Effect of Rwanda’s membership of the East African Community (EAC) on export diversification

Abstract

Rwanda is a member of different regional economic blocs to boost its exports and export diversification. This study analyzed Rwanda’s export diversifi- cation, performance after joining the East African Community (EAC). The study used data on Rwanda’s export to the EAC countries from 2001 to 2016 extracted from COMTRADE database. A 4-digit level has been used to assess the increase in the number of products exported and the Herfindahl- Hirshman index (HHI) to measure the share and improvement of the top 5 exports products before and after joining the EAC. Results showed a de- creasing in the volume of top 5 Rwandans exported products to EAC after joining the block. However, the observed increase in the export earnings from EAC was fueled by the specialization of selected export products and the introduction of new products lines into the Rwandan export mix. The Herfindahl-Hirshman index below 0.5 indicated that Rwandan exports into EAC are still highly concentrated; though there was a progressive reduction of the diversification index valuing from 0.5 to 0.3 of HHI. Custom union with EAC countries had a positive effect on observed improvement in HHI value since the coefficient of dummy EAC is positive. The Herfindahl’s in- dices above 0.4 in most cases indicate that Rwanda export earnings from EAC are generated by a small number of products i.e. Rwanda has specialized in the limited number of products. However, membership into EAC reduced export concentration and increased the chances of exporting a wider variety of goods. This would call for an emphasis on policy promoting diversifica- tion of exports focusing not only to traditional cash crops tea and coffee but also on non-traditional export crops that are less affected by international market price volatility in order to support and reinforce the membership of Rwanda into EAC and the benefits derived from the membership.