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This paper has been prepared for Monetary Integration, edited by Anthony Courakis and George Tavlas, to be published by Cambridge University Press. I have benefitted from suggestions by Richard Agenor, Bijan Aghevli, Max Corden, Shanta Devarajan, Pierre Dhonte, Robert Flood, Joshua Greene, Peter Isard, Mohsin Khan, Dani Rodrik, George Tavlas, and Peter Wickham. Claire Adams and Farhad Nourbakhsh provided valuable research assistance. I would like to thank these individuals without, of course, implicating them in the result. The views expressed in this paper are those of the author and do not necessarily represent those of the Fund.
For histories of the origins of the franc zone, see Yansané (1984) and references therein, Allechi and Mamadou (1989), Bloch-Lainé et al. (1956), Neurrisse (1987), Saint Marc (1964), and Vizy (1989). Julienne (1988) covers the 1955-75 period in detail. The institutional structure that was in place prior to the implementation of major reforms in 1974 is described in IMF (1963, 1969). On the emergence of the modern economic structure of the zone, see Bhatia (1985) and McLenaghan et al. (1982).
From 1962 through 1967, the parity of the Mali franc was equal to that of the CFA franc, but the currency was not convertible. From 1967 through 1984, the parity was maintained independently against the French franc (at 100 Mali francs = 1 French franc), and convertibility was guaranteed through a separate operations account with the French Treasury. Thus the main practical implication of Mali’s official absence from the zone in the latter period was to enable it to run its own central bank and to limit circulation of its currency (as legal tender) to within its own borders.
For example, when France operated a dual exchange market in the early 1970s, the CFA franc countries maintained similar restrictions governing transactions with countries outside the broad franc zone. The CFA franc is not traded in exchange markets; rather, it is convertible through official agencies at the established parity without any margins.
The IMF classifies countries as official or market borrowers if two thirds or more of their total liabilities outstanding are owed to one category of lender or the other; the four countries cited in the text are classified as “diversified,” or intermediate to those two criteria. For a complete list of country classifications, see IMF (1991, pp. 123-128).
This rule is implemented as a requirement that at least 65 percent of reserves must be held in the operations account.
The emphasis on rediscounting derives from the limited development of domestic financial markets and the absence of bank reserve requirements; for an analysis, see Bourdin (1980). To implement the credit restriction rules, each central bank’s operations account balance is notionally allocated among the member countries, with a residual allocated to the bank itself.
In 1990, the authorities in Belgium and Luxembourg took steps to strengthen the linkages with the deutsche mark by announcing a policy of adjusting interest rates to maintain the parity with the mark and to stay well within the allowed EMS margins.
Eichengreen (1990), for example, applies these criteria to European countries and concludes that “Europe remains further than the currency unions of North America from the ideal of an optimum currency area.”
Basic data are from the International Coffee Organization, Quarterly Statistical Bulletin, various dates. The published data for the Congo and Gabon are measured per kilogram of dry cherry coffee; those prices have been multiplied by two to make them equivalent to the prices for green coffee reported for the other countries. The market price is the ICO’s indicator price for robustas (the variety produced throughout the region), converted from US dollars to CFA francs at end-year exchange rates.
Labor mobility may also be supplemented by capital mobility, but what matters in this context is less financial than physical capital. The CFA franc is freely convertible into French francs, and there is thus a high degree of capital mobility. Whether this feature translates into movements of capital in support of economic activity where labor is relatively plentiful is more doubtful.
The territory of the CFA franc zone is approximately 14 times as large as France, while the population is only about 1/3 larger than that of France.
Data on import structure are not discussed here, since the external shocks affecting these countries have been predominantly on the export side.
Gold exports were not in the data base for the 1960s, but the omission is not significant. Burkina Faso, the only country in the zone with substantial gold exports, began mining gold in 1984.
Devarajan and Rodrik (1991) note that there also has been a wide range of experience regarding the variance of the terms of trade, with the Congo and Gabon having the most variable data and Niger, the Central African Republic, and Senegal the most stable.
For a detailed analysis of the institutional difficulties in analyzing the distribution of seigniorage in the zone, see Honohan (1990a). The following discussion equates seigniorage with expansion of each country’s monetary base, although—as Honohan argues—the actual distribution of revenues by the regional central banks might have differed markedly from that distribution in ways that are difficult to assess.
Comparison with the EMS is instructive. From the 1979 inception of the EMS through 1986, there was a clear pattern of high- and low-inflation countries, validated in part through occasional realignments and in part through adoption of a wide band for the highest-inflation country, Italy. Then from 1987 through 1989, the dispersion of inflation rates was reduced, mainly through convergence of Italy and Ireland down toward the group mean, and there were no further realignments. For details, see Ungerer et al. (1990). The lesson from that experience is that the persistence of substantial inflation differentials, even in a quasi-union such as the EMS, is inherently unstable because the high-inflation countries will face increasing losses of competitiveness and speculative realignment pressures; see Dornbusch (1989).
Cody (1991) calculates seigniorage rates for EMS member countries for 1979:2 - 1988:4. He finds that the United Kingdom and all of the countries in the narrow band of the exchange rate mechanism had rates between zero and one percent, while the others (Greece, Italy, Portugal, and Spain) were all 2.5 percent or higher. Grilli (1989) derives similar estimates over the period 1950-85. For 1980-89, Ghana, Sierra Leone, and Zaire (three of the highest-inflation neighbors of the CFA franc zone) had rates of 2.6, 6.2, and 9.3 percent, respectively. For an analysis of the limitations of seigniorage estimates that ignore institutional considerations, see Klein and Neumann (1990) and Honohan (1990a).
For a review of the way the banking crisis developed, see “Liquidity Crisis Squeezes Banks,” Africa Economic Digest (11 September, 1987), p.24f.
The regions are defined differently for trade and financial purposes. For example, Côte d’lvoire exempts member countries of the Economic Community of West African States (ECOWAS) from certain tariffs and restrictions. That area includes the seven members of WAMU, plus nine other West African countries that are outside the franc zone. Proposals surface occasionally for establishing a common currency for the ECOWAS region; see, for example, Balogun (1990).
For an overview of the issues relating to the choice of exchange rate regime for developing countries, see Aghevli, Khan, and Montiel (1991) and Corden (1990). The choices available in practice are, of course, broader and more complex than just fixed vs. flexible rates. If the CFA franc zone were to be altered, options would range from changing the parity against the French franc to establishing independently floating currencies. The intention of the present paper is not to compare those options, but rather to evaluate the strengths and weaknesses of the existing regime relative to the performance of countries with relatively greater flexibility.
The neighboring countries shown in the chart include all those that are contiguous to the CFA franc zone except Guinea, Liberia, and the Sudan, for which data were unavailable. Data also were missing for Equatorial Guinea. Honohan (1990b) provides statistical evidence, based on principal components analysis, that inflation rates in the zone have converged toward the French rate over the longer run. For a comparison with Latin American countries, see Connolly (1985).
For the full period covered by the World Bank data (1965 through 1987), the countries in the zone experienced a much larger decline in the terms of trade than did the neighboring countries (30 percent, compared with 12 percent), a larger standard deviation around the trend (25 percentage points, compared with 14 points), and a larger impact on GDP (-0.4 percent per annum, compared with -0.3).
Five of the six high-inflation neighboring countries—the Gambia, Nigeria, Ghana, Sierra Leone, and Zaire—have independently floating currencies. The Libyan dinar is pegged to the SDR; the Algerian dinar and the Moroccan dirham are pegged to other currency baskets; and the Mauritanian ouguiya and the Guinea-Bissau peso are classified as managed floating currencies. The ouguiya is adjusted on the basis of movements in a basket of currencies, while the peso is adjusted relative to the SDR on the basis of estimated domestic inflation. For details, see IMF (1990). The Latin American countries in Connolly’s (1985) comparison had adopted crawling-peg regimes.
The basic result in Devarajan and Rodrik is that if (a) a 1 percent real appreciation reduces real GDP growth by 0.15 percent relative to the potential growth rate; (b) a 1 percent adverse terms-of-trade shock reduces growth by 0.4 percent; (c) the average variance of the terms of trade is 5.4 percent per annum; (d) the inflation differential between flexible and fixed regimes is 13.8 percent; (e) the authorities aim to maintain real growth at 2 percent above the natural rate; and (f) average inflation under the fixed rate regime is 8 percent above target; then welfare would be improved by shifting to a flexible regime as long as the authorities are prepared to tolerate at least 1.5 percent higher inflation in order to stimulate growth by 1 percent. If average inflation under the fixed rate regime is 2 percent above target instead of 8 percent, the tolerance requirement rises to 6 percent inflation per 1 percent growth. In any case, if the stimulus to growth is temporary, the limits on this ratio appear much more reasonable.
Growth data were not available for two neighboring countries: Libya and the Gambia.
These comparisons are essentially unaffected by weighting considerations. Taking unweighted means, growth averaged 2.6 percent in the CFA franc zone and 1.8 percent in the neighboring countries. Weighting by 1989 GDP shares yields rates of 2.5 and 1.9 percent, respectively. Devarajan and de Melo (1987b, 1990) and Guillaumont et al. (1988) also found that real growth in the CFA zone has been as high as or higher than other sub-Saharan African countries.
These calculations are based on data from UNDP and World Bank (1989). The figures given in the text are unweighted averages across countries in each group for which data are available.
Over the period 1971-87, the ratio of exports to GDP averaged 24 percent inside the zone, compared with 29 percent outside. Because of the relatively higher growth in trade for the CFA franc countries, the two ratios had equalized at 25 percent by the mid-1980s. For the full period, the standard deviation of changes in the ratio of total trade to GDP averaged roughly 12 percentage points for both groups of countries.
Some studies have drawn less sanguine conclusions about real effects. Devarajan and de Melo (1990) use different groups of comparators (all other sub-Saharan African countries; all other low-income countries; and all other exporters of primary commodities) for a similar set of calculations. They conclude that export growth, investment, and external adjustment were generally inferior in the CFA franc zone in the 1980s. Corden (1990) no