LIl r 1%fDV RESTRICTED FILJL ~ji I Report No. AF-58b AF58 Volume 1 I nis reporT waU preparl:a Tor use wirnin the DanK ana iTs arfiloted organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION PROSPECTS FOR ECONOMIC DEVELOPMENT IN EAST AFRICA. (in fnior vnlulrnocs) VOLUME I - EAST AFRICA (in three parts) PART ONE: COMX.MON X.AVRKET, COMM.iMON SERVICES ATND rnkA)T-jTICM DI-T PROLEM August 31, 1967 Africa Department EQUIVALENTS C~urrency' 1 Shilling U. S. $0. 14 U7S. $1 Sh 7. 14 , 1 U.S. $2.80 ,Sh 20. 00 w eignt; Throughout this report, unless otherwise stated, tons refers to long tons of 2Z40 lbs. COMPOSITION OF THE MISSION This report is based on the findings of a Mission to East Africa which did its field work in October, November and December 1966 and consisted of the following: John C. de uTilde, Chief of Mission (IBRD) Colin M. F. Bruce. Deputv Chief of Mission and Chief Economist - Kenya (IBRD) Kudlnnur G V Krishna; Economist - Kenya (TBRD) C. G. Akhurst, Agricultural Adviser - Kenya (FAO) Maurice Ti'Fnn Ag7riciutlur21 Economist - Kenvy (FAO) Per Tveite, Deputy Chief of Mission and Chief Economist - Tanzania (Consul+ant) Bruno E. Scheltema, Economist - Tanzania (IBRD) Archie Forbes, Agricultural Adviser - Tanzania (FAO) Jacques Kahane, Agricultural Economist - Tanzania (IDRD) Otto~J 1M ais, i Js..'*JT ('i-,ef oJf is sin and Chief Economist - Uganda (IBRD) Nicholas Carter, lEconomist = UaTTdA (TDT I)TM David W. M. Haynes, Agricultural Adviser - Uganda (IBRD) M1I'ontague Yudellman , Agricult+uralI Econom-ist TT Ugandla (C'onsult4ant) H. David Davis, Adviser on Tourism (IBRD) Bernard H. Decaux, Adviser on InduUtLy (UUnsultant) Jack Derrick, Adviser on Industry (Consultant) Edward ". V. Jayco ser on Transport. (TDDIBRD J1L.IWI.J.u V U. u ,U .. ti 'AV ±.IJ UL ±U iJU Aristides J. Macris, Adviser on Agricultural Training and. Educati on (I 3iD TT\) David McLellan, Adviser on General Education (Consultant) r1 '_I TT n: -' 4: _ A -3_ T_ n__ / TTn\ Lyell 1 llUUithe Adviser onL L rial i 1u F) Gavin Wyatt, Adviser on Power (IBRD) The Mission's findings relate for the most part to tne situation as of the end of 1966, although in some respects note has been taken of developments up to the middlie of 1967. I TABLE OF CONTENTS Page No. SUtI,ARY AND CONCLUSIONS I. Introduction ............. I II. The Common Services. 2 A. Types of Common Services .. 2 B. Investment Reouirements.. 3 Telecommunications ........ F,ast, Africqn Railways and Harbours n . . Thp E.ast. Afriann AinTVSq Conrnrnrstion .- 7 III. The Commnnon Marketk 7 A. Re cent DeeloLopent.. 7 Tnteorconin+trx Trd... 7 .enya'S CoM.onMarIket Exports .. .. . .,, ..... ..... ........ 9 Ug-anda's Cor-,,m-,on MIarklet Export-s., . ., .9 ............ B ~aLIV*O .3 Adj;istme,.ts T,itn the C .larket, 15. TheI5aLI,y 4na , I.Jt.fl .on o QV, uotu ...............L. CAb. 1LiL UOL oIf.ULili S [rt UIUUiCI ary[ U . .. . . . . . . . . . . . . . . . . . . . . . .1 Th,A.A 4-.. T,T-2 4-1- -- fl n - U--- 4 ir 1[1ULLujustmnt V,dL U1 LL0[1, dUll oiT-o 1A,LlCil0U ULI. ..........I) ...... Estab-Li shirnent of Soeparate Monietary SDystems16.16...... ..... C. ITh Gom-mismiori on East African Cooperation .i IV. The Nvew East Af rican Communituy .1 A. Provisions on Common Services. . ,18 B. TProvisions on the Common Market . 19 Transfer Taxes . 19 Quantitative Restrictions. 19 -2- Page No. Freedom of Payments .......................................... 20 Coordination of Policies ...................................... 20 C. The Development Bank .......................................... 21 D. Finances of the Community ....................................... 22 E. The Institutional Framework ..................................... 23 V. Coordination of Plans and Policies .................................. 24 Coordination of Planning ...................................... 25 Coordination of Transport ..................................... 25 Planning of Industrial Capacity . 25 The Case of Textiles .,26 The Case of Sugar .26 Cooperation in Electric Power ................................. 28 Cooperative Development of Tourism ............................ 28 Cooperation in Higher Education ............................... 28 VI. Some Common Problems .......................................... 29 Estimating the Resource Gap ................................... 29 Non-Financial Constraints ..................................... 30 External Finance and Local Expenditures ..30 The Coffee Problem .30 Africanization of the Economies,., .... .....,,..,,,31 APPEMDIX I List of Common Services of the East African Community ANNEXES (under separate cover) I-A Common Transport Services I-B East African Tourist Trade VOLITHE I CUUINN IVMARKET, COIVJYION SERVICES AND COIRUVION PROBLEVIS SUM14ARY AND CONCLUSIONS 1. The three East African countries have long shared a common market and common services which not only have conditioned the progress of the nationa:L economies in varying degrees but have given rise to substantial expenditures in- cluding capital outlays that require considerable external financing. 2. The Common Services, including the East African Airways Corporation, had a total budget of arounld £90 million in 1966/67. They look after the col- lection of customs, excise duties and income taxes) conduct various types of research relating to agricu:lture, industry and health, provide meteorological and air navigation facilities; and perform certain statistical and economic tasks. The most important, however, operate the ports, railways, posts and telecom- munications and airways. The latter are all financially self-supporting in the sense that they generate enough revenue to meet operating expenditures and the service on their own debts. 3. Of the so-called self-supporting services only the railways and pDrts will require significant long-term external financing for their capital outlays. The East African Airways Corporation has financed its aircraft with suppliers' credits; and the East African Posts and Telecommunications, which was granted a loan in the equivalent of £4.64 million in February 1967, appears to be assured of sufficient resources to complete its 1966-70 capital program. 4. To cope with a future traffic increase of about 5 percent per year the railways need to invest about £50 million over a seven-year period 1965-71, and this together with refunding of maturing debt will entail external borrowing of £17.5 million in addition to the IBRD loan equivalent to £13.8 million cont;racted in April 1966. The ports, which have experienced increasing congestion, will have to handle a similar rise in traffic. Thus investment requirements over the same seven-year period have been assessed at about £19 million of which £6 million will probably have to be supplied by new borrowing. 5. In both the railways and ports there is urgent need for a study of the methods and organization of management, all the more so because the new treaty continuing the common arrangements in East Africa provides that the two services, after having long been joined in the East African Railways and Harbours, are to be entrusted to separate statutory corporations. In the ports energetic measures are also required to improve the efficiency of cargo handling and to raise labor productivitv which has suffered fran slack discinline and the Dayment of high wages without respect to performance. 6. The East African Common Market which has long provided for a comrron external tariff and a largely unimpeded flow nf onnrod anrd funds apnnneare for a while to be seriously jeopardized. The fact that Kenya's industrial develop- ment outpaced that of the other two countries and that Kenya's trade with i.ts common market partners developed much more rapidly gave rise to serious mis- g-iving- on the r+ prtf TofUgnnda and rtclr+.irii Tanzania auiit tp hpnefitsi of - ii - common market arrangements. Although the more rapid advance of Kenya's industry and trade has by no means been due entirely to the Common Harket, it was inevit- able that the other two countries should insist on action to correct what they viewed as a growing imbalance. Various measures such as the imposition of quotas on intercountry trade and the decision to replace a common note-issuing and monetary institution with separate central banks and currencies seemed to presage the dissolution of the Common M4arket. However, the crisis atmosphere that was thus created helped to foster a sober reconsideration of the issues and bring about a realization of the countries' joint stake in maintaining the Common Ser- vices and of the long-term value of a free trade area to economic development. 7. Under a new treaty which was signed on June 6, 1967 and will become effective on December 1 of this year, the essential features of the Common 1fiarket and Common Services are preserved within the framework of an East African com- munity. The treaty makes a number of institutional and organizational changes including the establishment of four separate statutory corporations to operate the self-supporting common services. The most important changes, however, are those designed to ensure that the benefits of common arrangements have been equitably distributed. For example, the -treaty provides for substantial de- centralization of the management and operations of many of the Common Services and redistributes their headquarters and facilities more evenly among the three countries. In addition. the treaty authorizes, under strict conditions. the imposition of modest duties on intercountry trade in manufactures for limited periods and provires for an East African Thevelonment Bank which is to assist industrial development principally in Tanzania and Uganda. 8. In many respects the new treaty recognizes in principle that coordination of planning and policies will be essenti.al to the success of the Common Narketn In practice much more attention will need to be paid to this than in the past. Coordination of transport development, for example, has been inadequate because the railways have been handled by the Common Services while roads have been en- tirely a national responsibility. All thre countries fav fr,.later notional development plans with little or no reference to the implications these have for the trade in goods and services among them. Irratonal investment decisions and wasteful excess capacity may well develop in the absence of consultation and co- ordination. It seems urgent, for instance, toc cncert action on future develop- ment of sugar production in order to prevent serious overcapacity and to promote Joint arrangements fo r distribution th-a would reduce transport costs h There appear to be potential advantages also in working out arrangements, particularly L)UtV:DWJI= \tlJyd dLJU UgIlJLId. lUl1 JUIL) t eApJlLUd. bUUlJ U1. lyUi UptUVJtI ~UOUIlUC5 dlJU lJA restoring some measure of cooperation among all three countries in the develop- ment of the rapidly expanding- to-u-rist trade. I. INTRODUCTION lo The IBRD's mission to East Africa concentrated primarily on the past economic performance and the development plans and prospects of each of the three countries - Kenya, Tanzania and Uganda. This recognized in effect that each country is an independent sovereign entity with its own government, its own economy, deve:Lopment plan and financial resources. The greater part of the Mis- sion's analysis and findings are therefore contained in Volumes II, III and IV of its report, dealing with Kenya, Tanzania and Uganda respectively. 2. At the same time the Mission has had to take into account that the three countries form part of a larger common unit. They are not only linked together by a common market and customs union but they share a wide range of services which together greatly influence their economic development and give rise to certain common problems and common investment requirements. It is these that will be briefly described and analyzed in this part - Volume I - of the Mission's report. 3. The links among the three contiguous countries were forged during the time of British administration. Free trade between Uganda and Kenya was established in 1917. After the establishment of a British mandate over Tanganyika,l/ the customs union was extended to include all three countries in 1923, although the principle of free movement of imported goods within the whole area was not fully recognized until 1927, while Tanganyika retained its own customs department until 19h9. Common ser- vices developed gradually over this period, first between Kenya and Uganda and after World WJar I, with Tanganyika. It should be noted, however, that the port-rail system serving Kenva and Uganda waiS for a long time linked only indirct.1v .wit tha iqt. of Tanganyika by means of shipping services on Lake Victoria. A direct rail connection was estab lished onnlv in 1963A and rlthen nnly wiflit the line ruinningy frorm +he T'n?an-ganyikn port of Tanga to the Moshi-Arusha area of northern Tanganyika. 4. The East African Common.Market and Services were not given any overall in- sq.itt.ional oircrganizat.ion until 19iiR wjhen tI;h East. Af'rican High Gmmnission consisting of the governors of the three territories was established and complemented by an ex- ec utive anri adlivisory staff aweas s a central legislative a . In T)ecmber 1961, with the advent of independence, the High Commission was replaced by the East African Common St-rvice.s nlrq'anination (.ACO'L A lnmmon Servicesritv rnn.qi.in of the prime ministers of the three countries was established as its suprerme organ and -was assisted by a nu.mber of ministerial c ng with fna commu- nications, commerce and industry, labor and research and social services. The com- pos~itionv of the~ Ge~ntral T egislative-~~ ~ Assembl wa revse and- th-e sphereo'fl ~its legislative authority was defined. While not given any authority to levy taxes EACSO was for the first time _assured a regullar sourcee o-fL rlevenu,e b9"j b0ei;ng -assiGgnetd 40 percent of the taxes on manufacturing and financial companies and 6 percent of the cutos nd excise duie collcte -in-- East-4 Africa--.A Aft4-er deducting_ costs. of V~.C~SCL~~L CLi~CL4.SC ICAL SCL J~COI ELC~"L o1 JU CACAO U ±11 ±i l 0 . i L' U~JIUL. U±LLJr, L UO V0± 1/ In discussing developments in the past this report generally refers to Tanganyika urthei ULthLJ 1dLILJ.LCt QJ LI _LU.l Wc0 LJU iUUU TLa Uai since 7anzibar was n ncluded in the Common ILU d participated in only a few of the Common Services. Zanzibar as part ol' the UiJiieu Republlc of lanzania was made part oI the East, African Community under the new Treaty for East; African Co-operation signed on June 6, 1967. - 2 - collection, these revenues were to go into a Distributable Pool Fund of which one- half was to be divided equally among the three governments and the erhe half wa T to go into EACSO's General Fund to defray the cost of "non-selfcontained" common services, namely those which were not financially self-supporting. A. T~;pes of Common Service 5. Thle most impotan of ACSO's Common S-ervi;ces h-ave becen +I-ose whi;ch are self-contained or financially self-supporting - the East African Railways and Har- bors Aidm-inistration (A&)and te East Afrcan rOStS In Telcol.mlunicai Ad- U ministration (EAP&T). In 1966/67 these two organizations had a total budget of r~ 7 0 4 ~ 1 -1 4 A_ \ -C [. C) _ n; A1 - ; q1 4 R _.. 4 - -X- -; +. 'I . t . .' -- Q ') _. ,1 -1 ; Uf V I M11 ±11 VIJ - t9_4 . _)H l. L L±iUiJ , i JU.LUUJAI! a l L CA01_1Jl.± dure oL G L V UJ o L111SJ_2 i LUIJ for EAR&H, and i16.03 million, including capital outlays of £3.97 million, four Elq-r&. 6. The East African Airways Corporation, which operates all the scheduled internal air services in East Africa as well as a number of inter- national services, has not in the past been formally a part of EAuOU. However, i' is made part of the Common Services under the new treaty continuing these services and the Common Market. Its annual expendltures are close -to million. 7. The non-selfcontained services had a total budget of only z9,39h,933 in 1966/67. They include, however, a wide range of activities and organizations. Among them are: a. The East African Custcms and Excise Department and the East African Income Tax Department which collect the taxes indi- cated on behalf of all three governments. EACSO has no com- petence to fix tax rates or customs duties, but in practice these have been kept virtually uniform by agreement among the three countries. Almost all of the budgeted expenditure of these two departments, ainounting to £2,586,749 for 1966/67, is defrayed from the gross receipts of taxes and duties col- lected. b. Various services devoted to research in the field of (i) natural resources, particularly research carried out by the East African Agricultural and Forestry Research Organization and the East African Veterinary Research Organization, for all of which £851,413 was budgeted in 1966/67, and (ii) medicine, carried out by no less than five institutions on such subjects as malaria, trypanosomiasis, leprosy, virus diseases, etc., and involving budget expenditure of £.423,158 in 1966/67. c. Services relating to air navigation and meteorology provided by the East African Directorate of Civil Aviation and the East African Meteorological Department for which the 1966/67 budget included expenditures of £,1256,314 and £515,343 respectively. - 3 - d. The University of East Africa for which the 1966/67 budget provided £594,2h4 partly to meet expenditures of the Cen- tral Governing Body and more largely (to the extent of £541,000) to cover grants to the constituent colleges in Nairobi, Dar es Salaam and Kampala. The capital programs and most of the current expenditures of these colleges are now defrayed directly by the three governments individually, and the University of East Africa will formally cease to exist in 1970. e. A large variety of miscellaneous services, including sta- tistical and general administration. 8. The principal means of financing the 1966/67 budget of £9.39 million for the non-selfcontained services are (a) TJK Government grants; principallv for sala- ries and research, of £1.24 million, (b) contributions by the three governments and the Dhstrihut2hle Pool Flnnd tmmrd tlhe colpletion of taxes and rdies, £2P_ 32 million, (c) the General Fund, which receives EACSO's share of the Distributable Pool Fund- £?299 million, and (d) loans, reimbursements, other contributions and receipts, £2.84 million. 9. Altogether, EACSO and its constituent services account for a total ex- -npndii ilr'p of rnepnrly £r 80n mi I I J lin per" yearv ar.-d emlo ar,oirrd A6) n,00 persns. iA.C'O importance is also reflected by the large external debt it has contracted. As of mid-1966, t-his debt amounted +o an equivalen+ of (071., 0),000 aS --r wi+h a combined external indebtedness $58b,327,00o contracted by Kenya, Tanzania and Uganda on their oaw account. EACS,O's external debt is jointly and severally guar- anteed by the three governments.l/ I). £IiV~U:iDUlUIil SU ftL4U±I~ItL1UIl2 JAJ. 1Ii ±LJLW LJ ~±U11U!U flU niIIest td1L UUIIpuLi nimi~luV X[ILU LI iU1 Iito [i 10. ~ ~ J lT-, -IDIRI IL-ff sio d-id no'u m,ak-e a- c f ^ p eh n i v exal l l o f t e i - a l a l requirements of EACSO. Only the development program of EAR&H was examined in some deta-ll. 1/ In Volumes Ii, III and Iv, dealing with the economies OI Kenya, Tanzania and Uganda respectively, it is assumed rather arbitrarily that the burden cf ser- vicing EACSO's external debt is snared equaily by the three countries. It is not known in what proportions the economies of the three countries actually produce tne foreign exchange required to service the debt or, for that matter, to pay for imports not financed out of borrowings by the Common Services. If a self-contained Common Service accumulates in any country receipts not re- quired for disbursements in that country, this surplus is in effect used (since the issue of separate currencies by each country) for the procurement of for- eign exchange required for (a) direct payment of imports, (b) payments on foreign debt or purchases of foreign securities for a sinking fund, or (c) transfer to one of the other two East African countries where funds may be needed for local disbursements or may be invested temporarily until they are needed either for (a) or (b). Telecommunications 11. EAF&T submitted to the Mission an investment program involving total out- lays of £11.21 million over the five-year period, 1966-1970. This differed only slightly from a £10.64 million program, which had been scrutinized in mid-1966 by another IBRD mission organized to appraise a telecommunications loan project for East Africa. Of this total amount, £9.52 million was for telecommunications and £1.12 million for postal services. In the past, investment in telecommunications had been comparatively neglected, resulting in poor service and a large backlog of demnand for telephones. In February 1967, the IBID accordingly approved a loan in the equivalent of $13 million (ih.6L million) fDr telecommunications facilities. It is expected that with this loan EAP&T should be able to provide out of its own resources the balance of £6 million renuirerd for its entire 1966-70 capital pro- gram. East African Railways and Harbours 12. The EAR&H investment program is the largest investment program of all EAOSO organiz?tions and has the greatest imnnrt on the economy of the region. Under the new treaty continuing the Common Harket and Common Services, EAR&H is to be spli + t inton +Ln qtw nnsrat+ nnrnnrat--I-3 fl de' A iZK ng th a+i rlflJlIl7 and prts respctive+4xr-l-I The investment program for both railways and ports consists of tlhree parts: one which was framed ori cg nally I a for te three-ya7 r nperiod 196A-67 nndi T.hic^h i ncopor>ates some carry-over from the preceding years; the second, which comprises additions to the 196567 program that were made in the light of the recent hea-vy growth o-f 'ra' fic9 and the third which covers the four-year period 1968-71. Since the three parts area integrally related they are consJdered as a who¶le both here ard -i-4n tUIi more detailed Annex I-A. 13. The Railways. Investment must, of course, be phased in accordance with the expected development of traffic. On the railways, revenue freight traffic in- creased on the average only about 3 percent a year, in the years immediately pre- ceding and folloving hndependercc -f-ro 107to? ±+_ -I ut, in-1 oA c-.lsc 4-t-raffi aa%.L...LJ Ja.aA~La'.4..± 5 .LL'.4.~~LJLLi a a, X 1 - -, I _.$ I La L, '.44., -'L 44 L.J . ~ 11 . Ul± u. a _L _La rose by nearly 7 percent and in 1966 by probably as much as 16 percent. The recent ni-in-mr an -.n,-,-,rc.nac',-,A ia-mm4. - -i-- ,-i m,- __lAa,-- - -4- -~-,1 4- -_ - -P4' --A- shar-p aincreass cause severe short - ages oi rollng LUstch t afic delays and con- gestion. However, the traffic increases were in large part occasioned by the ab- i I. - _ - -¾. 4- m-. -4---u.-I a - a.-&- . mD - 1 -AO ..1 riormailuly largt ris UIIi t Uhe utpUU adJU eo)rLLb of al thiree ECast U Afri.cadn eco-r,,uU-nie in 1966. For the years until 1972, EAR&H expects an average annual traffic growth of 6 percent fro-fnt a 1965 base. After a careful revieu of the development programs of the three countries and the probable volume of exports and imports, the qission is inclined to beileve that tne growth rate will be closer to 5 percent. In appraising the magnitude and composition of the investment program in broad terms, the Mission, in consultation with EAR&H, concluded that an investment of a little over £50 million in railways (including associated inland water and road services) over the seven-year period 1965-71 would meet the projected needs and could at the same time be carried out, About £3 million of the planned in- vestment should be deferred after 1971. The suggested adjustments in the content and phasing of the program are set forth in Annex I-A. Perhaps the most important suggestion is that the dieselization program be phased over a longer period in view of the serious shortage of properly qualified personnel for operating and maintaining diesel locomotives. 5- 15. The £50 million program includes about £20.3 million for renewals and £29.7 million for new investments. It makes no provision for the construction of a rail link between Zambia and Tanzania since inclusion of this project would obviously depend primarily on an assessment of the requirements of Zambia rather than those of East Africa. The program assumes that improvements in efficiency will make it possible to keep the annual rate of increase in rolling stock to 3 percent from 1966 onwards. The Mission and EAR&H both consider this assumption valid, particularly in the light of the greatly improved performance realized in 1966 under the pressure of a large increase in traffic volume. 16. Investment by the railways is now rapidly accelerating after lagging badly in the initial years of the program. Only £7.2 million was spent in 1965 and 1966, but in the current year - 1967 - expenditures may reach a peak i;1h.6 million largely as the result of an IBRD loan in the equivalent of £13.8 million concluded after considerable delay in April 1966. In the four-year period, 1968-1971, capital expenditures will remain at a high though declining level. 17. To accomplish its investment program, the railways will require addi- tional financing. A projection of the cash flow for the period 1965-71 indicates that total resources of £105.3 million will be available from net operating revenue, provisions for depreciation and pensions, realizations of investments in sinking and pension funds and existing loans. Fund requirements are expected to be £122.8 million including £50.1 million for capital expenditures and 4S5.8 million for debt service. The railways will thus have to borrow an additional amount of £17.5 million quite apart from any further loans that may need to be contracted toward the end of the period for disbursement after 1971. itiost of this will be required for financing new capital investment though part will be needed to refund exiszting term debts falling due. Of the latter amount, the railways expect to obtain £2.25 million from the three East African governments, partly in the form of a roll-over of existing debt. 18. The Ports. During 19065 and 1966- the norts experienced growing congestion as the reslat of the rapid expansion of traffic, the consequences of which were agravat.Pi hv increasingv inpfficiPnt. handling of cargo and lIw lbhor nrodnut.ivit.V The situation was most acute at the two principal ports of Mombasa and Dal es Sal aam where shipping delavs great1v incr,sed1- Verv little has hben ione to incres the capacity of ports except for a number of works in Dar es Salaam and the nearby tnongo Depot desilgned to handle t.he PmPrgency Zambian traffir 19. As in the case of the railways, port traffic rose rather slowly nri or to 1966. During the 1961-65 period the volume of dry cargo handled at MIombasa increased tn ho ~TY' a nlTh'yna+ n hif -in IQAAI -i+i. i-mnarl 1 J -rc~yon+. 1- -r cal l e on thbvrge3pret er bti 96 tjmed1 ecnt agl due to the extraordinary expansion of exports which has already been mentioned. During the same period, increases ln somme exports at Dar es Salaam virtually offet a decline in total import volume, but in 1966 the amount of dry cargo moved through the port rose by 30 percent, with Z7-mi n t-raffi- acc--out-n for --A-mew - - than half of this increase. 20. Forecasts of traffic are complicated by the difficulties of determining t11e extAentJU Uo which ti IiL e Iiniarked 1[± exJpansion in 1`66 ought toU De discounted and of antic- ipating the volume of transit trade which Tanzania will handle for Zambia. EAR&H expects traffic to gr-ow a-t 5 percent anualyly. Following our o-wn analy-sis of economic - 6 - development prospects for the three economies and after allowing for Zambian traf- fic that seems reasonably firm, the Mission would accept this rate of growth, but starting from 1965 as a base instead of, as in the EAR&H projections, from the abnor- mally inflated 1966 base. 21. There is little doubt that a substantial expansion of port capacity is necessary. The Mission reviewed the investment programs extending over the seven- year period. 1965-71. and concl=udes that total capital expenditures will probably need to be £19.1 million of which all but £0.8 million would be for additional facilities. This total amount would be only £0.7 million less than that pro- jected by EAR&H. However, as is shown in Annex I-A, the Mission would defer some of the items in RA?RIH's program and add certain others. particularly at Mombasa where more warehousing and better access facilities appear to be needed to speed un the handling of cargo S ince but £2.8 million was snent in 1965 and 1966 and only £3.6 million is likely to be invested in 1967, the bulk of the program, including total disbulrsemnnt. of £.12 7 millin, - jii1 I hV to be carripre ot+. in 19()R-71 22. Substantial4o addtoa-+l-.-, financing,-- will be~ nede sic onrly a small par - £1.75 million - of the 1966 IBRD loan is allocated to ports and the only other finL-anci co mmtted is £2 milli, on fr,- emergncy ,rkl to rcpe with Z ambian traffic A projection of resources and requirements, made in the same way as for the rail- ways, Y ndic-tes that further borrowng- of £6 million is likely to be reuired.rl This also would not include additional loan commitments that would presumably have to be obtained tow,.ard the end of the seven-year period in order to finance in-est- ment after 1971. 23. The MvIission would emphasize, however, that the investment program should Ile accompanierd by C energlet.ic s'+- +to +imrv _ffici of f +th ports. Preset+ methods of handling cargo, for example, delay clearance of transit sheds and slow up unLoadu ing. ort ra t e s shIo ulId ue reviLewdto'U UU e greater .IncentiveUS-, Uto UUlkA shipment and consignments in larger lots and to prevent the use of port facilities fLor stUUorinig goUds aIf utr Ucustoms c'learance. VV,yo must tue 10 lU r aCLse -1 abuor pro- ductivity which is now low owing to slack discipline and the payment of compara- tively high wages witho,ut respect to performance. 24. kIanagement Problems. Management for both railways and ports also requires attention. Since 1958, there has been a very rapid reduction in European and Asian staff. Although EAR&H has excellent provisions for vocational, technical and pro- fessional training, the rapid pace of Africanization has inevitably wealcened manage- ment, particularly at the lower and middle levels where many posts are held by relatively inexperienced men. Additional organizational and managerial problems will arise from the separation of the ports and railways and the measures looking toward greater decentralization which have been agreed as part of the terms of the new tripartite treaty which is in the future to govern the Common IMIarket and Common Services. A thorough study of all these problems by consultants would be highly desirable. In this connection the Mission understands that UNDP has been requested to assist in working out the changes in management and organization, together with training, that would be desirable in the interest of greater efficiency. - 7- The East African Airways Corporation 25. The EAA's traffic has been expanding rapidly. During the period, 1960-65, passenger traffic rose fran 120 million to 225 million passenger miles, freight volume from 3 million to o-ver 12 million ton-miles and revenues frcm £4.3 million to £8.8 million. EAA's fleet consists of DC 3's, Friendships (F 27's) and Comets as well as three VC 10's which it leased in 1966. A fourth VC 10 costing L.S45 million inclusive of spares has been bought for delivery in 1969. Over the next few years, it may well need an additional Friendship and replacements for its DC 3's. The Mission, however, has made no independent appraisal of EAA's investment require- ments0 The Corporationls revenues have in any event been ample enough to meet all operating and financing charges. New equipment is normally obtained on the basis of supplier credits, and the EAA has been able to meet payments on these c:redits regularly. However, the rapid expansion of EAA's services to the Far East, to West Africa and perhaps to the United States may adversely affect its profits in the future. III. THE COMMON 14ARKET A. Recent Developments 26. Both the Common Services and the Common Market have helped to knit the three East African countries more closely together. As we have noted, there is a common external tariff which with minor exceptions applies uniform rates to imports from outside the Common Market. There is a similar uniformity in excise duties and, in practice, also in company tax rates. Until 1964, there were no quantitative restrictions on trade among the three countries, although marketing and price con- trols maintained by a few boards did inhibit free trade in some agricultural products, principally maize. Within the Common Market, the free movement of funds and goods was facilitated by the fac-t that most of the commercial banks operated in all three countries and that, until mid-1966, there was a common East African currency issued by the East African Currency Board. The banks, principally British, freely trans- ferred funds within the Common Mliarket in accordance with credit needs and were thus able to make maximum use of available resources, taking advantage of the fact that the seasonal credit neak in ITPanda does not coincide wtth that in Kenya andl Tan- zania. When funds were short in East Africa as a whole, they could draw on London, usually through their offices in Nairobi. 27. As the three countries achieved indepnendence it was inevitable h1-at each of them should review the balance of advantages and disadvantages of these common arrangements established for them durina the colonial era TTUanda and npartinlarly _ __ -_ _ - - - - _ - ' - - --- - -~-t_-*'--. Tanzania have been very critical of the disproportionate advantages which have accrued to Kenya= Inter-count.rv Trade 28. There undeuhted1ly has been a large increase in trade within the Common Market, but the importance of this trade to each of the three countries va:?ies w.idely. Gor.pMrnalelh csntiscs--b-.c, n-en41 v Ia nly, begi-nning--, -1, 4-wi-t t --he )rLO are set forth in Table 1. 29. During the period 1959-1965, Kenya's exports to its Common Market partners rose sharply from £12.3 mi:Llion to £29.4 million, and their share in the countrv's total export trade increased from 27 percent to 38. percent. Uganda's exports to Table 1: DOM!ESTIC EXPORTS AND INTERCOTJNTRY EXPOPTS VT VETYA, TANG,A\'VYTKA 1/ AND LTTANMA Domestic and Intercountry 1959 1960 1961 1962 1963 1961 1965 1966 Exports From Kenya 1. To all destinations 45,603 48,962 51,274 55,233 63,623 72,995 76,599 83,974 2. To Tanganyika & Uganda 12,297 13,773 15,948 17,320 19,790 25,880 29,1425 28,901 Of which Manufactures 2/ 7,696 8,929 10,282 11,631 14,334 16,852 17,290 17,512 ). Percentage 2 of 1 27.0 28.1 31.1 I.I- 31 1 I.5'-* 3- L" -1), From Tanaanvi ka 1. To all destinations 47,861 57,147 50,900 53,609 67,050 75,243 68,694 83,754 2. To Kenya & Uganda 2,574 2,324 2,234 2,391 3,423 5,131 5,916 4,649 Of which Manufactures 2/ 286 318 281 546 1,165 2,553 2,535 2,324 3. Percentage 2 of 1 5.14 4.1 4.4 4.5 5.1 6.8 8.6 5.6 From Uganda 1. To all destinations 147,319 148,282 4'6,o50 141,689 59,716 714,216 72,14141 76,371I 2. To Kenya & Tanganyika 5,228 6,691 6,856 7,055 8,2h3 9,786 9,727 10,h37 Of which M9n tin 2/ 2,061 2,385 2,q14, 2,976 3-67R 5L. ]7 L7R8 6.519 3. Percentage 2 of 1 11.0 13.9 11.9 15.8 13.8 13.2 13.4 13.7 Balance of Trade 1. Kenya with Tanganyika and Uganda +6,809 +6,776 +8,953 +9,980 +10,627 +14,426 +17,721 +17,778 2. Uganda -with Kenya and Tanganyika -1,282 +81 -582 -686 -1,692 -3,816 -6,958 -6,021 3. Tanganyika with Kenya and Uganda -5,526 -6,856 -8,371 -9,295 -8.935 -10,610 -10,762 -11,753 1/ Excluding Zanzibar 2/ Goods under SITC Classification groups 5-9 inclusive, together with beverages, cigarettes and manufactured tobacco from group 1. Source: Annual Trade Reports, EACSO - 9 - its two partners rose much more modestly - from £5.2 to £9.7 million and their share in the country's total exports, after increasing from 11 percent in 1L959 to a peak of 15.8 percent in 1962, was only 13.4 percent in 1965. Tanganyika (i.e., Tanzania without Zanzibar) managed to increase its exports to Kenya and Uganda from £2.57 million to £5.92 million, but the proportion of these exports to the country's total sales abroad remained relatively small - 8.6 percent in 1965 as compared with 5.1i percent in 1959. In 1966 Kenya's exports to its Common I1arket partners failed to rise and their share in the country's total exports drooped to 3h_ti Dercent. Tn the same vyar Tanganvika's exnorts -*o Kenya and Uganda dropped markedly, and their proportion of total exports declined from 8.6 percent in 1965 to 5.6 percent in 1966. Only Uganda was able to raise its exports to its Clommon Market partners in 1966 - namely by 7.3 percent. 30. Kenya's export surplus with Uganda and Tanganyika rose sharply from £6.8 million in 1959 to £17-7 million in 195 anrl abut. the sme amoiint. in 196Q6l) Con - versely, Tanganyika's import surplus with the other two countries almost doubled over the same period, reaching almost 108R million in 965 and .11.8 millinn in 1966. Uganda's import surplus with the Common Market was almost £7 million in 1965 but dropped to about £' millo l 1966. TJAtLJ ,O 3 J¼LLL1..I Ilal flL U fA.|~J O 31. I^,Tell oer half of Keyz's e^orts o i-ts Common -1flarkeu pa-rtners Alav consisted of a rather wide range of manufactures. The figures in Table 1 show that the proportion of manufactures in th,e 4t-ot4- increase fo A142 Al 1959 to 72.4 percent in 1963, but thereafter dropped to 65.3, 59 and 60.5 percent ;_ -10 ) X. 1 0 wevrA tJ- l - ) C4 .L PIJ -_ - J ' I- - . UD V v ,Il .J , J.LL lll G . U UJ. a a 1 a IJ , .11 "V V s, L, . deceptive because the total of Kenya's exports for the first time contained large amountus of peturo'leum productUs (no10t c'lassiii-P4el as manufatues -olwn 4----th- 1 1-1--4 ,e co,na- alIIJUIJU.~ JL p ui.JLaUII p. IU U~ IJ~. U .La -L ±LU L IV~J u±a UUJ. J~o iL'Aj_LVL.wIij, ujial .iI pletion of the Mombasa refinery. If exports of petroleum products - £2.66 million in j45 5 mUl_l lon ir, 196u5 ardLJ ) UU Ii-LI miionin 1n 6 - are lef-tU U UI accoLIu the share of manufactures in Kenya's exports to its Common Market partners was 72.8 percentJ in 196L4 71.2 percent in 1965 and 70 percent in 1966. Ho-wever, it shlould be noted that even on this revised basis the share of manufactures remained about the same over the four years 1963-66. In absolute terms, Kenya's total exports of unmanufactured products to Uganda and Tanganyika have thus been increasing - at least until 1966. From 1959 to 1965, for example, Kenya's exorts of foodstuffs rose 50 percent in value. Kenya has continued to export substantial and generally risinLg [iouru, of such com oiuiul as Uai-y prod-ucts, partlcularly Iresh xiffln, wheat, fruits and vegetables, vegetable shortenings and high-grade meat (see Table 2). In 1966, however, exports of this type declined somewhat. Uganda's Common Market Exports 32. Uganda's exports to its Common Iiarket partners have been to a large extent agricultural, although there was a sharp decline in food exports in 1965 and 1966 owing to abnormally low sales of sugar to Kenya. The export of manufactures, par- ticularly of cotton textiles, more than tripled from 1959 to 1966, and the share of manufactures in the total rose from less than 40 percent in 1959 to over 62 percent in 1966. The cotton textile industry was first established in Uganda and developed a considerable market in Kenya and Tanganyika. Exports of iron and steel bar and other metal manufactures have also been significant (see Table 3). - 10 - Tanganyika's Common MIarket Exports 33. Until recent years, Tanganyika's modest sales to Kenya and Uganda consisted almost entirely of agricultural products - cereals, fruits and vegetables, oilseeds and vegetable oils and the like. Since manufacturing industries developed much later in Tanganyika, it is only since 1962 that manufactures have accounted for a progres- sively larger share, rising to £2,535,000 or almost 45 percent of the total by 1965. In 1966, however, the export of manufactures declined, although their share in the total rose to 50 percent. Cotton and synthetic fabrics, blankets, footwear, aluminum and other metal manufactures have been the principal manufactured products exported (see Table 4) Kenva's Position in the Common Market 3h. Aside from a large and growinp export. surnlus. Kenya has alsn had con- siderable net earnings on service account with its Common liarket partners. Since the three contin*.riPe sqhari a crnmon currennc wit.h each other, it is eytrenmely difficult to determine the extent of these "invisible' earnings. The balance of interna+ionnl pnayments itatistics iven in ecg,h nf the oni1tnryi economirc r-epor are supposed to include transactions with the other two Common Market countries as well as with the rest of the orld but are subject to a considerable margin of error for this very reason. However, there can be no doubt that Kenya has a substantial surplus in serviee acsount. with UgIanda and Tanganyika= The common transport and communications facilities located in Kenya serve landlocked Uganda and northern Tanganyika, particular the denselry propulated Moshi-Arh arean and thus earn substantial revenues. Kenya's foreign trade firms and wholesalers ¾nirn Anirnl nnn, i nv,}-c+ont-i o1 Dn+nrnnA --rA ciimr<1a a7- e inn z nrz'+n cc.norq to thesen sa:me areas.l/ Nairobi and fiombasa have also become centers for organizing the tourist trade in much of East Africa. cf. TIh.e exiist-ence ofl the Co.r.mon 11Ia-1- and Common Services has undoulbtedly >2. *1 .t. ai 'J.L Lla '- i-tij ±L, laU ar.LJ SJILlLl JW-J.,O laJ LLJJUUe.1 helped Kenya to develop its exports of goods and services to Uganda and Tanganyika. 1I 4is evident, ho-wever, tiat m.any otJher factors hIave comb4ied to ve Kenya ar dominant position in commercial transactions within the Common Market. Some of these factors are listed and briefly discussed below, but not necessarily in the order of their importance: a. Kenya's central geographic position has been particularly impui olla1 V± - I- VLD U ,ddadE Ubut al as n dUUU, with Lr e- spect to northern Tanganyika. It has not only enabled Kenya to serve conuve-ientily a large area, but has given it an edge over Uganda in the establishment of manufac- turing industries heavily dependent on imported materials. The transport network has reinforced the natural advantages of Kenya's position. b. Kenya's comparatively large non-African population has provided a high-income market as well as a reservoir of 1/ An indication of the extent of Kenva's entrepo^t trade is given by the fact that out of total customs revenues of £12.1 and £13.2 million received in 1965 by Uganda and Tanganvika resoectivelyv £7.7 and £3.7 million were on goods originally imported into Kenya and subsequently transferred by Kenvy tn t.hp other tun cniint.ri Ps Table 2: Kenya's Exports to Uganda and Tanganyika (C 000) Commodities by SITC Classification 1959 1960 1964 1965 1966 0 - FOOD Meat and Meat Preparations 279 307 348 361 355 ,;ilk arn Crea3, - f-resh 88 266 550 881 829 Butter and Ghee 415 476 475 586 560 Wheat, spelt and meslin, unmilled 577 855 964 1,709 967 Rice 0 66 187 24 39 Meal and flour of wheat and ispelt 851 779 1,115 51 13 Biscuits 110 135 164 245 225 D_.:is and _ vegetables 2__8 281 477 519 0 Sugar, unrefined 87 88 148 176 88 Coffee - roasted and ground 100 114 81 59 28 T567 4 4 370 391 L65 Margarine and shortenings 82 104 353 835 789 Food, other 484 421 _736 726 925 TOTAL 4,113 ,339 5 973 6 163 5,923 % of TOTAL EXPORTS 3 31.5 - 1 9 20.5 1 - BEVERAGES AND TOBACCO Beer 471 592 961 754 495 Cigarettes 1,646 1,762 1,625 815 527 Tobacco, manufactured 205 188 202 20 23 Beverages and Tobacco, other 126 86 220 220 338 TOTAL 2448 2 628 3 008 1 809 1 383 % of TOTAL EXPORTS 9 1 .6 5 - CHEMICALS Organic and Inorganic Chemicals 92 94 90 127 180 Paints, Varnishes, Pigments, etc. 70 95 403 669 406 Perfumery, Cosmetics, etc 6 59 27 291 625 Insecticides, fungicides, disinfectants, etc. 94 118 423 307 436 Soaps 468 593 1,380 1,125 1,338 Chemica1s, other 1ii, 101 45} 872 TOTAL 874 1,070 3,o25 3,252 3,787 % of TOTAL EXPORTS 7.1 7.8 11.7 11.0 13.1 6 - MANUFACTURED GOODS Bicycle tires and tubes 100 143 280 276 268 Paper, paper board and manufactures 281 365 867 1,094 1,818 Sisal bags 281 397 496 574 259 Cement, building 777 800 883 988 888 Corrugated plates, sheets, etc - - 802 695 119 Steel doors and windnws 200 271 3810 356 3-3 Household aluminium utensils 236 296 803 313 196 Metal Containers 232 243 181 308 276 Manufactured zoods, other 692 887 2.052 2.1,n 4.017 TOTAL 2799 3,362 6,304 6,965 7 780 % of TOTAL EXPORTS 22.8 24.4 'K.4 23.7 9 8 - MISCELLANEOUS MANUFACTUREd Clothing 591 743 2,003 2,367 1,658 Footwear 579 638 1,398 1,294 1,011 Furniture and Fixtures and mattresses 160 158 397 537 661 Other 186 238 562 743 981 TOTAL 1.516 1.777 4.360 4.941 4.307 % of TOTAL EXPORTS 12.3 1 2 .9 16.8 1 6.8 . 2 - CRUDE MATERIALS 173 161 188 522 843 3 - FUELS (including petroleum products) 19 16 2,592 5,114 8,632 4 - OILS AND FATS 195 266 129 210 134 7 - MACHINERY 95 89 179 308 803 9 - OTHER 65 65 121 146 109 TOTAL 2,3,4,7 & 9 587 597 3,209 6 296 5,721 % of TOTAL EXPORTS 4.4 4.3 12.4 `?i .4 19.8 GRAND TOTAL 12,297 12,773 25,8 292 28,901 Source: Annual Trade Reports, EACSO 1,2 - Table 3: UGANDAIS EXPORTS TO KENYA AND TANGANYIKA (f 000) Commodities by SITC Classification 1959 1960 1964 1965 1966 0 - FOOD Meat and meat preparation - 67 72 lb 7 Fish 13 35 hio 52 82 Millet, unmilled 3 11 83 X6 19 Biscuits 55 Ui 88 200 237 Beans, peas and pulses 50 3h 66 97 138 Sugar, unrefined 616 1,155 1,980 858 220 Sugar. cor.fectionerv and preparations 81 89 122 110 127 Tea 81 91 X7 33 33 Animal feeding stuffs 83 91 67 133 114 Food, other 32 90 537 650 966 TOTAL 1l.l17 i2'01 3,101 2 211 1 0)1 % of TOTAL EXPORTS 19.5 30.0 31.7 22.9 . 6 1 - BEVERAGES AND TOBACCO Beer 60 Io 32 52 163 Tobacco, unmanufactured 809 725 706 1,027 565 Cigarettes 1,03X 958 708 225 56 Beverage and tobacco, other 9 15 9 X5 29 TCTA . 1,912 1J738 1,l45 1,31±9 813 % of TOTAL EXPORTS - - .6 2 1.9 13.9 7.8 2 - CRUDE MATERIALS Wood and tim-ber h6 7 72 Crude materials, other L3 52 131 159 180 TOTAL 83 118 176 211 252 % of TOTAL EXPORTS 1.6 1.d8 1.8 72.2 2.1 1 - OILS AND FATS Cottonseed oil 835 985 835 1,016 727 Hydrogenated oils and fats 217 212 - - - Oils and fats, other 11 13 16l 13 TOTAL 1,063 1,240 85o 1.056 730 % of TOTAL EXPORTS 20.3 1-.5 --.7 10.9 7.0 6 M IAN-uFA-.7JRED G O ODS Cotton fabrics (piece goods) 605 951 2,251± 2,LO1 3,388 Enamel holloware 23 21 85 83 100 Manufactured goods, other 100 133 661 936 1,552 TOTAL 728 1,108 3,00 3,L19 S,o10 1 of TOTAL EXPORTS TV9 1V6 1 37 3.1 1Th3 3 - FUELS 196 218 L06 ±18 U18 5 - ;HnICALb 171 207 665 868 853 7 - MACHINERY 6 6 16 7 2X 8 - MISCELT.ANEOTJS MATFADTUR=ES 5o 1±8 111 157 326V 9 - OTHER 3 3 7 8 7 TOTAL 126 182 1 205 1 L58 1 66o % of TOTAL EXPORTS ..1 -.2 ij2.3 10 . 9 GRAND TOTAL 5,228 6,69X 9,786 9,727 10,h37 Source: Annual Trade Reports, EACSO - 13 - Table 4: TANGANYIKA'S EXPORTS TO KENYA AND UGANDA (f 000) Commodities by SITC Classification 1959 1960 1964 1965 1966 0 - FOOD Meat and meat preparations 70 53 88 127 11l Ghee excluding butter 109 110 71 61 bc Honey, naturai 19 39 29 L-8 7. Wheat, spelt, and meslin unmilled - 33 1 _ - Rice 53 72 230 13L 25 Meal and flour of wheat 1 2 26 - Potatoes excluding sweet potatoes 23 11 h 14 1C' Beans, peas and pulses 171 218 25h 3L-3 287 Onions 104 146 128 147 4S Sugar, confectionery and preparations 1 1 51 39 3k Tea hh LB 60 ho 35 Food, other L63 197 390 743 457' TOTAL 1 o58 930 1 332 1,696 1,021; % of TOTAL EXPORTS I TF.1 0 .0 -26.7 T2 .0 1 - BTEVERArIES AND TOBACCO Tobacco, unmanufactured 349 371 286 643 36L Beverages and tobacco, other 16 15 139 81 L6 TOTAL 365 386 L25 725 L8I Z of TOTAT EXPOP.TS h.2 -I.6 -T3 -T.2 T,.9 2 - CRUDE MATERIALS Oil seeds, nuts and kernels 199 155 175 123 195 W.ood and tiTber 56 80 53 7 Cotton, raw 9 - - - - Pyrethrum flowers 99 86 - - 39 Crude materials, other 79 57 114 85 146 TOTALT. )72 35L) 36° 261 h 56 % of TOTAL EXPORTS -I.3 Ti.2 7.2 -TA.4 S.8 L - OILS AND FATS Cottonseed oil 37 33 198 ho8 32c Coconut (coora) oil 296 221 333 316 13$ Oils and fats, other 12 32 L6 26 12 TOTAL 3L5 289 577 780 475 % of TOTAL EXPORTS 13.L .L -T1.2 -13.2 -ii.2 6 - MANUFACTURED GOODS Cotton fabrics (piece goods) 6 21 275 114 96 Fabrics and synthetic fibres - 17 116 175 l0z Metal containers 89 65 23 72 5F Manufactured goods, other 32 50 1,299 1,481 _____ TOTAL 127 153 1 713 1 843 1 661 % of TOTAL EXPORTS T7.9 -Z6 -3.4 ' 31.2 . 7 3 FUELS 64 62 14 2 5 5 - OMMTnAT.R 102 88 79 59 96 7 - MACHINERY 2 1 7 8 107 8 - MISCELLANEOUS MANUFACTURES 36 57 606 553 406 9- CYIIER 3 L 8 9 11 TOTAL 207 212 7T14 T 27' '4 of TOTAL EXPORTS 9-R.0 .1 -T1 9 -T-n3 -T I, GRAND TOTAL 2,574 2,321 5,131 5,916 4,649 Source: Annual Trade Reports, EACSO - 1)4 - skills and enterprise favorable to the early development of manufacturinng and co-mercial agriculTture In 1962 Kenya's European and Asian communities - 55,759 and 176,613 respectively - were each about twice as large as the combined number of Europeans and Asians in the other two countries. European farmers ian Venya Is Highlands pioneered in devel- oping commercial agriculture and in producing for export 4o th' L1e ni gb.bo r ing- - cou nt r i;es s u ch c or0.d iti ea as d airy tA UJIC ii-E1 J4 i i AJJU Ld LL1 LlI h J 4tJJ J U L. products, wheat, etc. The purchasing poiwer of these non- Afia P-4,luite helpe to lift per 4capit --- --4a cash i-ncomes 1-iJ.L_LU±i 1dJ ~ iiIU J 1ltZ-,Lj?U. LA) J-L-L U j?tJ. - pi up±U l.i.JL L ij~U1t M;JiO substantially above the levels in Uganda and Tanganyika, making 'eny-a the mor-e attractive market for- local rrmanu- facturing. The resident Europeans and Asians provided skills needed by foreign firms establishin]g themselves in Kenya and also themselves provided scrne of the needed enterprise in manufacturJng. c. Kenyals favorable climate, particularly the temperate conditions prevailing in Nairobi and the Kenya Highlands, was an important factor in bringing European farmers to Kenya and has reinforced the attractiveness of Kenya for European firms wishing to start manufacturing in East Africa. d. External economies developed as centers of commerce and industry expanded in Kenya and produced a growing reservoir of labor skills as well as a considerable infrastructure investment, and these made Kenya cumulatively more attractive to neil enterprise and thus made it more difficult for Uganda and Tanzania to overcome the initial advantages possessed by Kenya. 36. Thus, while all three countries have offered nominally the same induce- ments to enterprise in the form of access to the Common Market as a whole, tariff protection against imports from outside East Africa, taxation and facilities for transfer of profits and capital, it is in Kenya that these factors have provided the strongest incentives to the development of manufacturing industries. 37. The very fact that Kenya was able to take greater advantage of such pro- tection as the Common iIarket tariff afforded in the development of its trade and industry in East Africa has occasioned complaints on the part of Uganda and Tanganyika that the benefits of the customs union have not been equitably distri- buted. Kenya has indeed profited from its preferential position in the East African market vis-a-vis possible overseas suppliers, as have Uganda and Tanganyika with respect to their much more modest sales to their Common Market partners.l/ It is 1/ Although the Common Market tariff rates were originally primarily revenue. some of them provide considerable protection. The standard rate for manufactures has bhen 30 nprcent. though the specific duty on low-cost. textiles (grey gooad) has been the equivalent of about 100 percent. Those on butter, cheese, bacon and ham, biscuits. andl enamel hollow-ware have hben 718 percent (in 1967 thi-e r on ghee, biscuits, tinned goods and other processed goods were raised to 50 percent); bicycle parts and glass, 30 percent; and on a number of builders' requisites, 15-30 percent. - 15 - probable) however, that at least some part of the trade among the Common M4arket countries has developed independent of preferences either because the goods in- volved are not protected by any duty or because they are produced and sold at prices competitive with the landed cost, ex-duty, of imports from other sources. B. Adjustments WJithin the Common Market Redistribution of Revenues 38. To the extent that Uganda and Tanganyika obtained from Kenya more duty- protected goods than they in turn sold, they apparently received less import revenue. Some compensation for this was provided when the Distributable Pool Fund was estab- lished in mid-1961 pursuant to the recommendation of a special Economic and, Fiscal Commission. Under this arrangement, 40 percent of certain company taxes ard 6 percent of the customs revenues have been assigned to this Pool and, after deducting collection expenses, half of the net has been allocated to the General Fund. for support of non-selfcontained common services and the balance evenly divided. among the three countries. Since a larger proportion of these revenues are collected in Kenya than in either of the other two countries, Kenya through the Distributable Pool Fund has contributed not only a somewhat larger share of the expenses of the non-selfcontained common services but allowed a small share of its revenueFs to be redistrubutecd to Tanganyika. and Uganda. Industrial Licensing and Allocation 39. The proportionately greater industrial development of Kenya within the framework of the Common Market caused the most dissatisfaction on the part of Uganda and Tanganyika and produced a series of attempts to redress the balance. As early as 1948, the three countries joined in setting upa common Industria:l TL censing Council. The original idea was to provide an incentive for the develop- ment of specified or" scheduled" industries wiithin the Common Market by using licensing of industrial enterprises as a means of guaranteeing a market and in- cidentally directing licensees to certain locations in accordance with an, Fast African plan. The plan to direct the location of new enterprises was never realized, however, and tihe num,ber of scheduled industries was never exLenJdeU beyond the re- stricted number originally agreed - namely, textiles and blankets, steel drums, glassware, enamel hollow=ware and metal window and door framles. From time to time one of the governments has tried, after arranging for the establishment of some new industria" en terpri se, to get uscheduled± status lortU bbis industry in order to pre- vent the other two countries from promoting competing enterprises, but these attempts have a lwa ys failed. ITO. However, in April I64, lie biUhree governyrieents dui conclude an agreement at Kampala which sought to deal with the problem of industrial imbalance in three ways. First, certain new industries -were to be reservedu to eachun country: the assembly of trucks, the manufacture of motor vehicle tires and tubes and the assembly and manu- 'facture of rabdio se LUs o Tnganyika; the psroductlon of nitrogenous fertilizers and bicycles to Uganda3 and the manufacture of electric light bulbs to Kenya. Second, in the case ol certain already existing industries producing beer, cigarettes, shoes, cement, the enterprises were to be approached and persuaded that each coun- try's requirements should be produced within its own borders. In other words, each country wias, if possible, t;o get its own plant to produce those products such as - i6 - beer, cigarettes and footwjear for which presumably the market in each country was considered large enough to make production economic. Third, principally as a con- cession to Tanganyika, arrangements were to be made whereby the two countries (Tan- ganyika and Uganda) experiencing large deficits in Common Market trade could impose quantitative restrictions on imports of such goods that could be manufactured eco- nomically and effectively in the importing country. The Imposition of Quotas 41. Almost from the very beginning, controversies arose in carrying out the Kamnala Agreement Kenyav indeed, never ratified it formally. It disapproved of the allocation of the nitrogen industry to Uganda and proceeded to arrange for the establishment of a nitrogenous fertilizer plant in Hombasa. Efforts to reach agree- ments on quotas for some of Kenya's exports to Tanganyika failed, and in June 1965 Tanganyika unillaterally imposed a number of quotas which have since been broadened to include a wide range of products. These quotas, together with a widespread fear that the flommon liarket might break up completely, have undoubtedlv been instrumental in inducing manufacturers frorm Kenya to establish plants also in Tanganyika for the saxke of pr_ot+ctingr their market in that country. Establishr,t of 'Separate in-tary Systems 42. ImTosition of the first -i-tas- representing a signi icant breach of the principle of free movement of goods within the Common Market, coincided with an announcement by the Tanzanian novernment +that it intended to establish a separate central bank and currency. The two other governments soon announced similar de- cisions. In antici upat . of these separate monetar-y regimes th inter-country transfer of commercial bank funds to meet credit needs declined substantially in n _n r' / C iX-. 4 - -I rr~., nt-n --v', n1 r~"rc O+lO- dirIci n An n it 5)/ UU . In tL/'L U new c- bank -- 1 CAJ- a.tnd in June, Augu-st and September 1966 respectively, the new Tanzanian, Ugandan and Kenyan shillings ap- pear-ed, replacing the East African shilling that had been issued by the East African Currency Board.l/ Under agreed arrangements the sterling assets of the EACB, totaling £h8. 3 rmillion at the end of June 19666, were to be divided among the three central banks in proportion to the total of old East African shillings presented for redemption b-y each central bank, but after debi-ting each countr with the amount its government had borrowed under the "fiduciary credit facilities" expended by the EACB. Prior to the conversion the EAGB advanced ster- ling assets to each of the central banks - Eh million each to Kenya and Tanzania, and £2 million to Uganda. Notes and coins withdrawn in each countr-y are redeemed by the EACB either in sterling or in the fiduciary securities of the country's government. Since the Board's holdings of 'Uganda gover-nment securities - £9.5 million - were considerably larger than those of Kenya and Tanzania securities - £3.5 million and £2.6 million respectively - Uganda w-ill in t'he end receive 1/ The EACB's currency has circulated in Zanzibar as well as in Tanganyila, and the new central bank operates and issues currency in Tanzania as a whole. - 17 - correspondingly less sterling.1/ C. The Commission on East African Cooperation 43. mne imposition of quotas by Tanzania and the decision to establish separate central banks and currencies brought to the fore the whole issue of the continuation of the Common Miarket and Common Services. Earlier - in June 1963 - the three East African leaders had tentat:ively decided to accept President Nyerere's proposal to establish a federation, but subsequently this ambitious venture had been dropped, primarily owing to the opposition of Uganda. It was primarily to avoid a possible progressive de-terloration of their Common lMarket and Services that the three coun- tries decided in Septem-ber 1965 to establish a special Commission on East African Cooperation. This Commission was composed of three members from each country and a neutral chairman, Professor Kjeld Philip from Denmark, and was given the mandate to consider (a) how the Common Mlarket could be maintained, strengthened and. regulated, (b) what arrangements should be made for the operation of the Common Market follow- ing the establishment of separate currencies, (c) what shouLd be the extent, form and location of common services, and (d) what legal and constitutional arrangements might be appropriate. 44. The Commission provided a forum in which the three East African govern- ments were able for the first time to consider systematically as independent sov- ereign governments all the issues regarding the continuation of the Common Market and Services. Despite considerable debate and notwithstanding the pessimism expressed in many quarters, the Commission was able to present by IIay 1966, the original deadline, a report reflecting a very large measure of agreement. The heads of the three governments then authorized the Commission to embody its agree- ments in a formal draft treaty and to continue efforts to resolve some important issues which were still in dispute. By June 6, 1967 the remaining differences had been settled so that the three Heads of State could sign the new Treaty for East African Cooperation. IV. THE NEWq EAST AFRICAN COI'4UNITY h5. The Treaty, which will beccme effective December 1, 1967, continlues in essence the Common Market and Common Services 2/ although with some modifications and in somewhat altered form. It establishes an East African Community of which the United Republic of Tanzania, rather than Tanganyika alone, will be a charter member together with Kenya and Uganda. 1/ Judging from experience with a currency conversion carried out by EAC]3 begin- ning October 1, 1964, it will take a considerable time before virtual:Ly all the East African shillings are withdrawn. By the end of May 1967, £h7.5 million had been presented for redemption and £13.5 million remained out- standing. After taking into account the countries' respective liabilities to the EACB, the latter's sterling assets may ultimatel]y be apportioned approximately as follows: Tanzania, £20 million, Kenya, £18 millions and IJPanda. sompwhat. over £10 million. 2/ For a list of these services, see Appendix I. - 18 - 46. The changes made by the Treaty wiere for the most part designed to enable Tanzania and Uganda to share more largely in the benefits of the operation of com- mon services and to promote a more balanced industrial development as between Kenya and the other twqo countries. The first of these is to be achieved by certain meas- ures reorganizing9 relocating and decentralizing the Common Services. The second is to be ensured through limited facilities for the imposition of duties on inter- country trade and through the establishment of a new East African Development Bank whose resources are to be used primarilv to finance industrial development in Tanzania and Uganda. A. Provisions on Common Services [7. Under the Treaty the self-contained services are all to be organized as statutor; corporations; the East African Airways nrnnrntirn is forrmally made part of the Community; and the railways (togethier with the lake ports and lake services) are to be separated from the harbors. 8I I The hadquaiirnr+sofr th-P + services wl he distributed more tily olveirr the three countries. Tanzania has been allocated the headquarters of the Community i+scl f+aother with its secrotariat) wich will I-be locad in trvsbhn and -tha+ of the newJ Harbors Corporation, which will be at Dar es Salaam. The headquarters of the new Development Bank and of the Posts and Telecommunications Corpnrn.inn will be in Kampala, Uganda, and although the headquarters of the Airways Corporation -i 1 -1 rcn \f rrh a frnnini+7IQ M n- i+o --in flrr,i, n +inc fnnni1 nr .vill rer.ain at Na the Cr,u-nity4s Min,ist-ria Corporation's Board of Directors are to ensure that future development is sited as tnr. no rnc;h1r, ;¼ mlon,-,n -rmA rn.;ntr-4-Ar,nr1, ;- TThrnAn Iax a Cpo sLs O i LbLJ tiaJ L-J Li aLJL d4 pa D - t i c ua 1 LJ ¼UJrCIJ o4- L49 1The adi,LtLJWInistratJion o a numLser ol common services - lthle Custom.s anA Excise Department, the Income Tax Department, the Meteorological Department, the Dr)-irect- uoralte uf CGivil AviatUion and td4he Lo sts a n0d 1 aeL JILALcommunLiJ icni LJis Co rporati ci r atJ - is to be decentralized as far as practicable to the national level. The self- contained wv ±n ger1alla±y are to Vglv pri1£ ity to) Uganiua aunL £J1j] tCILLJ Tz ii the establishment of new services and facilities to the extent this is operationally fLeasibUe *iuz pi. ituy is Ju Ub 1-ver, t A ae esUlishmentiJ L sf1 kd piston en7i1 [gIJu and aircraft maintenance facilities at Entebbe, (b) a headquarters for inland rfiiaur-ir nesrvicesi cit hWii[.St a, Tan-zanti ,d-lu ii di) Uesel LtUUUHmU LiVU £dui0bl-tbi du carriage and wagon depots in Uganda. As a ccncession to Tanzania there is an under- taking to accord special consideration to tne development of Tanzanian harbors and the possibility of initiating a preliminary economic and engineering survey of a new rail line linking Miusoma on Lakce Victoria with Arusha and Tanga. 50. Certain provisiens in the Treaty are also designed to make sure that the Corporations take into account the interests of all three countries in some of their key operations. Thus the Corporations are directed to arrange their pur- chases within the Common Market in such a way as to "ensure an equitable distri- bution of the benefits thereof to each of the Partner States, taking into account inter alia the scale of their operations in each Partner State." Similarly they are instructed to invest any funds not required for physical investment in a way that would contribute equitably to "the foreign exchange resources" of each Partner State. - 19 - B. Provisions on the Common Market Transfer Taxes 51. The Treaty, as already noted, authorizes for the first time the imposi- tion of duties on inter-country trade, but under strict limitations. A member country may levv such duties, called "transfer taxes" on "manufactured" goods as listed in Annex IV of the Treaty provided it has an overall deficit in its trade in manufactures with its other two partners and the value of imports from any Partner State so taxed does not exceed the total of the deficit in the trade in manufactures with that state. The rates may not exceed 50 percent of those in the external tariff. A transfer tax can be imposed only if the protected article is already being manufactured or is likely to be manufactured within three months,l/ and it cannot be continued for a period greater than eight years. All transfer taxes are to be ahrogated fifteen years after the Treatv comes into force, and no country can levy new taxes as soon as its exports of manufactures to its other Common Market partners reach 80 nperent of the value of its imports of manufactures. Save in exceptional circumstances, the products of industries scheduled under the East African Licensing lawu ton iwhich reference has already been made calnnot be taxed. Parenthetically it should be noted that the Treaty continues the industrial li- censing system subject to the proviso that the number of scheduled industrins js not increased and that the separate national licensing laws are replaced by a single Eca,st African 1aw. QuaJn ui Uo tative aestr i c 4 ) 52, Philte permitting transfer taxes, the Treatty prohibits quantitative re- strictions on inter-country trade subject to certain exceptions. A member country c.an imIpJUse S LA-d I £ C Ut _LU UWJII In j-t1 , U tL,Ue udtL, UJ. ~CyNXL A tUV..~ can ~ ~ ~ ~ ~~, 4mos Cuhrsritost pro-tec' 4's balance of paynmenrU3 provided () i has previously consulted the Common Market Council, (b) its action is not contrary tU o ,A T TI and c restrJUctLIons have previously been IILmposed on i-LIpJts fA.o other countries and have been found ineffective, and (d) the restrictions imposed Uo nro affect thie imports from the Partner S tatIes m,ore unfav-oraby uhan unu3se from foreign countries. The Treaty also continues for various periods the authority to limit inter-country trade in specified 'tbasic staple foods and major export crops subject to special marketing arrangements." At the same time, however, it envisages that the Commrr-on Market wil:L extend graadually to all agriculltural products ajnd tna in this process "trade arrangements between the national agencies or marketing boards of the Partner States may be entered into directly within a single systemn of prices and a retwork within the Partner States as a whole of marketing services and facili- ties" (ArtIcie i3). Tne Treaty also sanctions quartitat1ive restrictions which each of the governments may have undertaken to impose under certain specifically listed contracts with companies which have undertaken to establish certain plants such as the petroleum refineries in Kenya and Tanzania and the nitrogenous fertilizer factory in Kenya. 53. In some respects, the Common Market is strengthened. In the future, for example, there can be abso-Lutely no departure from the common tariff without the 1/ A transfer tax can be imposed only if the protected industry has the capacity to produce 15 percent of the domestic consurmption oU th aUI ecued product or an output of no less than 2 million shillings. - 20 - unanimous consent of the Finance Ministers of all three countries, and consultations are to take place to remove existing differences in tariff rates. A uniform excise tariff is also to be established and maintained, but with the understanding that departures "for revenue purposes" are permitted under special circumstances and after consultations among the three Finance 'linisters. Freedom of Payments 54. There will be a wide measure of freedom in the movement of funds within the Common 1HIarket. Transfers on current account are to be entirely free, and pay- ments on capital account are to be permitted unless a member country finds that "control of certain categories of such payments and transfers is necessary for furthering its economic development and an increase in trade consistent with the aims of the Community" (Article 25). Such controls may not, however, prejudice the ability of the Community, the Development Bank and the Corporations to carry out their functions. The member countries undertake to exchange each other's currency notes at nar. Settlements among the countries are to be effected over accounts which the central banks will have with each other and in currencies acceptable to the creditor. If a member country exueriences balance of pavments difficulties and has exercised its IKF drawing rights under the first credit tranche beyond the gold tranche, it. can call on the Community7 Partner with which it. hs a payments deficit. to give it credit up to two months of its imports from that country but not for more than one month's imrorts in any twelve months' neriod. Such crehdits may not exceed three years and carry interest rates progressing from 4 to 6 percent, depending on the dunratio-n oif' thei cred~it. These st.~ripultions stric'tly limit.-h tihe obibtinn oif any central bank to hold balances in another or to hold the currency notes of another T.Ti + nI,-i+ c~rln2in,nn in cn Q++1 .MMnr+ -ri i.,l-iln+ -i+ titinQiAtirc flc'c'n-r -i+lh fn -r,i c1nn cbr~ without dernanding se-te-ent in wa tcniesacpal oeg xhne Gord~~-ination ofP Pol~icies CtC rT1-o m-,-rs2+X, rc.iornc.n, +1hif +hn smoot+h fbln+ irr -f' +hbromn fl,c. Tsr -lici depends on coordination of policies in many fields. Each member country agrees to pursue 'an economic pollicy aimed at enr,u-ing- +tme --i1libr of the overan1 1 ba1 ance of payments and confidence in its currency", and the governors of the central banks arne to meet quarterly, "to coordinate -an -eview their monnetaqry anrd balanoce of' pay- 2 'c 4C'r-- 'I i C,-2r+- - -l-i I in C'c- - - - - -in +C' 2, -l C'iir ci- -doni -rion-- -- --in hn in' i -P T-Ji- ments policies." Coordination of monetary policy should be facilitated by the fact that the statutes Of aoll three centrol banksni pose rather st rictIamtt 1; mi ++ onn o the advances which these banks can make to the governments and on the amount of government and government---guaranueed securitiL-2es win4cI t,hey can holdJ eit-Lher on 4thJWeir own account or as collateral for loans to commercial banks.l/ 1/ In the case of Kenya the total amount of advances and holdings of government and government-guaranteed obligations held for the central bank's own account or as collateral is limited to £12 million exclusive of securities taken over from EACB. In Uganda advances are restricted to 15 percent of government annual recurrent revenue and rmiust be paid off within three months of the end of thle fisc-all year) and holdings of securities a-s defined above -are li mited to 30 percent of total demand liabilities. In Tanzania the ceiling on ad- vances, which cannt remain outstanding 0r me than 300 days; - s 20 e- cent of ordinary revenue- and holdings of securities held for the central ganeres on accounrt andy as colelaeeral are resnu-esc.ed to percent of the government's ordinary revenues. - 21 - 56 The Gommunitg's TcRnomi Gonsultatie anrd Planning Gouninil ani the planning authorities of each state and of the Community are to consult on matters of planning,- and tleP G2ommunications Gounnil is to bh the forum for rnnsult,!tions with respect to the coordination of the countries' "surface transport poliqies." The Community's Tax Board may, on reqiiest. of anv Pnrtner State, render asosistance "in matters appertaining to fiscal planning" and "in the study of the correlation between taxes managed and collected by the Community and taxes managed and col- lected directly by authorities in that Partner State." The Counsel to the Community is given a mn t a ona t advise on and promotel "the harmonization of the comnmercial laws in operation in the Partner States." (Article 29). C. The Developm,lent Bank 57. Uganda, and particularly Tanzania, regard the new Development Bank as the principal means, together with the transfer taxes, of redressing the imbalance in industrial development within the Common iIarket. Although the Bank is also supposel to finance prjcs"dsgeto m'ethe economies of the Partner St+ates I. -}A.~.LA. i±IJ jJU 1)1 L) CL-.' 1- UD JC ,LJ U U'. Ltj X U1lC VL.UL _L}U.C LJJ UI' ± J I iC )UO UC increasingly complementary in the industrial field," i-ts financial and technical | ~~~~~~~~~~~~~~~~~~~~~~~~~~~_ _ . - _ 1A5__-I - I asS±S Ud.iUC is to give CJY±U.Ui U V L , ±LJUUb UliJLl UtI VUIUVjJIIIj U .1 L)1 1e ICi ulVul y l'C- industrially developed Partner States" (Article 1 of the Bank's Charter). This spe- cial objective is reflected also in the stipulation that the Bank -invest only in manufacturing, assembling and processing industries where the industrial imbalance is (nurJidered to be mnOSt --Marlked. Specifically the Bank is required to distribute its investments and guarant;ees in such a way that in successive five-year periods Tanzania and Uganda will each get 38-3/4 percent of the total and Kenya 22-1/2 percent. At the same time, however, the Bank is to be guided by "sound banking principles' and "ifinance only sound and technically feasible projects."- 58. The Bank will have a capital of £20 million of which £12 million are to come in equal portions from each of the three governments and the remainder may be subscribed by corporate bodies, enterprises and institutions whom the three governments may agree to accept as shareholders. Only half of the £20 million will be paid-in capital; the balance will be subject to call if required to meet the Bank's obligations with respect to borrowings and guarantees. The £6 million which is to be paid in by the three governments is to be contributed in four in- stallments; 10 percent within 30 days after the Treaty comes into force ard the bal- ance in three equal arounts at intervals of six months. Half of it is to be.in convertible currency,; the other half in the shareholder's currency.l/ The Bank is authorized to supplement its capital by borrowing and to accept special funds for "special operations." _/ To get the necessary funds for their capital subscriptions the three govern- ments have agreed (1) to divide among themselves EACSO's general reserve fund (El .95 million as of the enr ofn November 1966) excert. for ahout £0,5 million required as a working balance: Kenya is to get 40 percent and the other two countries 30 nercent each nnrd (2) to acquire the ACSO pensi on fuinr'l> ster- ling securities with a maturity beyond 1975 in exchange for their own securi- tie-s and a, nledgrear to nr-rvirl the foreicgn exchancg to meet E'scrfn liabilities to pay pensions abroad. As of mid-1966 such sterling securities in the pension fund had a maturity va,Lue of £5.28 million and a market value of £h. 07 million. 59. The Bank's chief executive officer will be a Director General appointed by the.AuDLt..II .. r,&. Ls AL …-iC-V pre.ident)J i-n- WI -IIt L. alu 1i U LI4IUL L L k UIIu L1I~.~~iUIL~]jV~JU2D)£2LUJ L II -I tAI UI Board of Directors. The Board will consist of one appointee of each government andiU eventually of two members eI ected buy silareholodUers othIer than thi-e t'iree gkoverin- ments. 60. The Bank is authorized to make investments in the form of equity as well as loans but its equit.y in-vestment cannot exceed 10 percent of unimpaired -paid-in capital and reserves other than the Special Reserve constituted out of ccmmissions and fees paid for guarantees. The Bank will normally finance projects directly, but may make or guarantee loans to national development agencies as long as such loans are for specific projects. In fact, the Bank is ";to supplement the activi- ties of the national development agencies of the Partner States by joint financing operations and by the use of such agencies as channels for financing specific projects"; and it is also to cooperate with other institutions, public or private, national or international, which are interested in promoting industrial develop- ment in East Africa. These provisions enable the Bank to engage in joint operations with such parastatal organizations as the National Development Corporation (NDC) in Tanzania and the Uganda Development Corporation (UDC) as well as with mixed com- panies such as the Development Finance Company of Kenya and similar companies in Uganda and Tanzania. 61. Only experience will tell whether the Bank will have some measure of success in remedying industrial imbalance within the Common Market without relaxing the requirement of applying only objective economic and technical criteria in its investment decisions. The Bank could become an important source of funds to the NDC and UDC which are both in need of additional financial resources, but only to the extent that these organizations can put forward sound projects for financing. In the private sector the Bankc can be helpful only to the extent that there are private entrepreneurs willing to start new ventures, particularly in Tanzania and Uganda, and requiring supplementary financing. The Mission's survey of private sector industrial development in all three countries does not suggest that lack of finance has been a serious constraint up to the present. D. Finances of the Community 62. The Treaty does not greatly alter the existing arrangements for financing the Common Services. The self-contained services - the Corporations - are to be operated, as in the past, on the principle that their revenues should be sufficient to meet all expenditures, including debt service, and to earn a return on net fixed assets at a rate which the Authority may determine from time to time.l/ One notable change is made in the financing of services which are not self-supporting and the expenditures of which are met out of the General Fund. The latter i4ill nc longer get one-half of the income of the Distributable Pool Fund. This Fund will receive onlg that share of the net revenue from custcms and excise duties (3 mert.'f and taxes on the income of manufacturing and finance companies (20 percent) which has been and will continiue to be redistributed evenly among the three countries 1/ The Authorityv may disperse the East African Airways Corporation from the need to earn such a return on net fixed assets. - 23 - Moreover, as a concession to Kenya the Distributable Pool Fund will cease to exist as soon as Kenya has contributed 4O percent of its share of tne paid-in capital of the East African Development Banlc, presumably by June 30, 1968. The General Fund w,jill in the future no longer get any specific percentage of the tax on profits of manufacturing and finance companies. However, the General Fund is to get from this tax "such sums as are required to make up (with the monies in the General Fund) the amount of expenditure to be met from the General Fund." In a sense, therefore, the General Fund is given a first claim on such revenues to the extent necessary to meet its expenditures as approved by Appropriation Acts passed by the Community's Legis- lative Assembly. In principle this could provide a more flexible means of financing the non-selfcontained services, but in practice it could also make their financing more insecure if the Common Market partners were unable to agree on the funds required. E. The Institutional Framework 63. The supreme organ of the Community will be the Authority composed of the presidents of the three countries and assisted by three full-time East African IMIinisters, one appointed by each State. Officers of the Community are the Secretary- General, its principal executive, and the Counsel to the Community. Both are to be appointed by the Authority, but the Counsel only after consultation with the Secretary-General and the Community Service Commission which generally controls appointments, promotions and other matters relating to the personnel of the Com- munity, other than that of the Corporations. 64. The Treaty provides for the following Councils: a. a Common Market Council which will ccnsist of the three East African Mlinisters and three ministers representing each of the three governments and which is to ensure and keep under review the operations of the Common Miar- ket and consider for referenc.e to the C(ommon IIarket Tribuna] any charges of a breach of obligations, b. a Communications Council composed of the three East African IMinisters and the ministers chrrged in each country with communications and empowered, with reference to the four Cornorations onerating in this fi eld, (i) to consider anrd approve the Corporations' development plans and associated borrowing programs as well as- inrividrul capitl works ex ceeding certain stipulated minima, (ii) to pass on legis- lative proposals sihmit++A by +the Gorporations (iii) to give the Corporations' Boards of Directors directives on sultation on matters relating to transport and communications. c. an Economic Consultative and Planning Council consisting of the three East Afric-an Minister's _and thre-e ministers from e-ach country and charged with the task of assisting the national planning of -thJe Partner Stte y "conultative means"t anAd to ad'vise- the Authority on long-term planning of the Common Services) d. a Finance Council composed of the three East African Ministers and1 the Finance Ministers of the three countries and empowered - 24 - to consult on major financial problems of the Community and to consider and approve major financial decisions, including those relating to estimates of expenditures and borrowing and investment programs of the Community, and e. a Aesearch and Social Council censisting of the three East African 'Ministers and three ministers from each country to consult on the coordination of the policies of the member countries and the Community in research and social questions. 65. Legislative authority is to be exercised by an East African Legislative Assemibly which will be composed of the three East African IMinisters, nine members designated by each country in accordance with whatever procedure it chooses to adopt, the Secretary-General and Counsel as ex-officio members and a Chairman appointed by the Authority. The three Heads of State must enact all legislation, 66. Other institutions include an advisory Tax Board and the Community Ser- vice Commission, whose functions have already been mentioned, and the Common lIarket Tribunal which is to settle disputes rela-ting to the interpretation of the new Treaty. 67. The Corporations have each been provided with a Director-General, who is to be appointed by the Authority and to act as the principal executive, and a Board of Directors which apart from the Director-General will consist of a Chairman (a person of Ilindependencelt) and three directors with experience in commerce, industry. finance, administrative or tecinical fields, all appointed by the Authority9 and one director appointed by each government0 Slightly different provisions govern the composition of the Board of the Airways Corporation. V. COORDINATION OF PLAITS AID POLICIES 68. We have already pointed out that the new Treaty recognizes explicitly the need for consultation on the coordination of national policies and programs in the fields of monetary and financial affairs, transport, planning, etc. It is important, of course, that these consultations result in coordination where necessary; and, for this reason, the MIission would lilke to indicate, on the basis of its own obser- vations, where in particular coordination may be especially needed. 69. There is one somewhat related matter concerning the freedom of capital movements among the three countries that deserves some attention. It will be diffi- cult to avoid impairing free exchange within the Common Mlarlket if there exist, within any one member country conditions conducive to the flight of capital to an- other member country. To check a persistent flight of capital complete fonrign exchange controls extending to current as well as capital transactions tend to be necessary. Current account. navments mav easqily hecenrmr vehirln fnr rnnnnn 1d capital flight. Controls may need to be established on the amounts of currency taken frnm onn Cnmmnn TK,nrlcrt cnuntrv to another and presented ±here fnr xchange at par; and the difficulty of preventing large-scale smuggling of currency could qsily-1 lera to- a marn-ket. in ihi sh tbh nn+oe nf' nne rniintr-w T-,,iq e- quoted at a substantial discount, W4hen Tanzania imposed foreign exchange controls on its transactions with Kenya and Uganda Tgrollri,, theo rrninlizationle-a-Sures o-C February 1967, this slowed up current payments and tended to undermine confidence in 1+ jaj cJaLJ teL1 TanLJaLi 6, . ort 140404 unatly iUt a poe p to l these controls - 25 - in June 1967. There is little doubt that stringent and long-lasting foreign ex- change restrictions would tend to be disruptive of the principle of freedcm of trade underlying -the Common Market. Thus, the success of the Commnon Mlarket de- pends in large part on whether each country abstains from policies lilkely to cause a flight of capital as part of its more general undertalking under the Treaty to pursue "an economic policy aimed at ensuring the equilibrium of its overall bal- ance of payments and confidence in its currency." Coordination of Planning 70. Now that so much emphasis is put on economic planning as a means of accelerating economic growth and influencing the structure of the econoray, in- cluding the composition and direction of its foreign trade, it is necessary that the plans of the three countries be coordinated in the interest of the smooth functioning of the Commnon Mlarket. All three national development plans examined by the Mission were framed in isolation. In the future it would certainly be desirable to have consultations in the course of drafting new, or revising old, plans. As a minimum, it would be advisable to determine to what extent tlhe ex- plicit and implicit premises of the plans with respect to the development of the trade in goocls and services within the Common Market are reconcilable. Th-e Ilis- sion found that little or no attention had been devoted to spelling out tlhe impli- cations of the develonri,ent polans for trade among the Common harket countries. One difficulty in that connection is the absence of really reliable information on -the total volume and comnosition of transactions among the three countries, particularly on the service account. I'he Mission recommends that efforts be made to remedy this vital deficiency in da-la_ 1ore dependable inform,lation on the balance of railvents within the Common IHarket would give each country the more ccmplete knowledge of its total foreign exch2nge receits and exenclituiires which i1; needs for nlann-ing and would also provide the basis for a determination of 'the ways in which national plans are lik-elyi t.n nffect rtelat.inns ,on ncn thp (nrnmon Mainrket. rrmnt.rieq- Goordinat.ionr ofv Transpo~rt 71. One oarea in which con-rdninated planning apaears to be neces- sary is that of transport. Here, the principal difficulty in the past ha, been that roadS transport has been a ma-Ftter of nat.ional respnr sibility7 w^hile railwaysa- haveP been a common service. This has prevented serious consideration of the proper role which each of these two transport modes should play in carrying- various types of traffic in the light of their comparative costs. All three governments have showni a tend- ency -to favor r-ail t+ranspc.rt and protect it +aga-inst road competition 1arge l. becmm au,,seC the railways have been self-financing and therefore did not impose any direct burden on t-he national budgens. 1A- mc 44- is u-iaa +p-ro l than v-rying- dr -s a economies of the three countries have been denied the benefits of cheaper road trans- port--. Consult--ant-s are now carrying Out a +-tud, financed by-b TThITTD of A-b problems of transport coordination which should provide the basis for better trans- poru planJin[ . Hlowever, this subject il ULUUUbLtLL,y 1reUire conUJULJUiLng, .AaJtes by the Community's Communications Council which, as already noted, is to 1:'e, among othier things, a forumr for considering the coordination of "lsurface transport policies.!'' Plnnning of Tndustrinl (Thracitv 72. In principle, ccordination of planning also appears necessary to prevent the development of wasteful excess productive capacity in various industr:ies. We - 26 - would not suggest, honever, that attempts be made to achieve an exact balance be- tween projected capacity and demand. Enterprises in all three countries must be allowed to cormipete for the East African marlcet even at the risk of developing some excess capacity. It is important, however, that adequate information be available on the likely development of demand, particularly for products which are the sub- lects of import substitution. EACSO's secretariat has in the past made a number of market studies, and it would be useful if the Community's secretariat expanded the work in this field. concentrating particularly on ways and means of getting more reliable information on the income-elasticity and price-elasticity of demand for goods suitable for production within the Common Market. The Case of Textiles 73 In some s thep danger of excess capacity and ovP.rproduction is not yet acute because there are still opportunities for import substitution which can be explored without undue cost. This appears to be true, for exam.ple, of textiles. If projections made by an EACSO market study are correct, the total Common Market demand for cotto fabrics sitable for local poctioni be 193 milli sar e yards by 1970 and that for synthetic fabrics about 80 million square yards. An anlysis of textile projects undler -way or assured has caused the +_iso to con clude that by 1970 output of cotton textiles will probably be around 163 million square yards ,ane d th+at of synthleticss nabout 6A6 mill-lion square -,yar + T,-Ii A appear that the possibilities for import substitution will not have been completely ehaustI-edu. Huowever, th11ere may well b1Ie some shift intetrd4n etle mn the Common MIarket countries as Kenya and Tanzania push ahead with their plans to 1114) 440-04) 444. 4JL1L4 11 T 1- 1C4.4- expan-d their productiJon of'L t extiles inwihUad a ihet enpeoiatl Th'le Case of' S-ugar -71 .m ,qt A n _ -1 1 .. 4 4-r 4. - 4.. -- of4 L, th Corn on ,,T1ZA4 A to pose certain problems requiring serious government consideration before long, particularly since all three governm,lents have been promoting output and controlling supply and distribution. In the past Uganda has developed a sugar industry capable not only of meeting domestic demand b-ut of exporting considerable quantities to its Common Harket partners, particularly Kenya. Until 1963, Tanganyika was also a sIgnificant net importer o1 sugar, Out I6 las iln Iecent year s bUcIme bself-bul fIUcIent and seems likely to remain so. Under its current Five-Year Development Plan, Kenya is rapidly expanding its sugar output with the objective of also becoming self- sufficient. Meanwhile, Uganda is also increasing its output in order to maintain a surplus for export and keep pace with rising domestic consumption. If sugar output in all countries continues to increase under the stimulus of government action, East Africa might well develop an overall surplus which, even if it were sold under a Commonwealth Sugar Agreement quota, could probably be exported only with a consid- erable subsidy. Uganda, with its center of sugar output 800 miles from the port of i/ in 19iO, Uganda's export of cotton piece goods to Kenya and Tanganyika amounted to 23 million square yards, while Kenya's and Tanganyika's exports to their Common Market partners totaled only 0.Uo2 ana U.o7 million square yards respec- tively. However, Kenya's and Tanganyika's exports of fabrics other than cotton were 60.25 and 0.96 million square yards, as compared with almost none by Uganda. - 27 - M4ombasa, might be particularly handicapped by an inability to sell all of its pro- duction in East Africa. 75. For the time being, the lag in achieving output targets in all three countries, together with rising domestic demands, are likely to defer the danger of overproduction. The Ilission's projections of sugar production by 1970 indi- cate, for example, that Kenya's output will fall about 25000-35t000 tons short of the target and that Kenya will therefore probably still need to import 50,000 to 60,000 tons in that year, Since at the same time plans for raising oitpilt in Uganda will not fully materialize, that country's surplus is unlikely to exceed Kenya's import deficit ./ Tanzania's production is enpented to develop approxi- mately in accordance with its rising consumption. 76. It would be unwise, however, to expect that shortfalls in plans will continue to nrevent a serlous problem. In Kenya for exanmnlie milling rnnraci+ by 1970 will be significantly higher than output which will lag only because time is reniired to organize effectively the nroduction of cane by smallholders. More- over, free competition is unlikely to bring about an economic distribution of production and trade because in all three countries governments control the praces, imports and distribution of sugar. In Kenya, for example, the supply and distri- bution of sugar is completely controlled by the Ministry of Commerce and Industry. 77 Te. I Mission believes th .VaLat tluihe th1.ree governments should at1, 01r aearily date give serious consideration to the cost, and particularly the opportunity cost, of proRcingsuga in -as u frica in order Ito delterm,4,ne where in 4the fDuture i a 1,~~'L5 .L51 4.1 10 iLi! 13 I 3 t1 11 Et 1 -114 LI-W I -L1 U,1± 111 1 -L U IIIClJ be most economic to expand output and whether there is any advantage in developing some export, espec4ally to nearby countries. This might involve a concerte study of the market potential, of the possibilities of broadening the market through re- ductions of production costs, and of measures to rationalize the distribution of sugar within the market area so as to save needless transport costs. There are indiation -o [ UIldle, "hab savings coud ue achieved if a"l "e sugar produced were pooled and distributed in such a way as to reduce transport costs from centers of production to centLUers of consumputlon.2/ in the absence of some sort of a rational sugar development plan for East Africa as a whole it is probable that trade in sugar aiong the Conrmon MarKet partners mill cease entirely and that some output mill have to be marketed abroad at uneconomic prices. A careful study of the possibilities o1. production anU J d distGlibLutlon and the alternatives open to the three governments would thus be highly desirable before additional commitments to sugar projects are made. 1/ In 196h Kenya imported 42,980 tons of sugar from Uganda and 30,201 tons from sources outside East Africa. In 1965 Kenya raised its imports from outside the Common Market to 73,336 tons because of fear that owing to a drought Uganda would be unable to supply its customary amounts. Imports from Uganda accordingly fell to 185,075 tons even though Uganda's output was much better than expected, and in 1966 Kenya imported only 5,000 tons of sugar from Uganda because it had overimported from other sources the previous year. 2/ On this subject, see Charles S. Frank, The Sugar Industry in East Africa, (Rast. African Studies No. 20 The East African Institute of Social >Research, East African Publishing House, Kampala, 1966). - 28 - Cooperation in Electric Power 78. Cooperation in the development and distribution of electric power is another subject calling for early attention. Uganda and Kenya, for example, both have important hydro-power resources which might be exploited by joint arrangements in some sort of agreed sequence that would be mutually advantageous. Uganda is committed by long-term contract to supply Kenya with 30 MW of power from its Owen Falls hydro station, and with the growing domestic demand on this station it must make an early decision whether or not to proceed with a new hydro nrolect. the Bujugali scheme, which would involve a heavy investment. Meanwhile, Kenya is apprnaching the comrnlption of the first stage of its own large hvdro nroiect_ the Seven Forks scheme, which is capable of ultimately develcping 250 MW. If the two couintries were able to jinn in develPing SuGGessiVe hydra nronicts to meet their combined requirements, this would permit a more rapid "loading-up" of power gen- erating facilitiesj, achieving reductions in generating cost and economies in investment outlays. The Mission has noted that the Uganda Government has taken ste-s recently to --ylore the pcssibl hity orf sucrh jint narhrangement-.q with + nya. A thorough examination of the ways and means and the possible benefits of such c rera wou,rldr~ deif4-initely be ion thei inre+.st of both countries. (See Annexes II-E and TV-E) Cooperative Development of Tourism 79. Another area in which greater cooperation appears desirable is the developmenth and promotion of ' touri sm whlchln i a rapiy g l souroe of 1ic to East Africa. WJhile a large proportion of tourists visiting Kenya come to that c arur a'o e t1os _..4 -4 4-_ TT1 _4 .A - --A rP,-, _ 4- A_ I __4 extensive tour which often includes Kenya. All three countries have a common in- terest in encouraging-t4S4isS to come lo 'ast'Afria as a wole. To theexen lueresl 4LI- q11 ui1UU1.[ d _L11, UUUJ. i± U~ IuLl 'Ji1 luL IJ.:, L .1- IiLId-C CIO 0l ±V1IL . 10 LA- IU that the tourist trade is directed toward East Africa, the countries share a com- mon interest in planning lts development, lncludlng Jolnt efforts to obtaln such changes in the structure of international air fares as will encourage tourism. lourist trade interests, governmental and pri-vate, of the three COunltries did work together in the East African Tourist Travel Association which provided a means for consultation and Jolnt action, particularly on publicity and promotion and the collection and analysis of statistical data relevant to intelligent plan- ning. The Association was unfortunately disbanded at the end oI i965, but the Mission would urge the three governments to consider reviving some forum for co- operation on tourism (see Annex I-B). Cooperation in Higher Education 80. One of the advantages of the operation of common services in East Africa has presumably been the savings in cost. By the same token the dissolution of a common service or institution creates a potential danger of a rise in costs. The Mission's survey of education in all three countries suggests that this may well be true of higher education. Ostensibly, the University of East Africa (UEA), which was established only in 196'3 to 'erirg tcgether the Urniversity Colleges in the three countries, still ensures the coordinated development of higher education. However, the three constituent colleges appear to be increasingly pursuing inde- pendent lines of development, and the UEA seems unlikely to continue beyond 1970. Previously a serious effort was made to avoid duplication of professional - 29 - faculties in each country. Thus, faculties for agriculture and medicine were established at Makerere University College in Uganda, for architecture, engineering, veterinary science and commerce at the University College in Nairobi, and for law at the University College in Dar es Salaam. Now, however, it is probable that faculties of agriculture will be established also in Nairobi and Dar es Salaam; work on a new medical school has started in Nairobi; in Uganda and Kenya certain steps are being taken with respect to the Technical College and School of Law respectively which may presage the establishment of an engineering faculty in Uganda and a law faculty in Kenya; and in Tanzania proposals have been made for medical and engineering faculties. While duplication of faculties may be desirable in some cases such as, perhaps, in agriculture, the early establishment of com- pletely independent universities may well entail costly duplication of facilities and high ratios of staff to students that will make the cost of higher education unduly burdensome. The Mission accordingly recommends a careful review of the development of university education in East Africa in order to determine whether some of the benefits of cooperation and joint use of facilities should not be retained well beyond 1970. VI. SOME COMMON PROBLEMS 81. This report does not attempt a comparative evaluation of the past program and the nrosnects of the three Past African countries. Here we shall give only a brief indication of some of the common problems the Mission encountered in East Afri fGa=- Estimqatincg thsne ource 82. The Mission has sought to determine for each country +he magnitude of the resource gap and hence the need for external financing until 1970/71. Esti- mantes of this sort r.ust. be treated wTith n co r1nsidrable. vareserve. Tlhe ciirY-znt. and future volume of domestic savings, for instance, is difficult to assess. Current savings can only be determined from such information as is available on fixed domestic investment and the balance of international payments. Data on the latter -artic uil a-r hiate rot+ bren entireiy sat Q f>c+ P tu, as- is ir a i+ n prlz+ by th ra large allowances for "errors and omissions" for certain years. The rate of growth ,in output and e=-+orts uThrich rwrill grelinfluitm-ner.ce. the resuceT ' apt , is also 1iffi- cult to project. Rates of growth in East Africa have been subject to wide fluc- 4 ua4- A_- A..- 4. 4:h -e4 s4 +-.A- -P -gr--; ,.-..1 rod ctJn+ ma tnd maarkets+ -1A --kedo l,Ud LI- 1|O LLU A LAIU VI . L.L U OO. U 4 L 0~ . L I.. tLL. 0± p. . A - . L 1 V 0. 1110 i. Lt -1± '11-) -. variations in the degree of confidence on the part of producers and investors. The 'lastu seven or eight years, whi4ch were cbaracterilzed by th+ neranie rvaln before and after independence as well as a few droughts, certainly did not witness a smooth progression of production and trade, but even if the future is to some degree more "normal," one must reckon with the possibility that the projected "1average"l rate of growth can early be rendered meaningless by one or two bad crop years or by political events that undermine investor confidence and precipitate a flight of capital. - 30 - Non-Financial Constraints 83. The Mission's estimates of requirements for external capital aid reflect its findings that the capacitv of the public sector to make effective use of re- sources for development is gradually increasing. However, it must be emphasized that non-financial constraints on develonment are still imnortant in all three countries and that foreign aid in the volume which the Mission has indicated might be needed Gan only 'he effectively committed and utilized if considerable improve- ments are made in staffing and the organization for planning and execution. The Mision's di ffi r-1l1i-- in ga r oIthpri-ng informnt.i nn on sceprnm tThat r-migch+. nqualif-yr fort' foreign financing strikingly illustrated this need, and it is for this reason that the 'project possibilities" listed in the separate country reports consist in large part of schemes on which much more work must be done before they can be seriously appraird fnr etv+n l fin -A'nci Tn all three counries, insufficient a+ttentiAnv is still being paid to the task of translating planning targets into concrete schemes or action prcgrams. In Tpr tv-his Js due to +-h fact that macro-econ-o-rc planning in the central planning ministries is not complemented by effective units 4-1-4- --- Ac. -,--.-4-4 ---I~ -~A A.4-.- -.1 -A ~----aa,-4- -1 - 4 --.,-.4-1--.v - 4-ha - -n 4- ,. 4 4-1.-. a Aid th C-3i1 Lt J c Ja a U UdLo pract Cal a un detal proJecti. pJl0U Lanning11 L LtiLn Ulili m1i1Q ndni s tri es tiha a re charged with the responsibility of carrying out major portions of the development program. I1n partJ , aIlso, itU i autributable tU o inadequate evalua0 tionVOU of 4C tI- 4-tual progress of projects and programs that have been undertaken, and the consequent fai4lure to -ident-ify tWhe bott-lenecks or diJff-icultiJes whiJch st-and Jin 4the way of -ore ± ±LL 0L U L) LCO UL.~L ULI. CIL U U- 1iU\) i. L4L 4- _L UX UJ-L NLCL 0 UCIIC 411 ~ L ullO 'Jay SCL rapid progress and to determine whether given development expenditures are really achieving their purpose. MostU 1IU.J_LZjL1stUl areU Zi±Llply no1)t sLOaffed dl Cii OILLLsUU. LU carry out their development responsibilities; and it would be useful if external d programs could1be miore effec'tvely or-lentleu Uwad'U limproUVilg t capauit ly for planning, evaluation and implementation, both by providing key personnel and by expanding training facilities. hle East African gover-nments themselves and the institutions and governments engaged in technical assistance activities might do well to encourage concerted action for this purpose. External Finance and Local Expenditures 84. All three countries also share, though in varying degrees, the common problem of how to finance all the local, as distinct from the foreign exchange, cost of public investment projects and the increase in recurrent expenditures that is so often an inevitable concomitant of development. Even assuming reasonable efforts to mobilize domestic resources, difficulties have been and will be expe- rienced in finding the necessary funds to match external aid for procurement of foreign goods and services. In all countries, some foreign assistance has been extended for financing of local expenditures and, particularly in Kenya, the large UK aid program has made rather generous provision for this purpose. The Mission noted repeatedly that stringencies of local finance were especially serious in the fields of road construction and maintenance, education and agricultural development where the proportion of local to total expenditures is very high. The Coffee Problem 85. Still another common problem of importance is the growing disparity between coffee production and exports. Under the ;nternational t'offee greement, to which Uganda and Tanzania have been party for some time and Kenya adhered re- cently, exports are likely to rise much more slowly than the potential volume of - 31 - output. In 1966, Uganda and Tanzania were able to increase sales significantly, but largely because there was no effective machinery to prevent diversion of ex- ports from nonquota to Quota markets. Such diversion has now been made much more difficult. In Tanzania, output exceeds current and future export possibilities by a significant margin, although it is not entirely clear to what extent this is due to an increase in yields which may not be permanent. In Uganda, there appear to have been substantial new plantings over recent years which are likely to lift output well above marketable quantities. In Kenya, the acreage of immature coffee is so large that output can be brought into line with a realistic evaluation of marlet prospects only by taking out of production some 30,000 acres, or one-seventh of the total area in coffee. All three countries have not so far faced up to the task of tackling energetically the problem of diversification in the coffee-growing areas. A fri cnizantinn o-f the Econnmies 86. One other important problem, encountered in all three countriers,7 arises out of the prominent position of the Asian and European communities in business li fn. The fac+ +hatn+ rin-m anrl wiea1+h is s+t11 zs miurh associ th color - brown or white in this case - is inevitably a source of discontent and a potential threat to politicall staillity. 1ULlilA. t,h -un-Ll of Africans engaged n petty trade has increased markedly, the lucrative retail trade in the cities and the! wholesale, imprt-+ and expo,+ +t-rad lha en- almos-+ .ho1l,y in th hands -f Euro c and AsXiansc5 and only a comparatively few African entrepreneurs are found in industry. An urgent rei-Jrement for the futr 4 s to reconcile the need for a con+inued CcnAtri kUtion of the Asian and European communities to the development of the economy with the need P__ -4 - A _4nttm_ _ ;_ - gre te s A e 4m 4- A 4 -4 -- ; P 4 _X. .&. >.A2 j UVl V V1d t i L W )JL a r L a c mm rc a ln o G ±J UL11 UJ1I 'Uh1 Ii UJU ±iIJUUD j ' 1)1 , LJAL 01 U11E countries. It must be recognized that East Africa cannot prosper without these "'multes. They account fo-r lfauc' of thes-igmuhote nrpi aduc comui IHiLJI 1 ~ ±IIu U UU[ Lw ,aui U. Wiit d.I g IIUUII U± LUii t=l i uuipi±i dLUL IIIUIJII of the management available to the economy. It is equally obvious, however, that AlfriLcans [lubt bue traLinetad ranlLd LLassite nOt -1 much to replace but Ut taKI hUeir- place with these non-African communities. 87. Many attempts have been and are being made to "Africanize" economic life. One rather negative way of accomplishing this has been an increasing number of dis- criminatory measures directed primarily against Asians in commerce. The:se have eeri accoriipanieu by efforts ori tue part of Asians thie-ri,selves tuo sh-±ift increasiy from trade to industry which is popularly regarded as a more "constructive" activity, and in Kenya anrd Uganda groups of Asian businessmen have actually been setbing up development corporations which would not only promote such a shift but help Africans to set up small industrial enterprises. All three governments have put considerable pressure on foreign business firms to train more African staff by restricting "work permits" to foreigners. iore emphasis, however, is naturally put on more African business enterprise rather than on more Africans in Asian and European business firms. On important manifestation of this has been the rapid growth of African cooperatives, particularly in the marketing and processing of agricultural products. Another, more recent, manifestation has been the nationalization of commercial banks, certain foreign trade firms and part of manufacturing industry in Tanzania. This action seems to have been designed not solely as a step to achieve "socialism,1' but also as a measure to transfer European and Asian enterprises to African ownership and control. 88. Cooperatives have undoubtedly played a useful role in Africanizing the economy and giving Africans experience in running ousiness. 1r%fhile tneir operation - 32 - has been attendd hv b nuimbhr of ahiiqe and considerahIp inefficiency; the govern- ments have generally been anxious to correct these deficiencies, and there is little doubt that oonperatives will continue to nlyv a nrominent. role. At their present stage of development, however, they hardly appear suitable for the management of businpss Pnternrises of consinderable omplexity State enterprise 2nd "mixed" enterprise are also likely to characterize the development of East Africa to some eYtePnt. althogih their ability1v to make a ponsit-.ivp contributJon to deve1opment will depend largely on the possibility of retaining or obtaining foreign managerial and tePhnica1 staf'ff which Africa.ns a s-.till iunahle to supnnlv 89. Wh--ile cooperatives and parastatal enterprises are capable of developing managerial talent, none of the East African countries can afford to do without the ,-,n1 -; +-C! cNf ;,W -T;9llnl Sn+ m+;wr ~nA oncm'nihi1 ;+s, +hn+ cmC+on amev'cn f'ycsn -Fho development of private business. It is therefore essential that Africans be en- abl ed to become busin essmen and entrepreneurs in grwng numbers. * heanxso industry to the Mdission's three coimtry economic reports give some indication of 4the elforts under way lo promote the --Pegec -fa Afrlcan- busines clss - e UIlIO i.L.Ji. 1.1 UJL±u'. 'a u'J U±±11 01L~ ,0J- .L -1 LJ . .A-'..,-IJ CUO, LIJ 00 _L-00.0 110 efforts have only just begun. There will inevitably be much groping for a proper appr 1 VacIl b O Uo lT jJi. U U±11L. _L U U UII 1) L iIJOi UOD , UIJUV UIIJ. PU . V&,1 000 ;: LAL V 0 1 : VW EL± overcoming the many handicaps from which Africans still suffer in establishing and , 'a ~ ~~. ta LPt a. O _L t5L-'LJ-..X C ux LJti,00 ~-LUC PI00U VOl l I . '., ILJ Ja.U ..L %.4. UJAL U JO.L 0 0 014 developing - omet v business enterprise of theirown. on. Th-e reconc4ili-ati;on of' greater African part-icipat-ioninbsesad economic life with the continued need for European and Asian enterprise wjill un- oubuteUly c ontinue to giv-e rieo Lto U±I±UUI ties [U I-IU LfritI. IL is a prleUVUmu± that requires a pragmatic, rather than an ideological, approach and one which will call for a cc Usiderable measure of -understanding both by the Afriuan governmen ts involved and by the institutions and governments that have been interested in the development of East Africa. Appendix I List of Common Services of the East African Community A. Services Administered Directly by the Community 1. 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 African Customs and Excise Department. 5. The East African Income Tax Department. 6. The East African Industrial Council. 7. The East African Literature Bureau. 8. The Auditor-General's Department. 9. The East African Community Service Commission. 10. The East African 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. 1h. 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 Crrency Board. - 2 - 24. Services for the administration of grants made by the government of any cointry, any organizati on or anyvauthoritv; for the purposes of projects or services agreed between the Authority and the Partner Stateso 25. Services for pur oses of co-ordinatin+ te econonmic activities of the Partner States. 26. Services for the purposes of any body or authority established to facilita tat le thlle coordiniation of thLLe aCtivi.ty of thlle PartneUr States on any matter of common interest. 3. ServLces Ad,HuLl LI ut tre I uy LII t UUhPU.Ud U..L i Ls - m_ _ - _ _ { X. : _ _ _ e _: I _ __ ___- n : _- i- _ _ _: - r -: - : - - - _ 3 - -Z I -4 I. irie Za6 L AI'lu:ll nAd.i Wayb UUrpUlt d ±ULIl - v:vI V_ltO 1iiu ldULll tJlUi. relating to rail, road and inland waterway transport and lake ports. 2. The East African Harbours Corporation - harbour services and facilities (other than lake ports). 3. The East African Posts and Telecommunications Corporation - posts, telecommunications and other associated services. 4. The East African Airways Corporation - East African and international air services.