Trade, GDP value adding activities and income inequality in the East African community

This paper investigates the extent to which the East African Community (EAC) countries have developed economically over time and whether income inequality decreases with economic growth. The relationship between trade and GDP per capita amongst EAC member countries is evaluated using the World Bank’s meta-data of development indicators and the EAC Secretariat’s data spanning from 2000–2019. Convergence in GDP per capita and inequality are tested using Coefficient of variation (CV) and weighted beta. The results show that agriculture, manufacturing, trade and repair, construction, and transport and storage constituted the top five GDP value adding activities, contributing about 38 percent to total annual GDP. The EAC GDP per capita were diverging in the long run but converging in short to medium terms, implying increase and decrease in the regional income inequality respectively. Agriculture, electricity and gas, transport and storage, real estate activities, public administration, and education were income inequality-increasing sectors. Together with finance and insurance, these sectors were also positively associated with GDP per capita. The exports of EAC member countries were found to be highly concentrated in few sectors and destination markets, implying limited diversification of products and markets. In their quest to diversify, these countries should choose the right mixes of export goods and services keeping in view of the prevailing market factors in importing countries, such as, changing taste and demands.Author summary: Regional Trade Agreements (RTAs) are perceived as potential institutional arrangements for encouraging free movement of goods and services across the borders of their member countries. They are generally considered as an engine of growth that creates jobs, reduces poverty and increases economic opportunities. However, little is known about the extent to which RTAs’ member countries have developed economically overtime and whether income inequality has decreased with economic growth or not. The current study uses novel approaches to investigate the role of trade in economic growth and income inequality amongst EAC countries. Trade flows for five EAC countries (Kenya, Tanzania, Uganda, Rwanda and Burundi) are compared using the EAC Secretariat’s trade data. The GDP added by each activity, GDP per capita, as well as inequality and factors influencing it are evaluated using the World Bank’s meta-data of development indicators. The study found that, in the long run (2000–2019), the GDP per capita increased overtime though at a diverging trend. GDP per capita convergence was observed in the short to medium term (2007–2014). Overall, the study provides some new insights into how the EAC countries’ trade policies can simultaneous address issues of economic growth and income inequality.