The effects of COMESA and the EAC on trade creation and diversion, export diversification, and growth of Uganda's economy.

Abstract

This dissertation deals with the effects of COMESA and the EAC regional integration arrangements on the Ugandan economy with respect to trade creation and trade diversion, export diversification into non-traditional exports, economic vulnerability to shocks, economic growth and welfare. The focus of this research on COMESA and the EAC in recent years is motivated by: firstly, the fact that there is neither clarity nor agreement on the particular benefits of the regional integration; secondly, that a significant amount of research has been done at a regional level but with less attention to specific country effects; thirdly, that only a limited research has been undertaken to determine the extent to which regional integration aids export diversification, the economy’s resilience to shocks, and growth of an economy in general. This research explores these issues using the gravity model and data from UN COMTRADE, UBOS, IMF, and World Economic Outlook over the period 1981- 2010. The results reveal that the EAC was trade creating and had more trade potential compared to COMESA which was trade diverting and with less trade potential. The results further show that not only was there diversification, but there was also reduced vulnerability to shocks. In addition, the results show a positive overall effect of COMESA and the EAC integration on growth and welfare of the Ugandan economy through higher GDP, although external debt and trade are largely in deficit. Gross domestic investment and foreign direct investment had mixed effects on economic growth. The key recommendations from the study are that Uganda should put more emphasis on trade infrastructure, such as roads and railways, to lower trade costs and boost trade in the long-run. Uganda should also focus on adding value to what she produces, and diversify the economy by investing in various sectors including manufactures, in order to reduce the economy’s vulnerability to shocks. Additionally, Uganda needs to address the issues of high debt levels, high trade deficits, and low domestic investment that are hampering her development efforts.