Theoretical Perspectives of
3.6 Challenges for Africa
What does all this imply for Africa? Clearly, one of the key lessons from the Euro-pean experience has been the need to build up institutions to promote regional integration and monetary union (UNECA, 2006). According to Masson and Patillo (2004:11):
“In Africa,…the institutional challenges are much greater. Existing national central banks generally are not independent and countries with their own currencies have often suffered periods of high inflation because the central banks were forced to finance public deficits or other quasi-fis-cal activities. A critiquasi-fis-cal question for Africa is whether the creation of a regional central bank can be a vehicle for solving credibility problems that
It is important, however, for African countries to ask themselves whether such an objective is desirable or even achievable bedevil existing central banks. If so, establishing a central bank that is more
independent and exerts greater discipline over fiscal policies than national central banks do may enable it to become an ‘agency of restraint’…How-ever, history tells us that such an agency of restraint requires other institu-tional buttresses and does not emerge directly from monetary union alone”
(Masson and Patillo, 2004: 11).12
What this literature reveals is a fundamental mistrust in the workings of State insti-tutions and an attempt to depoliticize policymaking. It is important, however, for African countries to ask themselves whether such an objective is desirable or even achievable. There is a tendency to push back the arguments and blame “institutions”
for not having properly implemented policy. But, as UNCTAD (2001:114) notes:
“the experience of major industrial countries with floating rates suggests that floating rates suggests that volatility, gryrations and misalignments in exchange rates cannot simply be attributed to lack of credible institutions. Rather, they are systematic features of currency markets dominated by short-term arbitrage flows.”
In the case of African countries, they lack a major reserve-currency country within the region. As UNCTAD (2005:110) has noted: “Can [developing] countries be expected to solve their exchange rate problems unilaterally when the magnitude, direc-tion and terms and condidirec-tions of capital flows are greatly influenced by policies in major reserve-currency countries, and when international currency and financial markets are dominated by speculative and herd behaviour?” However, a dissenting opinion on this was provided by Robert Mundell, who in a speech delivered in 2002 at UNECA, gave a broad outline on how Africa could achieve monetary union (box 3).
12 Not all analysts share this assessment of the importance of “independent” central banks. See Grabel (2000).
In theory, an African
Mundell’s Blueprint for Monetary Integration in Africa
Would Africa be better off with currency integration or even a common currency? A good case could be made for that. I argued three decades ago that Africa would be better off with a common currency and an African Central Bank. I have not changed my mind today.
1. The first point to recognize is that a common currency means that every country will have more or less the same inflation rate, measuring inflation by a common price index. This does not by itself ensure monetary stability. In theory, an African Central Bank (ACB) could be as much a source of inflation and instability as the national central banks are today.
Who controls the ACB and how it is managed are matters of the utmost importance. One of the most important issues that have to be decided is the monetary goal of the ACB. It can be an exchange rate goal or an inflation target. Unless there is agreement on the basic goal of the monetary authority, monetary union cannot proceed. One option would be to adopt a common currency basket. The fact that 14 countries are now tied to the euro could be an inducement for use of the euro as an anchor throughout Africa. The risk is that the euro might fluctuate considerably against the dollar. Africa could probably accept a depreciation of the euro against the dollar but not a strong appreciation. Because of the rising indebtedness and large current account deficit of the United States, there is a good chance of strong diversification out of the dollar and a strong appreciation of the euro. If, for example, it were thought that the dollar had reached the peak of its cycle against the euro, a case could be made for Africa to choose the dollar, the most important currency of the twentieth century. How would you choose between those two? Well, it seems to me that the issue is partly political. How does Africa see itself? Can it gain more by an alliance with Europe or the United States? What is the future of trade and lending relations with Europe compared to that with the United States? It would be better if Africa did not have to make this choice. My belief is that the best common anchor in the long run would be the Special Drawing Right (SDR), which has a chance of becoming the global unit of account.
2. A second step would be defining the price (or exchange rate) index that is to be stabilized.
National inflation rates differ in a common currency area because goods and services have different weights in the national index. Europe faced this problem by devising what it calls the Harmonized Index of Consumer Prices (HICP) as the measure of EMU’s inflation rate.
3. A third step is to define what the African currency is going to be. By analogy with the euro, it could be called an “afro.” Or it could be named after an animal, such as a lion or eagle.
But what unit would measure the value of the “afro”? It could be set equal to the SDR or
“intor” or to some other unit, even gold. Whatever it is called, it would have to be easily understood and definite.
4. A fourth step is to lock exchange rates. National central banks could initially fix their own currencies to the “afro”, buying and selling it as needed to keep the exchange rate locked.
No other actions would be needed or desired. The currency board system of adjustment would come into play.
5. A fifth step is for the ACB to make monetary policy for the region as a whole. Essentially, this means buying assets to provide for the increase in the money supply required to fulfil the stabilization targets set for the central banks. In the early stages of the monetary union, there would be a strong argument for using an outside anchor (e.g., the euro, the dollar or the SDR) while experience is being built up in the new bank and to maintain con-fidence in the early transition.
6. A sixth step is to devise a mechanism for sharing the profits or seigniorage of the ACB.
Probably, this would be related to the equity shares in the bank, as in the European Cen-tral Bank. The equity shares are closely related to size as measured by GDP.
7. A seventh step, which would amount to the final stage of the monetary union process, would be replacement of the national currencies by the new currency.
Recently, a great Anglophone countries fit into the same house? Does Africa mean sub-Saharan Africa? Another consideration is the role of power centres. Countries that aspire to be regional or world leaders try to centralize international political activity at their own political capitals. Each independent currency area tends to be linked to a power centre. Are power centres an issue in Africa? Where are they now and what can we expect in the future? Is there an expectation or hope that the new African Union will be the vehicle for a future African government that will settle on some location as a power centre, and will that also be the financial centre?
…..With improved economic organization in Africa, the road might be clear for a much-needed “Marshall Plan.” Monetary stability is not everything, but without it, the rest is nothing.
Monetary integration can produce better organization in the economic sphere and be a catalyst for integration in the political sphere. The new African Union opens the door to some exciting new possibilities and may find in monetary integration the wedge it needs to introduce some degree of political centralization in Africa.
Source: UNECA, 2002
Contrary to the opinion expressed by Mundell, Masson and Patillo (2004:7) argue that African countries should achieve monetary integration by using the basic build-ing blocks which already exist – in particular, the CFA (see annex I):
“An expansion (and transformation) of the CFA franc zone would allow countries joining it to achieve stability with the euro, while at the same time benefiting from the considerable credibility associated with the CFA franc. It would be natural to envision the EU assuming France’s role of guaranteeing the currency peg. However, France’s EU partners have shown no enthusiasm for doing so, especially since an enlarged CFA might have more serious budgetary and monetary consequences for Europe than is the case at present. The question for African countries would then arise of whether to continue to anchor the CFA franc to the euro, and if so, how.
The alternatives would be a joint float, a currency board with a peg to the euro, or “euroisation,” that is, the outright adoption by African countries of the euro as their currency If the former, the currency would then rely solely on the discipline and independence of the central bank, operating a cred-ible domestic monetary anchor. If the latter, countries would abandon any possibility of monetary independence vis-à-vis Europe, and doing so would likely revive perceptions of colonial dependence.”
On the dangers of “intermediate” regimes, Masson and Patillo (2004:7) suggest that the dilemmas confronting African policymakers have perhaps been exagger-ated. “Recently, a great deal of attention has been paid to the hypothesis that coun-tries need to choose between very hard pegs (at least a monetary union) or flexible exchange rates: the intermediate regimes are not sustainable. The main argument relates to the trend toward capital account liberalization, which makes the
mainte-Monetary arrangements between African countries provide a unique opportunity to some of the macroeconomic autonomy “policy space” that was lost in the 1980s during the debt crisis
nance of anything but perfectly credible pegs difficult. We consider that this factor is unlikely to dictate the choice of regime for most African countries, which continue not to be well integrated with international capital markets. If true, this would leave open the full range of possible regimes, including adjustable pegs.”
3.7 Conclusion
As Bradford (2005:1) notes, recent economic policy experience in developing coun-tries has led many to conclude either that there is no “policy space” for economic policy alternatives and/or that mainstream economic policy practice is highly defla-tionary. The lack of choice would seem to weaken democratic processes in develop-ing countries, limitdevelop-ing the role of public discussion, debate and decision in eco-nomic policymaking. Similarly, the perceived priority of financial stability over real-economy objectives of economic growth and greater employment creates a sense that there are biases in the globalization process and in its governing international financial institutions.
Monetary arrangements between African countries provide a unique opportu-nity to some of the macroeconomic autonomy “policy space” that was lost in the 1980s during the debt crisis. Assuming that national authorities adopt a responsible approach to macroeconomic policymaking by setting their own priorities in terms of exchange rates, fiscal policy and interest rates would surely be a step forward. How-ever, it is clear from our brief historical overview of the European experience and the broader international system that such policies of coordination engender many risks.
Policymakers need to be fully aware of those risks and the possible costs of mistakes before embarking on a project of monetary coordination.
The arguments in favour of greater coordination made by Mundell suggest that the way forward requires a more ambitious agenda. African countries need to be involved in this process if the right pro-growth financial architecture is going to emerge. For Africa, neither the experience of the EMS nor the Maastricht criteria for achieving monetary union are appropriate. Considering the evidence of what Michael Stewart (1983) called a “deflationary bias” in the current international financial architecture, a more pro-growth macroeconomic framework needs to be designed and implemented.
Greater macroeconomic coordination between African countries is required to achieve this goal, provided a certain number of preconditions are met, including the consolidation of the fiscal tax base. As a way of gaining revenue, independent monetary policy is at present too valuable a mechanism for most governments to contemplate its liquidation. A second priority is to accelerate the degree of trade
There are good reasons to doubt official statistics pertaining to intra-African trade flows
and to believe that if informal trade flows are counted, the true degree of integration is much higher than is commonly thought integration by removing barriers to trade between partners. A greater
sychroniza-tion of economic cycles is required, and the most immediate way to achieve this is through trade integration.
There are good reasons to doubt official statistics pertaining to intra-African trade flows and to believe that if informal trade flows are counted, the true degree of inte-gration is much higher than is commonly thought. Nevertheless, far more progress needs to be made in dismantling both procedural and structural trade barriers. In the European case, the initial customs union was achieved ahead of schedule in the 1960s. Similar progress is required in Africa before moving to the next step of mac-roeconomic policy coordination.
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