Business reforms can spur economic dynamism in the East African Community
East Africa is famous for its breathtaking landscapes and its unique concentration of wild animals. Could it also become as famous for its dynamic economic development?
In 2009 I came to Tanzania to work on tax harmonization in the East African Community (EAC). The Common Market Protocol was about to be signed and one of the biggest goals was to tap into the economic potential of the region by facilitating (cross-border) trade and improving the business climate. A year later, the five Partner States of the East African Community ratified the Common Market Protocol in order to realize “accelerated economic growth and development through the attainment of the free movement of goods, persons, labor, the rights of establishment and residence and the free movement of services and capital”. The overarching goal of the East African Community is to achieve sustainable economic growth in order to increase employment and reduce poverty.
On a recent trip to Ireland, stories about the impact of the continuing economic crisis were abundant. Newspapers ran stories about the substantial loss of wealth and purchasing power, such as the increase in 'negative equity' as the value of homes owned by the middle class fell significantly below their mortgages. Cab drivers explained how jobs had been shed throughout the economy, and bemoaned the resulting rise in the number of drivers and increased competition for fares. The reality of the recession and fiscal collapse following the banking crisis of late 2008 was clear.
However, anecdotal evidence about a different aspect of Irish finance – foreign direct investment – suggested a more positive story. I walked through one neighborhood in Dublin that houses the European headquarters of Google, Facebook, and LinkedIn. The latter two were established after the onset of the economic crisis, and Google is in the process of expanding its presence in Dublin. Lawyers at large corporate law firms were excited to discuss FDI, citing it as a key driver of Ireland’s future growth. One firm even maintains a FDI index that highlights large inflows and the positive perception of Ireland as a destination for US investment.
Might FDI in Ireland be the best indicator to consider the strength of the economic fundamentals that enable long-term growth? Ireland has historically benefitted from large inflows of FDI relative to its size. And despite the recent economic crisis, these inflows have largely continued.
Over the past 10 years, inflows of FDI into Ireland tend to be substantially higher as a percentage of GDP than inflows into other OECD economies (see Figure 1). In 2009 and 2010, the two years immediately following the banking collapse, Ireland attracted three to four times more FDI proportionately than other OECD economies. These inflows were not just large in relative terms – they were equivalent to 11.7% of GDP in 2009 and 12.9% in 2010. The negative inflows in 2005 and 2008 do indicate that more money was disinvested out of Ireland than newly invested in the economy those years. However, such outflows are mostly loans or dividend payments from foreign-owned firms in Ireland to their affiliates abroad, at least some of which were likely caused by a 2004 change in the US tax rate on foreign profits.
Figure 1: Net inflows of FDI as percentage of GDP, Ireland vs OECD
Source: UNCTAD and author’s calculations
Imagine things are looking up for you. You are running your own business transporting and selling charcoal to retailers in the area, your husband has a steady job, and together you own real estate which you rent out. Then, your husband dies – your in-laws and your husband’s kinsmen take all of the assets and are entitled to do so under law. You are left with nothing to rebuild your life and provide for your child. This is what happened to Anna in Kenya. Her story is not uncommon. Women’s rights groups in Kenya have been pushing for change and finally, with the institution of a new Constitution in August of 2010, their rights will be protected. This Constitution, the main purpose of which was to limit the powers of the executive, has risen from the ashes of ethnic violence following elections in 2007 in which over 1,100 people are believed to have been killed.
In terms of broad legal principles relating to women’s rights, Kenya’s new Constitution has two reforms. The first, is that customary law, still recognized in Kenya alongside codified law and common law, is no longer exempt from constitutional provisions prohibiting discrimination based on gender. As a result, discriminatory inheritance practices such as those that disinherited Anna will come under increased legal scrutiny. The second, is that in addition to gender being a prohibited ground for discrimination, protections were strengthened with a clause mandating equality based on gender, and a clause providing that parties to a marriage are entitled to equal rights at the time of marriage, during marriage and at the dissolution of marriage. In addition, Kenya has instituted specific provisions, so that Kenyan women can now pass citizenship to their spouses and children on equal footing with Kenyan men. The latter, a huge achievement as it empowers the other half of the population with the same right, is something many countries still continue to prohibit wives and mothers to do.