function 2>„ = 3„., * t>i )n we are able to immediately determine two of the three variables. As we mentioned earlier "3V<" 's simply the quantity demanded of the commodity in year " »-i ". The variable y we wi I I assume is growing at a constant rate. Each of the three countries will have a different national income growth but all will be somewhere in the range between 3-6$. That leaves only one variable to consider. Income elasticity 'b' is the only variable factor. The value of 'b' will change from year to year. In order to arrive at some kind of estimate of 'b', it would be necessary to run a 84. Table 5.2 Economic Scale of Production in Relation to Size of Egyptian Domestic  Market in 55 Manufacturing Commodities A. 2. 3. .4. 5. 6. .7. I tern Food and Kindred Products . Creamery Butter . Natural Cheese Raw Cane Sugar Refined Cane Sugar Beet Sugar Beer Malt ce 9. Soft drinks 10... Macaroni & Spagetti B. Tobacco Products I. Cigarettes C. Textile Mill Products 1. Pure Cotton Yarn 2. Woven Cotton fabrics '3. Rayon yarn & fibres 4. Viscose yarn 5. Motor car cloth D. Lumber & Wood Products 1. PIywood , . 2. Packing cases E. Paper and AlIied Products 1. Cigarette paper 2. Paper cigarette filters 3. Viscose cigarette filters F. Chemical & Allied Products . I. ChIorosuIphonic acid 2. Nitrobenzene 3. Ani Ii ne 4. Matches 5. Soap & detergents ••",6. Ammonium nitrate 7. Petroleum products Unit of Measurement tons -do-- do th . tons -do th, hectolitres th. tons th. tons mill, bott I es. th. tons bi i ons th. metric tons mill, metres mill, pands -do-tons cubic metres thousands tons mill, -do-rods tons -do--do th, mill, sticks mill. Ibs. tons of ammonia content th. barrels Economi c Scale of Prod, (per annum) 747 5,35-1,071 7,356-14,712 360 21-52 1,970 33-66 158 6- 15 7- 17 4-35 5.7-1 I.4 30.7-76.7 26-64 I I N.A. 4,000 I , 150 I , 100 135 205 850 750 600 19-38 150-225 43-300 65-162 G. Rubber Products 1. Tyres & tubes for cars 2. Rubber footwear thousands th. pairs 4050 4,725-11,800 85. Table 5.2 continued I tern Unit of Measurement Econom i c Scale of Prod (per annum) H. Leather Products I. Leather footwear I. Stone, Clay & Glass Products I. GI ass bottles 2..Cement, Portland 3. Gypsum products 4. Clay floor & wall tiles J. Fabricated Metal Products 1. Metal Cases 2. Metal barrels 3. Co I Iaps i bIe tubes K. Machinery. Except Electrical I. Agricultural tractors (assembled) . 2. Ba I I & ro I I e r bea r i 3. Typewriters th. pa i rs mill, bottles •th. tons -do th, sq. ft. mill. thousands $1,000 No. $ 1,000 thousands 577-1 , 154 N.A. 329-658 221 4,330-8,660 100-600 315-780 2,400-4,800 2,650 10,000-20,000 154 . Primary Metal Industries 1. Pig i ron 2. Steel (finished) 3. Steel Sheets & strips 4. Primary aluminum 5. Copper products 6. Electrolytic Zinc th. tons -do--do--do--do- . tons 700 600 206 40-80' I 5-30 8,600 M. Electrical Machinery I. Transformers .2, Motors & Generators 3. Household refrigerators . 4. Household washing machines 5. Household vacuum cleaners 6. Primary batteries, dry 7. Flourescent lamps $1,000 -do- . thousands -do---do-mi I I ions thousands 17,000-43,000 19,000-46,000 240 203-509 208-560 18-35 N.A. N. Transport Equipment I. Cars (assembly) thousands 60-180 86. regression analysis on consumption of a particular commodity and the relevant increases in income.. In this way a trend could be established as to the future behavior of 'b'. Unfortunately the statistics for this calculation are not available at this time but it will be a fruitful exercise to calculate 'b' and then examine quantitatively the effect of Zambian entry into the EACM. It is the hope of the author to be in East Africa in the near future, where the required data can be more easi Iy•estimated. Thus the purpose of this chapter has been to develop a sound theo retical model that can be used to estimate the effect of integration on industrial development. 87. CHAPTER VI Cost considerations of proposed integration. In the preceding chapters, we discussed and attempted to quantify the' benefits of Zambian entry into the common market. Our analysis would not be complete if we did not stop to consider the cost side as well. Therefore, this final chapter will deal with some of the negative aspects of integration. The format of the chapter will be to consider: (1) some of the costs of integration accruing to both Zambian and the EACM countries, i , (2) the steps that should be taken in order to minimize these effects. The first and most obvious negative effect is the loss of revenue i that Zambia will sustain by diverting trade from Southern Rhodesia and South Africa to the EACM countries. As recent as 1968, approximately 33$ of all Zambian imports came from these two sources.^ In order to estimate the custom revenue collected from these sources we return to 2 our 1966 data. Table 6.1 summarizes the relevant information. These calculations were based on the import estimations of chapter four. The upper limit calculation was based on a two digit S.I.T.C. classification and the lower estimate on a more detailed examination of the four digit classification. The tariff rates that were applied were those published in the tariff schedule of the Zambian government."' There was some difficulty finding the appropriate custom duty for each commodity since the Zambian schedule is not based on the S.I.T.C. classification but on.a descriptive commodity by commodity basis. Thus, by matching the S.I.T.C. commodity description with the relevant tariff rate we have arrived at a close estimation of the tariff revenue collected. 88. _ Table 6.1 Zambian Revenue Losses for Relevant Impact Effect Estimations Southern South TOTAL Rhodes i a Afr ica Thous.$US TotaI i mports 64,904 - 83,936 Upper limit estimation of impact effect 45,475 72,744 Revenue loss for U.L. estimat i on 6,104.86 . 6,985.2 13,090.06 Lower limit estimation of impact effect 27,166 27,627 Revenue loss for L.L. est.i mati on 5,183.65 3,019.8 8,203.45 Source: United Nations, Commodity Trade Statist ics 1966 Series D, Vol . XVI, No. 1-36. Table. 6.4 Adjusted Calculation of Tariff Revenue Losses Southern South TOTAL Rhodes i a Af ri ca Thous.$US Upper limit revenue loss 3,184.16 5,029.97 8,214.13 Lower limit revenue loss 2,320.75 • 2,777.6 5,098.35 89. An interesting observation is that there is not much difference in revenue loss between the upper and lower limits for Rhodesia, while for South Africa the revenue loss more than doubles. The reason for this is that most of the South African goods in the lower level estimate carry a low tariff rate or are duty free (see table 6.2) while the large revenue earners such as commodities 110 (alcoholic beverages), 710 (mach inery), and 840 (clothing), were included in the upper limit estimation (table 6.3). Just the opposite-is the case for Rhodesia, high revenue . earning commodities such as 122.3 (manufacture tobacco) is included in both estimates and it was only the free or nominally taxed goods that are added to make the upper bound estimate. We should note, however, that these revenue loss figures are not truly representative.. Even if the import effect were complete it would not mean such a large revenue loss. Such goods as liquor, tobacco and luxury goods which carry a high import rate will not be totally tax free if imported from EACM. Certainly an excise tax would be levied on these goods and thus most, if not all,the revenue loss on these goods would be recouped. This would not affect the trade flow between the EACM and Zambia, since East African goods would still enjoy a comfortable level of protection. Adjusting the calculations for this fact, results are shown in table 6.4 (the calculations are determined by assuming that an excise tax will replace the tariff rate on such commodities as per fumes (#553), manufactured tobacco (122.3), liquor and wine (#110)). These values are substantially lower than the first set of figures and they represent a truer picture of the situation. The next question that must be considered is, "to what extent does Zambia rely on custom dutie.s as a source of revenue?" As we men tioned earlier, Zambia is one of the world's leading producers of copper 90. Table 6.2 Lower Limit Impact Affect Estimation & Related Revenue Loss Southern Rhodesia South Africa S.T.T.C. Amount Tar.Rate Revenue Amount Tar.Rate Revenue 001.I 786 Oh I . t 1108 5$ .55.4 705 Free 01 1.3 454 5$ 22.7 Free 012.1 321 5$ 16.05 Free 013.8 782 20$ 156.4 Free 02 2.2 481 lid/lb; 12.4 02 3. 160 Free 04 5.9 • 652 Free 04 6 453 5% 22.65 ' 04 8. I 143 Free • 04 8.4 448 ' 20$ 89.60 05 1.9 151 Free 05 4.5 5 Id/lb. 34.8 05 .5. 195 20$ 39.0 291. 20$ 58.20 06 6. I 1602 5$ 80.10 06 2. 448 . Free 07 I.I 120 5$ 6,0 07 3. 244 Free 07 4.I 126 2d/lb. 4.8 07 5.2 132 10$ 13.2 09 I.4 240 20$ • 48.0 09 9.I I 178 5$ 58.90 y i. Table 6.2 continued S. Rhodesia S. Africa S.T.T.C Amount Tar.Rate Revenue Amount Tar.Rate Revenue 12 2.3 2190 5sh/lb. 2862.90 d 24 2.2 '"205 Free 27 6.2 259 Free 29 2.5 665 Free 33.2.9 118 Free 183 Free 42 1.3 106 5$ 5.30 51 4. . 244 Free 53 3.3 278 20$ 55.60 309 Free 54 1.7 328 25$ 82.00 823 25$ 205.75 541.9 222 25$ 55.50 5 5> 3. 692 35$ . 242.20 55 4.1 137 20$ 27.40 55 4.2 156 . 20$ 31 .20 256 20$ 51 .20 55 4.3 . 439 20$ 87.80 59 9.2 807 Free 59 9.5 200 5* 10.00 59 9.9. 730 5$ 36.50 62 9. 1 • 506 5$ 25.30 1891 5$ 94.55 63 2.4 554 5$ 27.70 165 5$ 8.25 64 2. 1 1297 10$ 129.70 £51 ' 5$ 63. 10 64 2.3 138 Free 259 Free 64 2.9 202 20$ 40.40 185 20$ 37.00 65 2.2 299 Free 131 Free 65 5.6 194 . Free 92. Tab le 6.2 cont i nued S. Rhodesia . S. Africa S.T.T.C Amount Tar.Rate Revenue Amount Tar.Rate Revenue 65 6.I 395 Free 65 6.9 164 ; Free 66. 1.2 1156 5$ -57.80 932 5$ 46.60 66.5.1 152 35$ 53.20 804 35$ 281.40 69 I.I 530 25$ 132.50 69 2.2 326 10$ 32.6 69.3.2 176 . 15$ 26.4 69 4.2 353 5$ , ' 17.65 415 5$ .20.75 69 5.1 110 5$ 5.50 69.7.2 317 25$ 79.25 69,3. 928 5$ 46.4 837 5$ 41.85 71.2.2 124 . 5$ 6.20 712.9 143 5$ 7.15 414 5$ 20.70 71 9.8 326 . 5$ 16.3 1047 5$ 52.35 719.9 267 5$ 13.35 72 3.1 2396 5$ 119.80 502 5$ 25.10 .72 9.9 404 5$ 20.2 1265 5$ 63.25 733.3 769 5$ 38.45 587 5$ 29.35 812.4 145 25$ 36.25 821. 584 30$ 29.20 910 30$ 273.00 831. 371 Free 841.1 1177 20$ 235.4 2845 20$ 569.00 841.4 ' 377 25$ 94.25 93. Table 6.2 continued S. Rhodesi i a S. Africa S.T.T. C Amount Tar.Rate Revenue Amount Tar.Rate Revenue 841 .4 377 25$ 94.25 851 . 1728 15$ 259.2 1602 15$ 240.30 891 .2 169 '25$ 42.25 892.9 366 10$ 36.60 368 .10$ 36.80 893 317 470 054. 1 3M Free Tota 1 thous. 27, 166 $US 5,183,65 27,627 3,019.80 a. $33/ton, 376 tons. b. 22$/metric ton, 1580 tons. c. 44$/metric, ton, 109 tons. d. . $ I,430/metric ton, 2002 tons. Sources: United Nations; Commodity Trade Statistics, 1966, Series D, Vol. XVI, No. 1-36. Republic of Zambia, International Customs Journal, March, 1965. y4. Table 6.3 Upper Limit Impact Effect Estimation & Related Revenue'Less S. Rhodesia S. Africa S.T.T.C Amount Tar.Rate Revenue Amount Tar.Rate Revenue 001 , 108 807 010 2861 5$ 145.05 Free 020 620 Free ' 203 040 815 20$ 163.00 1350 20$ 270.00 050 856 Free 1396 060 1693 5$. 527 5$ 090 1421 5$ 84.65 797 1 10 772 1649.8 a 1 10 10.07" b 120 2208 5sh/lb. 2,862.90 240 210 Free 380 Free 270 • 246 Free 498 Free 290: 716 Free 126 Free 330 253 Free 1948 Free 420 560 5$ 28.00: 161 5$ 8.50 510 : 195 5% 9.75 651 5$ 32.55 530 36 1 Free 330 Free 541 426 25$ 106.50 1096 25$ 274.00 550 289 20$ 57.8 1527 • 20$ 305.40 581 497 : 5$ 24.85 599 265 5$ 13.25 1738 5$ 86.90 620 586 5$ 29.3 3242 •5$ 162.30 630 1220 5$ 61 .00 400 5$ 20.00 640 2366 10$ 236.6 1846 10$ 184.60 650 2548 1944 • • • 660 2779 $5.50/ton 457.81 3563 354.50 670 1916 5$ 95.80 10692 5$ 534.60 680 198 5$ 9.90 918 5$ 45.90 690 4433 10$ 443.30 5019 10$ 501.90 710 1712 5$ 85.60 14520 5$ 726.00 Tab Ie 6.3 cont i nued ^•T.T.C. Amount Tar.Rate Revenue Amount Tar.Rate Revenue S. Rhodesia S. Africa 720 4727 5$ 236.35 3597' 5$ 179.85 730 2427 5$ 121.35 ' 5682 .5$ 284.10 812 600 25% 150.00 387 25$ 96.75 831 37 1 ... 840 1419 20$ 283.80 < 3720 20$ 744.00 851 1728 15$ 259,20 1 602 15$ 240.30 890 1561 10$ 156. 10 2158 10$ 215.8: 070 197 5$ 9.85 650 5$ 32.5 Tota1:thous. 5 US 45,475 6, 104.86 72,744 6,985.17 a. Liquor, 55-, 14 sh./gal. b. Wine, 10 sh'-./gal . Sources: United Nations, Commodity Trade Statistics, 1966, Series D, Vol. XVI, No. i-36 Republic of Zambia, International Customs Journal, Mar., 1965. 96. Table 6.5 Zambian Government Revenue from Indirect Taxes, 1966 Customs $ 21.56 Excise 12.04 Mineral Royalties 110.88 Copper Export tax . 51.80 Motor Spirit tax 1.96 Motor Vehicle licenses 3.08 Other I i censes .28. Profits of government enterprise Stamp Duty .56 Other 1.68 TOTAL 203.84 Mi 1.1 ions of US.$ Source: Republic of Zambia Economic Report 1968 (Lusaka 1969) p. 93 Ta bIe 6.6 Revenue Loss as percentage .of total Customs Revenue and total Indirect Taxes Revenue $ of Custom $ of total Revenue Indirect tax revenue Lower est. 24$ 2.5$ Upper est. 38$ ' 4$ 97. and for this reason derives most of its revenue in the form of mineral royalties and copper export taxes. Only 11$ of all indirect, tax revenue comes from customs duties, while over 80$ is derived from the two above mentioned sources (table 6.5 shows the components of indirect tax revenues for 1966). Taking the latter estimates of revenue loss it represents only 2.5$ to 4$ of the total indirect tax revenue, a smaI I price to pay for integration. There will also be another revenue loss. Under our proposed integration, Zambia will forfeit the right to levy custom duties on EACM imports. Looking at the 1966 statistics the level of trade was not sufficient to change the results of the findings. For this reason we wi I I simply consider the above mentioned loss. This loss of revenue can be presented as a strong argument for demanding (1) a share of regionally based industry, and (2) loaning privileges from the East African Development Bank (EADB). In the previous chapter we discussed the necessity of reactivating the Council of Industrial Development, not only for Zambia's benefit but for the continued operation of the EACM. Certainly, Zambia will receive the support of Tanzania for implementation of such a plan. •The EADB was established in 1967 to replace the distributive pool set up in 1961 by the Raisman Commission. The purpose of the bank is to help the 'have not' countries of the EACM, namely Uganda and Tanzania. Zambia could easily subscribe to the EADB and have priviIeged drawing rights as Uganda and Tanzania. The exact details as to the amount contributed and the percentage of with-98. drawing rights would have to be worked out by. the participating"^" """~ countries, but the EADB is certainly a possibIe .tool to be used to compensate Zambia for her loss of revenue. Another important consideration is the effect integration will have on Zambian small scale industries. If the transfer tax system is maintained until its 1975 expiry date then Zambian local industry will receive a certain amount of protection. But, more important, is the fact that most of Zambia's future industrial development will be on a regional basis. Zambia, with a population of 4 million of which only 9% are employed for money wages^, is handicapped by a very small domestic market, and therefore the scope for any large scale (production) industry is very slim. But now in dustry can take advantage of.economics of scale and supply a market seven times the size of its own domestic market. Therefore, most of the future industrial development will move in.this direction. There will also be growth of industries that enjoy a certain geographical protection. Certainly the food procuring industries and particular bulky consumer goods will be produced locally. Thus, the only fear lies in the realization that some existing industries which are now operating underthe umbrella of a protective tariff may not be able to compete with EACM goods after the suspension of the transfer tax. This might be considered a short run cost but when we consider the long run industrial development of the region it is a benefit. From the EACM point of view, there are very few costs involved. As we mentioned earlier the EACM countries import very little from Zambia Even if we were to assume that all these imports were taxed 30% (which is a high rate), the import revenue loss would be less than ha If-a-mi I Iion dollars a year. The greatest cost that the EACM would have to bear is 99. the expenditures involved in extending the services of the EACSO to Zambia.; The burden would be shared by Zambia since it is the recipient of these services. But the distribution of costs is some thing that would have to be negotiated between the two parties. This logically brings us to our final point of discussion in the thesis. That is, "What steps should be taken by Zambia towards becoming a member of the EACM?" and further, "How will the Treaty for East African Co-operation have to be changed to accommodate Zambian accession to the common market?" First of all, let us mention constitutional and administrative changes. .Besides the simple semantics of replacing the term "three Partner States" to "four Partner States", there are some basic moves, that must be made to accommodate Zambian. entry. The first and most obvious change is the inclusion of Zambian authorities on the administrative Councils. Zambia would elect an East African minister and deputy minister who would be full-time members of the Common Market Tribunal as well as representatives to the different administrative committees. ... The standardization of Zambian tariff rates to those of the EACM could take place over a transitional period of two or three years. The East African Customs and Excise Department (EACED) has been the single collector of import duties and has then distributed the funds on a"country destination"basis. Since most of Zambian imports come via Tanzania (now by road but in future by rail), extension of the functions of the EACED could easily be extended to Zambian goods without an great increase in operational costs. The EACED is an important source of data for the administration of the transfer tax system, thus, in order for Zambia to take advantage of the transfer tax system she must join the EACED. 100. As we argued in the previous chapter, one of the foremost pre-conditions of Zambian entry into the Common Market should include the guarantee of some regionally based industry. Under the present Treaty set-up, Article,23, paragraph 3, states: "...that no additions shall be made to the schedules of articles, the manufacture of which is-, subject to industrial licencing under the said East African Indus trial Licencing Laws". This section would have to be amended to accommodate Zambian demands. Better still, the whole section could be replaced by a new regional industria I.pIan which would be drawn up by the re-activated East African I ndustria I Counci I . ,, Membership in the East African Development Bank would require amending Annex 6 of the Treaty to include Zambia on some agreed upon basis. As we said earlier in the chapter, the EADB is an important compensatory tool. Also negotiations must determine to what extent Zambia will participate, in the 27 services offered by the East African Common Services Organization.^ (See the Appendix UT for the list of services). By taking part in EACSO, Zambia could take advantage of economies of scale that would not be possible if these services were undertaken alone. Finally, participation in the East African Corporations gives added benefits to Zambia. The two corporations that deal with ground and sea transportation (i.e. East African Railways Corporation and East African Harbours Corporation) could be easily extended to include Zambia since Zambia already depends heavily upon these very transport facilities. Participation in the remaining two corporations dealing with air travel, post and telecommunications would be determined by joint agreement and implemented during the transitional period. 101 Zambia, therefore, fits quite well into the East African community. Even though the Treaty for East African Co-operation was tailored specifically for the needs of the three participating members of the EACM, with a few minor adjustments Zambia could readily be included. Not only will the entry of Zambia benefit the EACM financially, but also the changes demanded by Zambia will, improve the workings of the common market and increase the chances of continued success. Before the concluding remarks, brief mention will be made to some of the other aspects of integration that relate to the major issues discussed above. . s One important consideration is the effect cur proposed integ ration will have on the balance of payments position of the countries concerned. The immediate effect will be an increase in the visible, exports to Zambia from ;both Tanzania and Kenya. As far as Zambia is concerned there will simply be a shift in the source of her visible imports from South Africa and Rhodesia to the EACM. In- the long run it is hoped that Zambia's visible exports to the EACM will increase. As the entire region develops its industrial base, intermediate and capital goods will become an increasingly larger share of domestic imports while local manufactured goods will be sub stituted for commodities previously imported. Integration will have a positive effect on the inflow of foreign investment. As the market size of the community increases business opportunities will appear that were previously not feasible because of the limited size of the domestic market. One of the benefits of direct foreign investment is the increased exposure of local administration to new technological advancements and entrepreneurial skills. 102. One of the main problems of integration facing the European . Economic Community has been the harmonization of agricultural policies of the member states. Fortunately this has not been the case for East Africa. All three countries in the EACM were agricultural exporters and follow a co-ordinated agricultural policy. Local demands are met by local production. Since Zambia is an exporter of mineral products there is no need to worry about competing exports. As we mentioned earlier Zambia is striving to become self-sufficient in food production. Most of the agricultural products imported from the south were duty free, if the East/African agricultural goods are more costly then this will stimulate the development of local agricul tural production. Factor mobility will not greatly be affected by Zambian entry into the EACM. Although a common market by definition assumes free movement of capital and labour such' has not been the case in East Africa. After the Arusha Declaration when the banks were nationalized in Tanzania restrictions were placed on the movement of capital. This was done to stop the flight of capital which was occurring after indep endence. Similarly, the movement of labour has been limited. Inter-territorial migration has been slight. African workers have tradition ally been reluctant to move away from their tribal groups. When they move from the country to the cities they usual ly live in areas of the city populated by their local tribesmen. For this reason, mobility of labour has been limited. Finally, we must consider the effect of integration on mone tary and fiscal policy. Since 1966 all three members of the EACM have had separate banking systems and separate currency. It would, therefore, not be difficult to incorporate the Zambian banking system with the 103. appropriate mechanism being set up to facilitate rapid and efficient— exchange of currencies. Fiscal policy harmonization would have to be worked out between the contracting parties. : Such negotiations would ensure that the Zambian tax system was in line with that of the EACM. This would guarantee equal treatment of business enterprises regardless of where they located within the extended common market. This chapter has served to round out the discussion of the topic by indicating some of the costs involved, resulting from our "Proposed integration". The conditions for Zambian entry that have been suggested, hopefully will minimize these effects and, therefore, improve the chances of success. Having discussed the important aspects of the issue we can now turn to the concluding remarks. • •; CONCLUDING REMARKS Throughout this study I have tried to present to the reader the important issues facing both Zambia and the East African'Common Market when considering the question of further integration. The analytical tools offered by traditional custom union theory have limited use since they have been developed with the advanced countries in mind. Our investigation has been limited to examining the issues that are of particular importance to the contracting parties'. The empirical study has shown Tanzania will be the largest gainer with an immediate increase in her GDP of between 7.3$ to 13.9$. A smaller impact effect in the range of 5.1$ to 10.8$ will be enjoyed by Kenya. This fact, combined with the hope of some type of regionally planned industrial development will increase the harmony.and satisfaction .104. within the EACM. For the East African Common Market as a whole there is hope for increased rate of economic growth. With a larger market, a broader export base, and the likelihood of increased rate of in dustrialization the chances for such an occurrence are,greatly im proved. For Zambia the proposition . is equally attractive. One of the greatest stumbling blocks to Zambian economic development will be overcome. The small size of the domestic market will no longer be an obstacle to development. With regionally based industry, freer access to world markets (E.E.C.) and a more rational use of skilled manpower .(through participation in EACSO) the benefits of integration are likely to outweigh the possible loss of customs revenue. Therefore, our study has shown that both the EACM and Zambia will enjoy net gains from our proposed integration. A practical approach has been suggested and the question is now up to the parties concerned. Interest has been shown on both sides and it is appropriate to conclude the study with the words of President Kenneth Kaunda express ing his genuine desire for such a union, "I pledge for myself and my Government that, where a practical approach will lead to fruitful co-operation, we shall be the first to sieze it." / 105.' FOOTNOTES INTRODUCTION 1. Address given by H.E. Dr. Kenneth Kaunda, President of the Republic of Zambia, delivered at the Sub-regional Meeting on Economic Co-operation in East Africa held December 10, 1965, sponsored by the Economic Commission for Africa (ECA). U.N. E/CN, 14/346. 2. Elliot, C. The Zambian Economy. East Africa Journal, DEc/68, p.15. CHAPTER 1 1. Viner, J. The Custom Union Issue, New York, Carnegie Endowment for International Peace, 1950. 2. Makower, H., and Morton, G. A Contribution Towards a Theory of Custom Un ions. Economic Jornal (EJ), Vol. LXII, Mar/53, pp.33-49. 3. Lipsey, R.G. The Theory of Custom Unions: Trade Diversion and Wei- . fare. Economica, Vol. XXIV (I), .No.93, Feb/57. 4. Meade, J.E. The Theory of Custom Unions, North Holland Publishing Co., Amsterdam, 1956. < • 5. Gehrels, F. Custom Unions from a Single Country Viewpoint, Review of Economic Studies, Vol. XXIV (I), 1956-7. 6. L.ipsey, R.G.. Mr. Gehrel on Custom Unions, Review of Economic Studies, Vol. XXIV (3), No.65, 1956-7, pp.21 1-214. 7. Meade, J.E. op. cit. . , 8. Ibid., pp. 107-1 15. 9. Lipsey, R.G. The Theory of Custom Unions: A Gepneral Survey, EJ, Sept/70. 10. Ibid., pp.506-7. 11. Ibid., p.508. 12. Other sources of comment on traditional customs union theory are: Spraos, J. .The Conditions for a Trade Creating Custom Union., EJ, Vol. LXXIV, Mar/64, pp.101-108. . . . Mishan, E.J. Trade Creating Customs Unions - A Comment. EJ, Vol. LXXV, Mar/65, pp.238-40. Michaely, M. On Customs Unions and Gains1 from Trade. EJ, Vol. LXXV, Sept/65, pp.577-83. Massell, B.F., and Cooper, CA. A New Look at Custom Union Theory, EJ, Vol. LXXV, Dec/65, pp.748,58. Mishan, E.J. The Welfare Gains of a Trade Diverting Custom Union Reinterpreted. EJ . Vol. LXXV I., Sept/66, pp. 669-71 . 106. Kemp, M.C. The welfare gains of a trade-diverting Custom Un i or.: Corrynen;-, EJ , Vol. LXXVM, Sept 67, pp. 652-3. ' Massell, B.F. A Reply; and Further Thoughts on Customs Unions, EJ, Vol. LXXVM I, Dec/68, pp.979-81. D'Arge, R. Note on Customs Unions and Direct Foreign Investment, EJ, Vol. LXXIX, June/69, pp.324-34. Johnston, H.G. 'The Economic Theory of Custom Unions' in Money Trade and Economic Growth, Unwin University Books,. Allen and Unwin Ltd., London, 1964, p.46. 13. Balassa, B. Trade Creation and Trade Diversion in the European Common Market. EJ, Vol. LXXVM, Mar/67, pp. 1-22. Bentick, B,L. Estimating Trade Creation and. Trade Diversion. EJ, Vol. LXXIM, June/63, pp. 2 I 9-25. 14. Lipsey, R.G. The theory of Customs Unions: A genera I Theory, op. cit. p.496. 15. Cooper, CA. and Massell, B.F. Towards a General Theory of Customs  Unions for Developing Countries. JPE, Oct/65. 16. Ibid. -CHAPTER 2 1. Raisman, J. East Africa - Report of Economic and Fiscal Commission, July/60. 2. International Monetary Fund. Survey of African Economies. Vol. II, Washington, D.C, 1969, p.75. 3.. Ibid., p.76. 4. Brown, A.J. Custom Union Versus Economic Separatism in Developing Countries, Parts I and 2, Yorkshire Bulletin of Economic and'/, Social Research, May/61 & Nov/61. . , 5. Ghai, D.P. Territorial Distribution of Benefits and Costs of the East African Common Market, in Ley and Robson. 6. Newlyn, W.T. Gains and losses in the East African Common Market, Yorkshire Bulletin, Nov/65. 7. Hazlewood, A. The East African Common Market: Importance and Effects. Bulletin of Oxford University Institute of Economics and Statistics, Feb/66. Hazlewood, A. The Shiftability of Industry and the Measurement of  Gains and loses in the East African Common Market. Yorkshire Bui let in, May/66. 107. CHAPTER 3 1. U.S. Department of Commerce. Foreign Economic Trends, 7ambia., American Embassy, Lusaka, April/4/69, p.3. 2. Baldwin, R.E. Economic Development and Export Growth, p. 1.41. 3. Ib i d., p.I 43. 4. International Monetary Fund,' Surveys of African Economies, p.220. 5. Republic of Tanzania, Background to the Budget, p.19. 6. - Ibid., p.8. 7. Guillebaud, E.W. An Economic Survey of Sisal Industry of Tanganvika. .London, 1958, cited in Ruttenberg, Agricultural Development in  Tanzan i a, p.13. 8. Op. cit. ftnt. 4, Vol. 2, p.148. 9. U.S. Department of Commerce: O.B.R. Basic Data on the Economy of Zambi a, Dec/68, p. 19.. 10. Ibid., p.7. II... In 1967.there were 83 establishments employing approximately 10$ of the total labour in the manufacturing sector which dealt with assembly.and repair of transport equipment, Economic Report, 1969. 12. I K = I,4$US. Economic Report. , I 969, p.160. 13. In 1968 Zambia imported in manufactured goods; Beverages & Tobacco 2,171 Chemicals . 22,645 Manufactured goods . • 74,116 Machines & Transport Equipment 134,444 Miscellaneous Manufactured goods 23,956 Total • . 257,331,000 K. I'4. United Nations, Industrial Development,. Africa. N.Y., 1966. 15. Republic of Tanzania, News Release, Sept/68. 16. For example, in 1966, the Zambian government created an independent Zambian railroad. Also in 1967 the Central African Airways, which consisted of Air Rhodesia, Air Malawi and Zambian Airways was dis-solved and seperate companies were established. U.S. O.B.R. Basic data on Economy of Zambia, JDec/68, p.16. 17. Rivkin, A. Africa and European Community Finance and Development, June/66, p.126. . 108. 18. EEC publication, Bulletin of European Communities, Aug/69, p.24, i.9. Roche reau, • H. Significance of the new agreements tone I uded with the  AASM and the East African Community. Bulletin of European Communities, Sept/0ct/69, p.8. 20. .Bulletin of European Communities, Aug/69, p.21. 21. Kaunda, Dr. K. Address by H.E. Dr. Kenneth Kaunda, President of the Republic of Zambia, in UCA Report of the •Sub-regionaI Meeting on Economic Eo-operation in. East. Afifica. Annex III, Dec/10/65. .CHAPTER 4 1. Treaty for East African Co-operation, Printer, Nairobi, Kenya, on behalf of the East African~Common Service Organization, June/6/67. 2. United Nations, Foreign Trade Statistics of Africa. Series B., Jan^Dec/1966, No.. 13, E/CN.I4/STAT/Ser B/13. 3. Clark, Paul G. Development Planning in East Africa, Makerere Institute of Social Research, Kampala, 1965. 4. Gray, Clive S. Development Planning in East Africa: A Review Article, East African'Economic Review, Dec/66, .pp.I-17. 5. Ibid., p.4. 6. Ibid., p.6. 7. Clark, Paul, op.cit. ft.nt.3, p.70. • 8. Zambian Monthly Digest, Sept/69, p. 17. ' 9. U.S. Department of Commerce. Foreign Economic Trends and Their Impli cations for the United States, Zambia, Lusaka, p.7. 10. Of the 720,000,000 $US of copper exports in 1968, 240,000,000 was exported to Britain and 246,0.00,000 to E.E.C, Zambian Government Economic Report, 1969. 11. The population of Zambia is 4,000,000 and 75$ is employed in the subsistence sector. CHAPTER 5 1. Using the 1966 statistics avai IabIe, Kenya produces 60$ of total manufactured output excluding mining. 2. I.B.R.D.. The economic development of Kenya, p.151. 109. 3. Treaty for East African Co-operation. Article 2. I • • •• ' '•" /4. Diamond, Peter A. Effective Protection of the East African Transfer / Tax, p.37-47. . 5. il b i d., p. 43. ' 6.. East African Treaty for Economic Co-operation. 7. Raisman Commission Report, p.29. 8. A summary of the Kampala Agreement has been printed in the East African Journal, April/65, and Appendix 2 gives the duties, of the proposed Committee. .9. In 1966 interterritoria I trade in manufactured.goods and mineral fuels made up 12.2% of Kenya's domestic exports while Uganda and Tanzania's shares are 51$ and 17$ respectively. 10. Leibenstein, H. Economic Backwardness and Economic Growth, p.40. It. Metwally, M.M. The Effects of Market Limitations on Industrial-. . ization in Egypt, Ein-Shams University, Cairo. CHAPTER 6 1. Republic of Zambia, Economic report,. 1.969, p.64. 2. United Nations, Commodity Trade Statistics, ST/STAT/SER D/59-B6. 3. - International Customs JournaI, Republic of Zambia, Brussels, Mar/65. 4. U.S. Department of Commerce Overseas Business Report. Basic Data on the Economy of Zambia, Dec/68, p.19. 5. U.N., op, cit., ftnt. 2. 6. Treaty for East African Co-operation, Annex IX, Article.23, part A 7. Footnote No. 1 in Introduction. APPFNDIX I I 1. Residence Labourer's Ordinance of 1937. 2. Carson, J.B. The Administration of Kenya Colony and Protectorate, Nairobi, I95I, p.9. 3. Economic and- Finance Committee, Government and Protectorate of Kenya. Interim Report, I925, p.2-7, quoted in S.K. Aaronovitch, Crisis in Kenya, London, I946, p.99. 110. 4. Forester, M.W. Kenya Today: Social Prerequisite?for Economic DeveIopment. The Hague, 1962, p.73. 5. Ruthenberg, Hans. African Agricultural Production Deve1opment Po1icy .in Kenya. 1952-1965, p. 5. 6. Douglas, Dorothy W. Structure and Advice: A Case of Kenya, American Journal of Economics and Sociology, Oct/65. 7. Ruthenberg, H. op. cit. 8. Ibid. 9. ' Ruthenberg, H. Agricultural Development in Tanganyika, p.16. 10. Nyerere, J. Principles of Development (appendix). II.. Gulliver, P.H. Land Shortage, Social Change Among the Hyakyusa, East African STudies #11, East African Institute of Social Studies. 12. Nyerere, J. _Ujamae - The Basis of African Socialism, reprinted from Freedom and Unity, London, 1967. 13. Nyerere, J. 1963 McDougall Lecture to the Food and Agricultural • Organ i zati on, reprinted in Freedom and Unity. 14. Saul, J.S. .Marketing Co-operatives in Developing Countries, The Tanzanian Case. Conference at University of Sussex, March 31 to Apri I 3/69. 15. Ibid., p. 7-8. 16. Report of the Presidential Special Committee of Enguiry into Co operative Movement and Marketing Boards, Dar es Salaam, 1966, P-9. ... 17. It was reported by a student researcher on the accumulated holdings of one Union President, for example, who started from a low income base and in a few years had acquired "one Toyota car, two tractors, a house and a bar, wife's house, one Isuzu lorry, canoes (two) and fish nets" with the lowest estimated va.l ue at 86,000 shillings. Saul, J.S. Op. cit., p.9, ftnt 26. 18. Saul, J.S. Op. cit. 10. APPENDICES APPENDIX 1 A The following is a breakdown of,the offices and services of the East African Common Services Organization: a) Transport and Communication Services 1 Ra.i Iway . i n land and harbours together wi th •associated road services and shipping 2 Ports and- telecommunications 3 Air transport 4 Civil aviation and meteorological services b) Revenue Col lection .5 Customs and excise collection 6 Income tax assessment and collection c) Economic and Statistical Services .7 Department of Economic co-operation and East Africa representatives overseas 8 -Statistical services d) Research Services 9 Agricultural and fisheries research services 10 . Medical research services . 11 Industrial research 12 Research by Meteorological Department e) Other Specific Services .13 East African literature bureau 14 East African hide and leather bureau 15 Desert locust survey 16 Royal East African Navy 2. APPENDIX IB A. J. Brown is concerned with the operation of the spread effects and the circumstances under which they wi II affect the higher cost of imports from members of custom unions. He uses Keynesian.muItipIier analysis and assumes that there are unused resources of all factors of production. The new production P is substituted for previously consumed imports with price equal to import price pI us customs duty The model is as follows: Assumptions : two countries A & 3 industrial development takes place in A and resources are supplied by B P (/-•* ) tax-free value of imports t is ad valorem rate of customs duty x is the fraction of P consumed in A - . '"K " fraction of P consumed in B "V, r»t marginal propensity to import of A and B respectively nu ••" from foreign countries mi " from rest of foreign trade The first term of the numerator in both equations (1) and (2) represents the spread effect. The second term in equation (2) is the loss imposed on B from purchasing some part of its imports from A at higher than world prices. The second term of equation (1) is the value of the increase ji n i exports to B plus the value free of tax of the reduction in imports from the rest of the world. To get the effect, this amount needs to be divided by the muItipIier and Assuming that country A is Kenya, and country B is Uganda and Tanzania combined, and estimating the plausible variables, Brown applied this model to EACM. He concludes that: " with these values the country in which manufacturing arises to displace imports into'the free trade area, ex-• periences a rise in income equal to twice the new manufac turing output, the rest of the area experiences a rise in income of about a tenth of the new manufacturing output." Therefore, Brown's findings reinforce the findings of the Raisman Commission of 1961 which stated that the spread effects of increased production in Kenya would generate enough income in Uganda and Tanzania to compensate their loss of income as a result of buying Kenyan products at higher than world prices. A basic fault of Brown's model is that he fails to consider the' case where industries would have located in Tanzania and Uganda if the EACM did not exist. He restricted himself to those industries that required a certain size market that would not have located in an individual country without the existence of a common market. In the following year the same problem of benefits and costs were examined but from a different point of view. Mr. D. Ghai attempted to estimate the degree of dependence of each country on the common market. He calculated the exports of each member country to East Africa and divided it by the monetary gross domestic product. His results showed that from 1946 to 1962, Kenya had increased inter-territorial trade from 4$ to 10$. Uganda's trade fell from 10$ to 7$, while Tanganyika maintained a level of 2$. He concluded .that Kenya relies most, and Tanganyika least, on the EACM. His conclusion was rein-forced by figures for the value of inter-territorial trade in 1962: Kenya 17.32 mi I Iion pounds, Uganda 7.06 mi I Ii on, and Tangany i ka 2.39 mi I I ion. A further breakdown shows that 67$ of Kenya's exports to Tanganyika and Uganda are manufactured goods, Uganda exports cotton, coffee, cigarettes, sugar, electric power, while Tanganyika's exports consist of foodstuffs and raw materials such as fruit, vegetables, and tobacco. On examining the degree of protection enjoyed by each partner country's exports, Tanzania had the. lowest protection - 46$ of her exports duty free,while Uganda had the highest degree of protection at 20.6$ duty. free. The cost of the custom union is the tariff revenue forgone and again the greatest cost is carried by.Tanzania. Ghai con-c]udes: "From our analysis of the internal distribution of of benefits and costs of the EACM it appears that Kenya has been the greatest net beneficiary, that ' Uganda has on balance gained rather than, lost and . that Tanganyika has suffered a substantial net.loss." This report added the fire of economic separatism, but was not left unchaI Ienged for long. Mr. A. D. Haze I wood was soon to demonstrate that the data Ghai had used was unsatisfactory, and had led to false conclusions. He pointed out that existence of an East African market was not exclusively dependent upon the existence of EACM. • . Some products required no protection at al I and would be traded in East African markets without any tariff preference. Therefore, to what extent are the existing economic inadequacies a result of EACM and its actions? Hazelwood wisely shows that when corrections in the'data are made for those products that require no protection, the results are not quite so profound. Making this distinction gets the following results: IMPORTANCE OF COMMON MARKET - 1962 Interterritory trade as a $ of GDP Total interterritory exports Interterr i tor i a I exports dependent on preference Kenya celt Uganda 3$ Tanzan i a 1$ Similarly, for degree of protection: • Ken-Tanz. Effective 12$ .. Normal 45$ Tanz.-Ken 10$ 16$ From-these findings it was not so obvious that Tanganyika was losing from remaining a part of the EACM. As mentioned above, it was obvious that Nairobi, the capital of Kenya, had become the industrial growing point in an otherwise traditional agricultural economy. The historical reason for this phenomenon is that it was the administrative centre for the British Colonial Office and was, therefore, more likely to be exposed to the outside world. The question then arose as to how much of this industrial growth was a result of the EACM. . Mr. Newlyn undertook an investigation as to the shiftability of industry from Kenya to Tanganyika and Uganda if there was no custom union. He compared the average value of output per plant in Kenya with the size of export to the particular areas. If the value of exports to the country was greater than the average output per plant, it meant that the industry was shiftable from Kenya to that particular country. From his investigation he found that a large amount of Kenya's production.couId be shifted to Tanganyika or Uganda and he concluded as follows: "According to the 1961 data-a large amount of Kenya's production was shiftable to Uganda and Tanganyika and there would be a clear gain for Tanganyika and insig nificant loss to Uganda from having the EACM." Within months, Haze I wood was quick to show that Newlyn's con clusions were invalid, because of his methodology and the data he used. Newlyn's method of calculating average output did not take into consider ation that in many industries, a large percentage of output was supplied by 1 or 2 firms and the remaining 10-15 plants were simply local producers, supplying a municipal market. Also there was an assumption of homogeneity of industry which led to further misinterpretation. For example, the baking industry was considered to be shiftable when, in fact, it was bis cuit products that were being exported which requires a larger.scale of plant than the average output figure suggested. There is such variation within each industry that the whole industry cannot be easily classified as shiftable or not. • After re-examination of the data, out of the 15 industries which Newlyn classified as shiftable, only 4 passed the test. Newlyn was the first to admit that his calculations were-incorrect. But the damage had already been done. Too often, analysis of this kind is siezed upon and used to further political aims of certain pressure groups. 7. APPENDIX I C / . ' ' . . • In the Agreement five approaches to the rectification of imba lances were listed in the order in which it' was thought they could be applied. 1. In certain existing industries in which the firms operate plants in more than one country, the firms were to be requested to increase the relative share of output in Tanzania. 2. Several new industries about to be established, of such a nature that there could, initially, be only one plant in East Africa,, were to be allocated by agreement among•the three territories. Most were assi gned to Tanzania which was to receive radio assembly and manufacture, the manufacture of motor vehicles, tyres and tubes, and the manufacture al aluminum foil, circles and plain sheets. Uganda was to receive a bicycle assembly plant and a fertilizer plant, and Kenya a light-bulb factory. The allocation was to be made effective by each government agreeing to schedule these industries under the Industrial Licensing Acts and then arranging that licences issued by the East African Indus trial Council (over which the three Governments have ultimate control) would be issued in accordance with the decisions reached under the Kampala Agreement. 3. A system of quotas was to be introduced on exports from the surplus countries to. faciIitate- the.bui Iding up of productive capacity in the deficit countries. 4. The 'surplus' countries agreed to attempt to increase their purchases from 'deficit' countries. 5. A committee of industrial experts was to be appointed to survey the long-range problem of allocation of industry among the three countries 8. and the provision of a system of differential incentives to attract / / . /manufacturing industry to the less developed countries. Source:Economic Integration i n Africa, P. Robson, P.149. APPENDIX I I In East Africa, as in other parts of the developing world, agri culture has been the major economic activity within each country. From table 2A1 we see that Uganda relies most heavily on this sector, with 90$ of. its population involved in the agrarian economy, 60$ of G.D.P. and 80$ of its'export earnings being derived from agricultural production. In Tanzania agriculture accounts for 80$ of population, 50$ of G.D.P. and 80$. of export earnings, whilst in Kenya, which is least dependent on agriculture, 75$ of population, 35$ of G.D.P. and 50$ of foreign earnings are supported by agricultural activity. This type of development has its roots in the past. Before the colonial era, East Africa was populated by nomadic tribes whose main occupation was.subsistence agriculture. Not until the late nineteenth century did East Africa become subject to British Colonial influences. Uganda was the first of the three territories to be exposed to the outside world. In 1875, the first contact had been made" by.missionaries, though it wasn't unti I 1900 with the signing of the Uganda Agreement .that a British administration was established. It was only with the completion in 1901 of a railway to the coast that Uganda became an exporter of cash crops. Cotton was grown by peasant farmers in addition to the subsistence activities. Cotton exports dominated the economy, and even as late as 1938, 80$ of export earnings came from this source. With increased world demand for coffee, the farmers switched production and increased exports of this crop from 13,000 tons in 1945 to 150,000 tons in 1962-3. The important thing to note is that over 90$ of these exports were produced by peasant African farmers and that little capital investment was required to 10. increase output. This is in contrast to Kenya where 80$ of agricultural exports are produced by settler farmers. But the problem in Uganda now exists that any further increase in output would require fundamental changes in traditional methods of land tenure and attitudes towards sub sistence farming. Introduction of new methods of farming and reorganiz ation of land tenure would be a precondition to any substantial increase in agricultural output. The colonial administration in Kenya was established by the British in 1895 and an active policy of encouraging immigration was followed. The hope for Kenya was for a path of economic development similar to that of Canada or Australia. Thus, in the early 1900's it was British policy to develop an export economy operated by European farmers and worked by native labour. In order to attract European settlers, the most fertile area of Kenya was declared the "White Highlands". This well-watered upland was surrounded by low-lying African, non-scheduled lands. Some of this land was fertile but most areas were good only for grazing and a large area lay idle because it was infested by tsetse flies. Within the White Highlands or Scheduled Areas lay some of the most fertile farm lands in Africa. Holdings in these areas were restricted to whites only and were acquired on a 99 or 999 year lease basis, for a nominal rental fee paid to the Crown. Africans were forbidden to own land although after a time ' squatters arrangements were made for Africans to own small patches of the estate on the condition that the squatter and his fami ly worked as contracted j labour for the white estate owner. Early colonial poiicy can easily be summed up by the words of Sir Charles Eliot, first British Commissioner of British East Africa. Eliot wrote in 1903, " the interior of the protectorate is a White Man's country. This being so, it is mere hypocrisy not to admit that white 11, interests must be paramount." The great mass of the Africans lived in the Reserves on the Non-scheduled land. These reserves were used as labour pools to supply the large European farms with cheap labour. African labour was drawn from the reserves for two reasons. , First, because of the poor'con ditions of the reserves and more important, because of the "hut tax" that was levied upon every African male. Since the .Africans had no cash they were forced to work for a certain period of time in order to meet this obligation. The amount of tax varied depending on the party in power in Britain at the time. Discussion centred around whether the tax should be paid off by two or six months earnings but there was no question as to the purpose of the tax. "We consider that taxation is the only possible method of compelling the native to leave his reserve for the purpose of seeking work. Only •in this way can the cost of living be increased for the native and' as'we have previously pointed out, it is on this that the supply of labour and the price of labour depends." ^ The average size African farm of 23.6 acres (as contrasted with the white farm holdings of 3,400 acres) was used primarily for subsistence agriculture. While the male members were off working, the wife and chil-. dren cultivated the home plot. there were few externalities of this dual system that could benefit the local inhabitants. There was a certain spill-over of technological innovation that could be applied to African lands. But there seems to be very little evidence of increased produc tivity. The technology of the large European farms was highly mechanized and did not lend itself to small acreage. In many cases the work done by African labour was simple, tedious operation, from which no knowledge could be gained. In addition, because of the crowded conditions within the 12. the reserves, and lack of capital, little improvement was noticed. There were certainly social services which became available to local inhabitants, since the foreign enclave developed hospitals, schools and. other amenities to which the natives also had. limited access. The dual economy was a success on purely economic criteria. The large farms became the economic backbone of the country and between 1954-1963 provided one-third of the total agricultural production and 5 four-fifths of the agricultural products brought to market. These large farms produced for the world market and provided government and farmer with foreign exchange. As mentioned above, eighty'percent of domestic exports came from the settler farmer sector. Although the economic benefits were high from such a system, the social costs were also high. The growing irksomeness of the.income disparity between African and Non-African, the breakdown of traditionaI native customs, the overcrowding of reserve areas resulting in increased erosion, and the discrimination of Marketing Board agents against the African farmers brought the crisis to a boiling point in the early fifties. The year 1952 marked the outbreak of violence. The MauMau had sought to drive out the settler farmers by with-holding labour, and any natives who went to work for the white men were killed. This crisis situation brought a massive inflow of British aid to bolster the military and police force. Suppression of the rebellion cost well over 13,000 lives including 96 Europeans, among them 32 civilians. ^ With the uprising came the awareness of the plight of the African farmer and a switch in policy was made. Further economic development 13. would be aimed at the African sector of.deveIopment. i ' The Swynnerton Plan, backed by 5 million pounds, was implemented to bring about basic changes within the structure of the economy. The new approach was characterized by: (1) a land reform bringing land consolidation and the issuing of title deeds. • i . (2) changing the emphasis from the development of subsistence crops to the introduction of new cash yielding crops; (3) efforts to reorganize pastoral areas, by establishing grazi ng areas. (4) settlement of rain-fed land and some investment in irrig-' • ation farmi ng. (5) provision of more finances and personnel for auxiliary ser vices and technical assistance. ^ There was a great response from the small-farm sector. Large percen tage increases were made in all.areas of pyrethrum, tea, sisal, rice, but the most spectacular was that of coffee revenues which grew from 170,000. in 1954 to 5,000,000 in 1964. * Thus, in the decade preceding independence, positive steps had been taken to improve the lot of the African, but there was still a long way to go, . In 1960 Africanization of the White Highlands was implemented in the "One million acre settlement scheme". Under this program 1.2 million acres were to be purchased from voluntary sellers in the scheduled areas and re distributed to Africans. Redistribution was divided into high and low density areas, the former covering one million acres and plots of 28 acre size were allocated with estimated earning power of K.Sh.500. The low-density program was to accommodate better qualified Africans who owned some capital of their own and demonstrated some agricultural ability. The average 14. size of plot was 35 acres with a minimum net cash income of K.Sh. 2000. Completion of plan was anticipated for 1968 but was extended to 1972. The main reason for slow progress was lack of trained manpower and small field staff. It seems obvious that the purpose of this plan was political in nature. As Africanization continued the European farmers could demand a good price for their land, one much higher than if there had been no government backing. But whatever the motivation, it has been a positive step in the raising of African standards. In Tanzania (previously Tanganyika-) there has also existed foreign-owned and operated estates. But unlike Kenya, these farmers did not form the only supply of agricultural exports. The estate5covered only 1.1$ of total land or 10$ of the arable land. In 1954 the estates accounted for 25$ of agricultural product. The World Bank reports that 35$ of market supply and 45$ of the agricultural export were provided by the estates. Most recent figures show the estates' share dropping to 12$ of total agri cultural output. The main estate crops are sisal, coffee and tea. Commercial growing of cotton and coffee was introduced to the peasant farmers by the early Catholic missionaries and have become the main export of Tanzania today. Cotton, millet, sorghum, root crops, bananas, leguminous crops, rice, etc. are produced almost entirely on African farms as well as half of the country's coffee and tobacco. ..Shifting agriculture that was traditionally practiced by local farmers is being transformed to semi-permanent and permanent farming methods as a result of increasing population pressures and demand for cash exports. Work is also being done by extension workers to increase the productivity of the land through fertilization, and improved farm management. 15 What is more interesting about the Tanzanian agricultural develop-' ment is the structural changes called for in the pursuit of "African Socialism." Tanzania's President, Julius Nyerere,has based his hope for African Socialism in rural redevelopment. In a paper entitled "Socialism and Rural Development", Nyerere explains the basic social unit of traditional Tanzanian society to be "Ujamae" or the extended kinship group. For this reason he feels that Tanzania has the best possible foundation for a truly socialist state. The Ujamae system is based on (1) mutual respect of the kinship groups, (2) common holding of material goods,and, (3) an obligation to work and contribute to the collective welfare of the group. ' Even though the government truly believes in the ideologies for which African socialism stands and seems willing to make sacrifices to uphold them, problems have arisen in the actual implementation of the program. There arises the conflict between economic progress and ideo logical goals. Material progress involved the fragmentation of Tanzanian rural society into individualistic economic units. The few attempts that were made at co-operative farming/were generally unsuccessful and a waste of government resources. The co-operative nature of the extended kinship group was based on the social structure of the family group and was a matter of economic necessity. Once cash crops were introduced and the general changing of the conditions through increased population pressures the trad itional socia I.structure of the extended family began to deteriorate. P. G. Gulliver studied the Nyakusa tribe and found overwhelming evidence of the existence of these types of conflicts and adjustments within tribal society when faced with new opportunities of economic development. . President Nyerere himself has been aware of this problem and voiced his concern. He realized that the introduction of cash crops tended to 16.. ' • . encourage individualistic and acquisitive attitudes and the increasing dependence on wage labour rather than co-operative or communal work. Therefore, he wrote in 1962, "Acquisitiveness for the purpose of gaining power and prestige is unsociaIistic. In an acquisitive society wealth /I tends to corrupt those who possess it." He rejects capitalism as a form of development. "Tanganyika wou1d reject the creation of a rural class system even if it would be proven that it would give the largest overall production increase." After an unsuccessful attempt at operating state co-operatives, however, a more tempered approach was taken. Rather than develop co operative farms, the emphasis shifted to marketing co-operatives. Thus the number of co-operative societies increased from 857 in 1961 to 1,533 in April 1966, and the volume of produce handled from 145,000 tons in 1960 to 495,000 tons i n 1965. The role of those institutions was not to be limited to marketing alone. With the post-independent government, great hope was placed on these boards as tools for future economic development. Not only did many of these co-ops have large surpluses that could be used for credit extension but also the co-operative movement represented an effective policy tool that affected rural development most directly. The development of the co-operative movement and marketing boards was in the President's own words, "...from the socialist principle of fS avoiding the exploitation of man by man." 17. Table 2A 21  Tanzanian Agricultural Production Va1ue:mi 11ions of T.Sh i 11i ngs 1961 1962 1963 1964. 1965 1966 Coffee 104 102 134 172 205 305 S i sa 1 264 294 440 468 280 254 Lint Cotton 100 120 148 172 212 253 Cashewnuts 14 26 28 40 63 80 Oil, seeds and nuts 28 26 36 38 28 27 Ground nuts 14 24 26 22 10 8 Sugar 28 36 48 58 61 64 Tea 34 32 36 . 30 37 44 Other cash crops 40 46 70 78 54 54 Staple food crops 1,270 1,410 1,394 1,302 1,260 1,896 2,116 2,360 2,380 2,210 1 Source: Surveys of African Economics P.219 Table 2A 32  Kenyan Agricultural Production Valuermi 11 ions of K.Shi 11ings 1961 1962 1963 1964 1965 1966 Coffee 208 190 220 279 _ 259 346 Tea 96 134 137 147 198 Sisal 90 90 159 135 78 60 Wheat 54 42 61 73 88 77 Ma i ze 58 66 79 32 38 54 Other cereals 16 12 19 16 17 16 Pyrethrum 50 40 22 18 29 43 Wattle 10 14 13 13 11 15 Sugar 20 24 27 31 32 20 Cotton 10 6 9 11 . 13 13 Other cash crops 76 62 44 44 48 62 Total crops Livestock prod. 688 234 680 268 790 197 808 190 760 196 904 273 Tota1 Revenue 922 948 987 998 956 1,127 i c^iir-^Q. Qurv/ovQ of African Economics. D.149 18. Table 2A 43 ' Ugandan Agricultural Production Va1ue: mi 11ions of U. Shi 11i ngs 1961 1962 ' 1963 1964 1965 1966 C3ffee beans 276 306 430 302 200." 252 Seed cotton 122 248 235 302 309 193 • Sugar 92 1 10 104 96 ••96 Tea 48 -.46 56 50 . 54 Tobacco 6 6 12 12 14 3 Source:' Survey of African Economics P. 300 19, Although the middle man has been eliminated in the agricultural sector, this does not mean the disappearance of exploitation. J. S. Saul ably points out that within Tanzanian society there has developed a unique social structure. Within rural society has developed a new sort of elitism based on membership in the co-operatives. The executives of the individual co-operatives have used their infIuence and accumulate personal fortunes. In 1965 a Special Committee reported "With regret we must report that in a great many cases, society secretaries engage in. petty thievery, often in collaboration with a corrupt committee man and sometimes, not so petty." ^ Stories of such i Ik were commonly heard in the agricultural sector. ^ As well, some co-operatives offered ploughing services to their members but there was an inequitable division of ploughing time that favoured the committee men and in some cases these men did not pay the , . 18 hire charges... The result of these investigations has been increased government participation and control. Even though there was evidence of grass-roots discontent within co-operative movements once the inequitable distribution of benefits the "activists" resorted to parochialism and tribalism to stir the peasantry against increased government control. The success of this re-organization of the co-operative movement will come with the increasing awareness and education of the peasant farmers. Nyerere has called for local farmers to be suspicious of their leaders and not to fear criticism. Though increased government control may have short term costs,, as social awareness and, more important, the educational standard rises, in the long run all of Tanzanian society will benefit. 20. Make up of Agricultural Production — j Having briefly summarized the historical development of each country's ••' agricultural sector we can now turn to a more detailed analysis of the actual products of this sector. Let us look at a country by country breakdown of agricuIturaI - production. As was. indicated earlier all three countries depend heavily on the agricultural sector. From tables 2A 2, 2A 3, and 2A4,.it is obvious that the greatest revenue earners in all three cases are coffee, sisal, cotton and tea. Coffee has become the main agricultural export for all three countries. All are members of the International Coffee Agreement (ICA), and therefore the "bulk of their coffee goes to the quota market. Any amount above this quota must be sold outside the quota market at lower prices. Uganda is the largest producer with 160,000 tons in 1967, of which 94$ was robusta type coffee. Kenya then follows with a 1966 production of 51,300 tons, most of which is high quality arabic coffee. .An interesting observation is to note how the small farmer share of production has increased from 20$ i n 1960 to about 50$ i n 1966. Th is is a d i rect resu11 of the one mi I I ion acre settlement program discussed earlier. As these small farm plantations reach maturity it is predicted that the 1970 crop will reach 70,000 tons. Tanzania is next with a 1967 production of 47,000 tons of which 3/4 was arabic and one fourth robusta. In all three countries production has been greater than ICA quota so that the respective governments have been encouraging im provement in quality rather than increased production. Sisal was the main export earner of Tanzania up until 1966 (£ of total earnings). Tanzania holds 2/5 of the total world market but the price of sisal has fallen because of increased competition from Brazil.and the intro-21... duction of substitute synthetic fibre. In 1967, 217,000 tons of sisal were exported but because of the higher labour costs and low international prices, both coffee and cotton were greater export earners, dropping sisal's share of export revenue to 15$ in 1967. . Kenya is the only other East African country that is producing sisal. Production-reached a peak in 1963 of 70,200 tons because of good prices, but dropped to 57,000 tons in the next 3 years following a drop in price. Export earn i ngs fei I from K.Sh. 150 mi I I ion in 1963 to 66 mi I.I i on in 1966. Most of the crop is from large estates and the government is discouraging smaI I farm production of sisal because of the dim prospects for the industry. Cotton was once Uganda's main export and was the engine of her early economic development but now it ranks second to coffee accounting now for about 1/3 of total export earnings. The largest producers, of cotton, Uganda set a record crop of 285,000 tons in 1965-66. The government is actively encouraging the production of cotton through the introduction of pesticides and improved cultivation practices. Output is expected to exceed 368,000 tons by 1971 which is the end of the second five-year deveIopment plan. Tanzania has enjoyed increased output earnings that has more than doubled between 1961 and 1966 (see table 2A 2). The 1966 production of 77,600 tons has placed cotton as the second largest source of export revenue bringing in 22$ of total earnings. '. Production of tea holds a lesser position in the hierarchy of foreign exchange earning crops. In Uganda, it is the third most important crop and fourth largest export. Tea production has traditionally come from large estates but the government has introduced a program to extend tea production to African small farm holders who would sell their output to the estates. By 1970, the total area under cultivation is expected to be 33,000 acres of which 22. 14,000 wi I I be grown by African "outgrowers". Tea production in Tanzania has been minor in comparison to other crops. Although previously dominated by estate farming, tea produc tion has been introduced to the African Sector. From the respective tables we can see the other agricultural products such as ground nuts, sugar, wheat and maize together make up a substantial part of the agricultural sector but are not of any importance individua I ly. 23. APPENDIX I I I •SERVICES TO BE ADMINISTERED BY THE COMMUNITY The secretariat of the Community, including services relating to the Common Market and the Chambers of the Counsel to the Community. 2. . . The East African Directorate of Civil Aviation 3. The East African Meteorological Department 4. The East Afri can Customs and Excise Department 5. The East Af r i can Income Tax Department. 6. ' The East African 1ndustr i a 1 Counc i 1. 7. The East Afr i can Literature Bureau. 8. The Auditor-General's Department. 9. The East Afr i can Community Service Commission. 10. The East Afri can Legislative Assembly. 11. The East African Agriculture and Forestry Research Organization. 12. . The East African Freshwater Fisheries Research Organization. 13. The East African Marine Fisheries Research Organization. . ' -14. The East- African Trypanosomiasis Research Organization. 15. The East African Veterinary Research Organization. 16. ' The East African Leprosy Research Centre. 17. The East African Institute of Malaria and Vector-Borne Diseases. 18. The East African Institute for Medical Research. 19. The East African Virus Research Organization. 20. The East African Industrial Research Organization. 21. The East African Tropical Pesticides Research Institute. 22. The East African Tuberculosis Investigation Centre. 23. Services arising from the operations of the East African Currency Board. 24. Services for the administration of grants or loans made by the govern ment of any country, any organization or any authority, for the purposes of projects or services agreed between the Authority and the Partner States. 25. Services, including statistical services, for the purposes of co-ordinating the economic activities of the Partner States. 26. 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