Manufacturing Industry and Economic Development in Eastern Africa: A Test of Kaldor's First Law

Abstract

Since the dawn of the century, the eastern African region has recorded high GDP growth rates and adopted substantial structural policy reforms aimed at industrializing the region. This study sought to analyse regional economic growth for six eastern Africa countries from Kaldor’s perspective. Using OLS, the paper tested Kaldor’s first law for the period 2000-2013 for countries in the region, namely Ethiopia, Burundi, Kenya, Rwanda, Tanzania and Uganda to determine the role of manufacturing industry in regional economic growth and development in the context of regional integrations. There is support for Kaldor’s first law in the region. Test results show that 46.8% of GDP growth differences in eastern African economies is associated with the differences in the growth of manufacturing output. Agriculture is the leading contributor accounting for over 61% of observed GDP growth differences. the results show signs of de-industrialization for several countries in the region. Despite recent improvement in structural policy reforms to spur industrial growth, as a share of GDP manufacturing output is the least at 8.61% below agriculture and services sectors at 34.67% and 47% respectively. The results concur with a similar study by Thirlwall and Wells (2003) which tested Kaldor's growth laws across the continent.

The results present important economic and development policy implications in the context of pursued regional trade and integrations. Most vital is the demonstration that the law of comparative advantage will not work in favour of export growth in the region as the countries manufacture similar or related products. There is need for countries in the region to diversify their manufactures and advance from primary products to advanced manufactured goods so as to achieve growth and development goals for the region.

Keywords: Kaldor’s first law, economic growth, industrialization, East African Community (EAC)