Economic And Monetary Integration In Africa

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Economic And Monetary Integration In Africa

• G24 XXIII Technical Meeting Singapore September
  13 14 2006
• O. Joseph Nnanna
• Director General West African Monetary
  Institute (WAMI)
• Accra, Ghana

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AGENDA

• ONE
• The developmental challenges facing
• Africa
• The new approach in tackling Africas
  developmental challenges
• The economy of scale problem
• Weak Institutions and Poor Infrastructures
• Low volume of intra-trade transactions
• The need for good governance

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• TWO
• What we know/not know about regional
• economic communities in Africa (RECs)
• The major regional groupings and the
• problem of overlapping membership
• THREE
• Theoretical and Conceptual issues of the Optimum
  Currency Area (OCA)
• The empirical literature
• Are Africas RECs OCA compliant ex
  ante/ex-post?
• The quantitative/qualitative convergence criteria

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• THREE
• Theoretical and Conceptual issues of the Optimum
  Currency Area (OCA)
• The empirical literature
• Are Africas RECs OCA compliant ex
  ante/ex-post?
• The quantitative/qualitative convergence criteria

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• FOUR
• Are RECs a mere political expression?
• What are the medium to long-term benefits?
• FIVE
• The performance score card the empirical
  evidence
• Conclusion
• I thank you for your kind attention

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The developmental Challenges facing Africa

• Africa has majority of the Worlds small and poor
  nations. (7 countries have a population of less
  than one million).
• Only four countries have a population of 60
  million and above. About 58 percent of the
  continents GDP is controlled by four countries
  (South Africa, Egypt, Algeria and Nigeria)
• Approximately 12 countries have GDP of less than
  US1.0 billion and almost one-quarter of the
  African countries per capita income is less than
  1000.
• The continents real GDP growth rate averaged 2.2
  percent between 1987/1997, when the population
  growth rate was almost 3.0 per cent.

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Africas developmental Challenges

• The GDP growth rate was estimated at 5.0 percent
  in 2005
• Africas share in global trade has declined
  steadily since 1970 and accounts for about 1.5
  of total World trade in 2004 (UNCTAD)
• African countries are individually too small to
  achieve economies of scale in production and
  marketing
• Weak institutions and poor infrastructure are
  commonplace in majority of African countries
  (rule of law, property rights epileptic power
  supply, bad roads and high production/transportati
  on costs).
• The level of recorded intra-trade volume is
  small, arising from poor payments system, of
  product lines.
• Poor governance, policy errors and inconducive
  macroeconomic environment undermine sustained
  output growth.

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• What we Know/not know about Africas RECs
• RECs in Africa evolved from historical, cultural
  and trade links
• Political especially colonial ties,
  geographical proximity and contiguity also play
  key role in shapping RECs in Africa.
• The major external drivers of RECs in Africa
  include
• The New Partnership for Africas Development
  (NEPAD), with emphasis on trans-national
  infrastructure development
• The EUs Economic Partnership Agreement with
  Africa with emphasis on the principle of non
  reciprocity in preferential trade regime under
  the Cotonou Agreement

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What we know/not know about Africas RECs

• Globalisation and the fear of creeping
  marginalization as driving forces
• Multiple and overlapping memberships is very
  common. Membership is generally driven by
  strategic and political reasons
• The 14 major RECs in Africa
• See REC Matrix (page 27)

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• In West Africa ECOWAS co exists with the West
  African Economic and Monetary Union (UEMOA), the
  Mano River Union (MRU) and the Community of
  Sahel-Saharan States (CEN-SAD) and the West
  African Monetary Zone (WAMZ)
• In Central Africa, the Economic Community of
  Central African States (ECCAS) co exists with the
  Central African Economic and Monetary Community
  (CEMAC) and the Economic Community of Great Lakes
  Countries (CEPGL)

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• In South Africa, the Southern African Development
  Community (SADC), co exists with the Southern
  African Customs Union (SACU).
• The Indian Ocean Commission (IOC), is joined by
  the Common Market for Eastern and Central Africa
  (COMESA)

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What we know/not know about RECs in Africa

• COMESA also coexists with the East African
  Community (EAC) and the Inter-governmental
  Authority on Development (IGAD)
• In North Africa, the Arab Maghreb Union (UMA) is
  dominant.
• Each REC has a mandate to foster greater economic
  and monetary integration of its various member
  countries.

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What are the drawbacks of overlapping membership
in RECs?

• Fragmentation of economic space and inconsistent
  strategies
• High financial burden on member countries
• Competition for donor funds
• Duplicated efforts contradictory objectives and
  divided loyalty
• Membership and reform fatigue

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Some theoretical and conceptual Issues of Optimum
Currency Area (OCA)

• OCA definitions geo-political expression,
  typically representing a region in which factors
  of production are internally mobile (Mundel,
  1961)
• An optimum geographical domain, with a general
  means of payment either a single common
  currency or several currencies whose exchange
  rates are immutably pegged to one another
  unlimited convertibility for both current and
  capital transactions but whose exchange rates
  fluctuate in unison against the rest of the World
  (Kaboub, 2001).

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Characteristics of OCA

• Price and wage flexibility
• Financial market integration
• Product market diversification as a safeguard to
  economic shocks
• Assymetric shocks as a risk sharing mechanism
• Labour mobility
• High degree of intra-trade transactions
  (openness)
• Willingness to surrender national sovereignty
  over the conduct of monetary and exchange rate
  policies

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OCA Theoretical and Conceptual Issues

• Deep financial market
• The concept of endogeneity and the achievement of
  OCA status ex-post (Frankel and Rose, 1998)
• The Empirical literature on African OCA
• The OCA arrangement was found to be beneficial to
  the CFA zone (Melo, 1987) in terms of protecting
  the zone form adverse exogenous shocks and higher
  output growth

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• CFA countries also enjoyed stable macroeconomic
  environment than others (Guillaumont and Plane,
  1988).
• Several empirical studies examined the impact of
  monetary union on fiscal policies applying the
  model of credible commitment.
• Findings tend to reveal greater budget discipline.

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• The theory of Agencies of restraint to regulate
  the governments in Africa proven (Collier, 1991).
• Are Africas RECs OCA compliant ex-ante? The
  answer is NO!!
• The volume of recorded intra-trade is low
• See table 1
• - the average in COMESA (1970-04) was 5.8 per
  cent
• - the average for ECOWAS 1970-2004) was 7.4
  per cent

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• - SADC 6.0 per cent
• - CEMAC 2.0 per cent
• - UEMOA 11.3 per cent
• Anecdotal evidence (unrecorded) trade
  transactions at major border posts) suggest
  higher intra-trade volumes as high as 30 per
  cent accordingly to some analysts.
• Factor mobility is low, financial markets shallow
  (with the exception of the SADC REC)

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• Can African REC become OCA compliant ex post?
  The answer is YES at least in the medium to
  long-term
• Quantitative and Qualitative convergence criteria
  requirements to be implemented on sustained
  basis.

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• The Primary Convergence criteria
• - Budget deficit/GDP ratio of 5
• (the ratio for the ECOWAS is 5)
• - A single digit inflation rate
• - Central bank financing of government
• restricted to 10 percent of previous
  years
• government retained revenue
• - External reserves import cover of 3
  months.

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• The Qualitative (Structural) convergence
  Criteria
• Payments system harmonization (adoption of Real
  Time Gross Settlement System (RTGS) platform
• Statistical systems harmonisation with the
  adoption of the GDDS as a minimum standard
• Adoption of common external tariff (CET)
• Adoption of trade liberalization scheme
• Adoption of uniform commercial code

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• Adoption of harmonized financial system
  regulation
• Cross listing of stocks
• Adoption of current/capital account
  liberalisation
• Convertibility of national currencies within the
  RECs
• Free movements of people/goods

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Are Africas RECs just a mere political
expression? The answer is No

• African leaders underscored the imperative of
  economic integration in numerous
  protocols/Treaties
• The most important political expression has been
  the Abuja Treaty (1991) establishing the African
  Economic Community (AEC)
• The Constitutive Act of the African Union of the
  Abuja Treaty underscored the importance of
  establishing the AEC through the Coordination,
  harmonization and progressive integration of the
  REC.

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• Potential and actual benefits of RECs
• - Economies of scale most African
  countries are too small to achieve the large
  economies of scale needed to improve efficiency
  and to compete
• - Potential increase in intra-trade and inter
  
• trade.
• - Macroeconomic policy credibility
• - Stronger negotiating position (EPA)
• - Improved productivity
• - Better infrastructure (NEPAD)
• - Higher welfare gains (trade creation) etc.

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• The Performance Score card-empirical evidence
  (See tables)
• - RECs have positive influence on fiscal policy
  implementation in Africa
• - Inflation rates are generally lower where
  RECs are firmly established (WAEMU)
• - RECs have positive influence on the
  sustenance of out put growth

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• Conclusion
• Given strong political will, economic integration
  and convergence can be achieved and sustained in
  Africa.
• - But political will is not a substitute for
  sound macroeconomic policy regime.
• Thank you for your kind attention

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