Optimal Currency Areas

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Optimal Currency Areas

• Theory and Evidence for an African Single Currency

ESDS International Conference November 2005 Paul
Adams M.Sc Development Economics Manchester
University
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Objectives of Presentation

• To present my findings regarding an African
  Single Currency
• To highlight the importance of international
  datasets for this paper
• To indicate data gaps which I found whilst
  undertaking this research
• Re-affirm the importance of reliable data for
  developing countries

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The Theoretical Backdrop

• Mundell (1961) and McKinnon (1963) begin the
  debate on the size of Optimal Currency Areas
  (OCAs)
• Central concept of asymmetric shocks and labour
  mobility
• Many theoretical advancements, often from
  unexpected areas of economics
• Impending European Monetary Union saw a more
  rigorously empirical approach to OCA theory
• See Tavlas (1993) for a thorough overview

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The African Backdrop

• Single currency a political aim since 1963 when
  the Organisation for African Unity was founded
• Renewed emphasis since the Abuja Treaty in 1994
• Tito Mboweni, Governor of the South African
  Central Bank, now indicates 2021 as the target
  date for monetary integration
• Poor intra African trade levels just 10 of
  total African trade

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African Data Problems

• Relatively large area to assess
• 53 countries compared to 15 originally in EU
• Mostly constituent of developing nations
• More straightforward economic indicators only
  reliably available since the 1980s
• Certain countries have no economic data
• More complex financial data still missing for
  many countries

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The Way Forward

• Objective
• An assessment of regional economic communities to
  remove duplication
• Investigation into the possible trade effects of
  monetary integration in Africa

• Solution
• An OCA Index to predict convergence of average
  bilateral exchange rates within groups
• A Gravity Model of intra-African trade

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Regional Economic Communities
ECOWAS Economic Community of West African
States COMESA Common Market for Eastern and
Southern Africa ECCAS Economic Community of
Central African States SADC Southern African
Development Community AMU United Maghreb Arab
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Successive Allocation to Regional Economic
Communities
Stage Country REC Chosen (Rejected)
1 Mauritius SADC (COMESA)
2 Congo, Democratic Republic ECCAS (COMESA, SADC)
3 Angola SADC (COMESA)
4 Seychelles COMESA (SADC)
5 Zambia SADC (COMESA)
6 Burundi ECCAS (COMESA)
7 Zimbabwe COMESA (SADC)
8 Malawi SADC (COMESA)
9 Rwanda ECCAS (COMESA)
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Gravity Model RationaleThings that effect trade

• Common colonial history
• Common nationality
• Shared language
• Geographical distance
• Geographical size
• Economic Size
• Population

• Island Status
• Landlocked Status
• Membership in Customs Unions
• Membership in economic communities
• Common currency

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The Scary Bit Or, Gravity Model Estimation

• The estimating equation

• The simple explanation
• Countries trade for various reasons, the gravity
  model seeks to include as many of these as
  possible.
• Specifically, the variable of interest is CU the
  currency union variable
• Accounting for all these variables, does
  membership in a single currency increase trade

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Gravity Analysis Data requirements and sources
Real Bilateral Trade International Monetary Fund Direction of Trade Statistics
Population World Bank World Development Indicators
Real GDP World Bank World Development Indicators
Other geographic and political dummies Mostly CIA World Factbook
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Estimates of the Currency Union Effect on
Intra-African Trade
Pooled Panel OLS with robust Standard errors 3.27
Time-Fixed Effects 2.93
Other Estimates of the Currency Union Effect
Rose (2000) 1.21
Rose and Glick (2002) 1.3
Masson and Patillo (2005) 1.29
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Time Series Data ProblemShort time scale
Equatorial Guinea CFA 1985 (entry)
Guinea Bissau CFA 1997 (entry)
Madagascar CFA 1982 (exit)
Mali CFA 1984 (entry)
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Conclusions

• In general, the currency union effect on
  intra-African trade is positive and significant
• This was robust to a number of sensitivity tests
• The point estimate is of a similar magnitude to
  comparable studies
• There remains the need for further investigation

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Epilogue The Search for Data

• The availability of data has been instrumental in
  expanding the OCA debate into more empirical
  areas.
• The dissemination of good data practices needs to
  continue in developing countries
• To act as a real-time monitor
• To enable detailed research which benefit from
  longer and wider datasets.
• PARIS21 spreading this message
• Ability of data to form a virtuous circle with
  development.

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The Virtuous Circle
? Data
? Research
? Growth/Development
? Quality of Policy Decisions