Export-led growth in the face of terms of trade volatility: The case of the East African community trade bloc

The East African Community (EAC) was revived in July 2000. Since then, there has been some progress registered in expansion of trade between the five member countries, especially with the Customs Union that brought together Kenya, Tanzania and Uganda in 2004, with Rwanda and Burundi joining in 2008. According to the EAC Development Strategy for 2011/12 to 2015/16, intra-EAC trade grew by 40 percent between 2005 and 2009. Uganda’s exports to Kenya increased from US$ 15.5 million in 2004 to US$ 172 million in 2009, while Tanzania’s exports to Kenya increased from US$ 95.5 million to US$ 300 million over the same period. Growth in exports is expected to be facilitated by the Common Market which came into force in July 2010. The projected increase in trade and investment among the EAC partner states should improve prospects for economic growth and development. However, this expectation falls within on-going debates in policy making agencies, such as the World Bank, regarding the validity of the trade-economic growth nexus in developing countries. Thus, here we examine the export-led growth hypothesis for the EAC countries of Uganda, Kenya, Rwanda, Tanzania and Burundi using panel co-integration techniques to test the hypothesis that export expansion leads to increased output and economic growth, both in the long and short-run.