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Economic Convergence, Political Integration And ECONOMIC CONVERGENCE, POLITICAL INTEGRATION AND PROSPECTS OF A MONETARY UNION IN THE EAST AFRICAN COMMUNITY SIMON GITHUKU NYOKABI REG. NO. K96/CTY/20058/2010 A Thesis Submitted to the School of Economics in Partial Fulfillment of the Requirements for the Award of the Degree of Doctor of Philosophy in Economics of Kenyatta University October, 2017 DECLARATION This thesis is my original work and has not been presented for award of a degree in any University or for any other award. Signature: ..................................................... Date: ........................... Simon Githuku Nyokabi Department of Applied Economics Kenyatta University We confirm that the work reported in this thesis was carried out by the candidate under our supervision as University supervisors. Signature: ..................................................... Date: ........................... Dr. Jacob Omolo Senior Lecturer School of Economics Kenyatta University Signature: .................................................. Date: ........................... Professor Germano Mwabu Professor of Economics School of Economics University of Nairobi ii DEDICATION This work is dedicated to my wife Irene Kawira and mother Angelina Nyokabi for their prayers, encouragement and unwavering support. iii ACKNOWLEDGEMENTS I am greatly indebted to the Almighty God for granting me the opportunity and health to develop and write this thesis. I also express my profound gratitude to my supervisors: Dr. Jacob Omolo and Professor Germano Mwabu whose expertise, understanding, and patience, added considerably to the development of this thesis. Without their intellectual inputs and constant support, the thesis development would not have been possible. My personal thanks also go Dr. Anthony Wambugu and Dr. Muniu Muchai for finding time to read the thesis and give me comments. My heartfelt gratitude also go to Dr. Massete Kuya for his generous support and guidance when overseeing corrections received from the Examination Board at the Graduate School on 9 th May, 2017. I am also greatly indebted to my 2010 classmates including Bartuiyot arap Koril, Duncan Ouma, Samuel Wambugu, Robert Lihawa, Moses Njenga, Rosemary Birgen, Jennifer King’ori, Elijah Ruttoh, Lenity Maugu, Mbutu Mwaura, George Kariuki, and Luka Kiptui for their encouragement and support. My gratitude also goes to my friends John Njoroge Maara for reading and giving comments for the thesis. My thanks also go to Mr. John Wainaina and his wife Christine for their moral support. iv TABLE OF CONTENTS DECLARATION ..................................................................................................... ii DEDICATION ........................................................................................................ iii ACKNOWLEDGEMENTS ..................................................................................... iv TABLE OF CONTENTS ......................................................................................... v LIST OF FIGURES ................................................................................................. ix LIST OF TABLES .................................................................................................... x OPERATIONAL DEFINITION OF TERMS ......................................................... xi ABBREVIATIONS AND ACRONYMS .............................................................. xii ABSTRACT ........................................................................................................... xv CHAPTER ONE: INTRODUCTION ................................................................... 1 1.1 Background ......................................................................................................... 1 1.2 Statement of the problem ............................................................................. 22 1.3 Research questions ....................................................................................... 24 1.4 Objectives of the study ................................................................................. 24 1.5 Significance of the study .............................................................................. 25 1.7. Organization of the study ............................................................................ 26 CHAPTER TWO: LITERATURE REVIEW ................................................... 27 2.1 Introduction....................................................................................................... 27 2.2 Theoretical literature review ........................................................................ 27 v 2.2.1 The OCA theory.....................................................................................27 2.3 Weaknesses of the OCA theory ................................................................... 35 2.4 Operationalising the OCA criteria ............................................................... 37 2.4.1 Concept of income convergence……………………………………….37 2.4.2 The concept of business cycles………………………………………...39 2.4.3 The concept of political integration……………………………………39 2.5 Empirical literature review .......................................................................... 45 2.5.1 Income convergence and monetary union……………………………..45 2.7.2 Cyclical convergence and monetary union…………………………….48 2.7.3 Political integration and monetary union………………………………55 2.8 Overview of literature .................................................................................. 57 CHAPTER THREE: METHODOLOGY .......................................................... 61 3.1 Introduction .................................................................................................. 61 3.2 Research design ........................................................................................... 61 3.3 Theoretical frameworks ............................................................................... 62 3.3.1 Income convergence in EAC…………………………………………..62 3.3.2 Business cycle synchronization in EAC……………………………….68 3.3.3 Political integration in EAC……………………………………………70 3.4 Empirical approaches ................................................................................... 72 3.4.1 Empirical model specification of income convergence in EAC ........... 73 vi 3.4.2 Business cycle synchronization in EAC……………………………….74 3.4.3 Political integration in EAC……………………………………………77 3.4.4 Factors influencing political integration in EAC………………………77 3.5 Definition and measurement of variables .................................................... 80 3.6 Data type and data sources ........................................................................... 83 3.8 Data analysis ................................................................................................ 84 CHAPTER FOUR: EMPIRICAL FINDINGS .................................................. 86 4.1 Introduction .................................................................................................. 86 4.2 Descriptive statistics .................................................................................... 86 4.2.1 Descriptive Statistics for the State of Income Convergence in EAC .... 86 4.3 Statistical Properties of the Variables .......................................................... 89 4.3.1. Panel Unit Root Tests…………………………………………………90 4.3.2. Multicolinearity test…………………………………………………...93 4.4 Empirical Findings ....................................................................................... 94 4.4.1 State of income convergence in EAC…………………………………94 CHAPTER FIVE: SUMMARY, CONCLUSIONS AND POLICY IMPLICATIONS ................................................................................................ 134 5.1 Introduction ................................................................................................ 134 5.2 Summary .................................................................................................... 134 5.3 Conclusions ................................................................................................ 139 vii 5.4 Policy implications ..................................................................................... 141 5.5 Areas for further research .......................................................................... 143 REFERENCES ..................................................................................................... 144 APPENDIX .......................................................................................................... 166 viii LIST OF FIGURES Figure 1.1: Per capita GDP (US$) of the EAC partner states: 2000-2012 ............. 14 Figure 1.2: Intra-EAC exports: 2008-2013 ............................................................. 15 Figure 1.3: Intra-EAC imports: 2008-2013 ............................................................ 16 Figure 4.1: EAC partner sates contributions to the Secretariat (US$): 2000-2012 ........................................................................................................... 116 Figure 4.2: Political integration in EAC: 2000-2012............................................ 118 Figure 4.3: Institutional distance in EAC: 2000-2012 .......................................... 122 Figure 4.4: Relationship between political integration and institutional distance in the EAC: 2000-2012 .......................................................................... 124 Figure 4.5: Social integration in EAC: 2000-2012 ............................................... 126 Figure
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