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I would like to thank Mr. François, Mr. Dhonte, Mr. Tahari, Mr. Katz, Mr. Clément, Mr. Cossé, and all the economists of the Sahel Division I for helpful discussions and comments. All errors are mine.
The West African Monetary Union (WAMU) was founded in 1960; it links seven countries (all former French colonies) by a single currency, the CFA franc, which is pegged to the French franc. In addition, the West African Economic and Monetary Union (WAEMU) was established on January 10, 1994. Both organizations comprise the same countries, presently Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger, Senegal, and Togo.
The CEAO membership included Burkina Faso, Côte d’Ivoire, Mali, Mauritania, Niger, and Senegal.
This is not necessarily true on a priori grounds. In theory, the net effect of fiscal harmonization may be negative, since regional trade creation may lead to trade diversion for individual countries. Empirical studies using applied general equilibrium models suggest, however, that the net welfare gain will generally be positive. See, for example, Fehr, Rosenberg, Wiegard (1993).
Trade neutrality is defined as a situation in which the marginal conditions for a Pareto-efficient free trade allocation are not violated. For a short formal exposition see Fehr, Rosenberg, and Wiegard (1993), pp. 1494-1497.
A prime example in this context is beef. Until 1994 traditional producers in the region--like Mali, Burkina Faso, or Niger--had difficulty in exporting their livestock to Côte d’Ivoire, because of fierce competition from subsidized beef imports originating in the European Community. Since the devaluation, regional exports have picked up markedly.
This problem is even more pronounced with respect to cigarette imports from Guinea; since this country is not member of the WAEMU, it Is not subject of this study, which concentrates on fiscal externalities within the zone only.
Note, however, that Table 1 reports effective tariff rates, which also take into account the effect of exemptions and fraud. In contrast, the CEAO’s 50 percent rule applies to nominal tariff rates.
An extensive literature on the effects of deficits in monetary unions has evolved around the European Monetary Union. The following exposition draws on some of these writings, notably De Grauwe (1992) and Wyplosz (1991). The need for macroeconomic--i.e., budgetary policy--coordination in the WAEMU is very clearly laid out in Touré (1992).
This does not necessarily mean that interest rates have to be exactly equal in all countries of the monetary union. Bond traders will attach risk premiums to bonds originating in countries with a low credit rating.
In contrast to the IMF’s harmonization strategy, the BCEAO seems to envisage an ultimate switch to the OP as its ultimate goal. See, for example, BCEAO (1993, p. 8).
A fiscal externality remains, because even in a one-rate VAT system there are VAT exemptions, which in principle allow for beggar-thy-neighbor policies of the kind described above. The possibility of using this instrument is limited, however, if exempt categories are defined identically in all countries.
Another common argument in favor of ad valorem rates is that they do not have to be adjusted in the case of inflation.