Front Matter Page
Research and Southeast Asia and Pacific Departments
Contents
Summary
I. Introduction
II. Existing Exchange Rate Arrangements
III. Stylized Facts
IV. Estimation and Empirical Results
V. Optimum Currency Areas: The Role of Trade
VI. Conclusions
Text Tables
1. Growth and Inflation in Africa, 1964-93
2. Growth and Inflation in CFA-Member Countries, 1964-93
3. Growth and Inflation in Africa By Type of Exporter, 1964-93
4. Correlations of Growth Across CFA Countries, 1963-89
5. Correlations of Growth Across ECOWAS Countries, 1963-89
6. Correlations of Growth Across SADCC Countries, 1963-88
7. Correlations of Growth Across CBI Countries, 1963-87
8. Inflation Correlations Across the ECOWAS Countries
9. Correlations of Underlying Disturbances Across the CFA Countries, 1963-89
10. Correlations in Underlying Disturbances Across the ECOWAS Countries, 1963-89
11. Correlations in Underlying Disturbances Across the SADCC Countries, 1963-89
12. Correlations of Disturbances Across CBI Countries, 1963-87
13. Intra-African Trade as a Percentage of Total Trade
14. Intra-CFA Zone Trade Shares
15. Intra-African Trade Shares: Selected Country Groupings
References
Summary
Africa has more countries than any other continent and hence the largest number of potential monetary and exchange rate arrangements. Current arrangements are notable for their diversity, ranging from the common currency union used by the members of the CFA franc zone to the freely floating exchange rates of such regional economic powers as South Africa. Moreover, these arrangements have evolved considerably over the past three decades as exchange rate arrangements have moved toward greater flexibility in Africa, as in developing countries more generally.
This paper looks at whether the existing highly fractured monetary arrangements in Africa correspond to what might be expected from the theory of optimum currency areas, which considers the economic factors that determine the gains and costs of adopting a single currency and seeks to measure these gains and losses. Gains from monetary union come from lower transaction costs and the elimination of exchange rate variability, while losses come from the inability to pursue independent monetary policies and to use the exchange rate as an instrument of macroeconomic adjustment. Both gains and losses are affected by structural features of the economies concerned, such as the size of asymmetric real disturbances, openness to trade, and labor mobility. Although the theory of optimum currency areas explores the advisability of forming a currency union, it is also relevant to the broader choice of regional exchange rate arrangements.
The paper presents empirical evidence on the size and correlation of underlying economic disturbances and intraregional trade across sub-Saharan Africa. Economic disturbances are calculated from a time-series model of real GDP per capita, while intraregional trade is calculated from the IMF’s Direction of Trade database. The results indicate that in both dimensions most African countries have significantly smaller links than those across the three major industrial countries. As these countries show no signs of moving toward closer monetary cooperation, it appears unlikely that closer cooperation will occur within Africa in the near future as it has, for example, over the last two decades in Europe.
At the same time, the limitations of this exercise should be recognized. Only two criteria for determining the optimum range of a currency area are examined. Other potentially important issues, such as factor mobility, are not discussed. In addition, the results may reflect poor data on real output and underreporting of regional trade or country-specific factors that do not reflect the underlying economic structures of the countries involved. However, the uniformity of the results across groups of countries in the east, west, and south of the continent suggests that there is little likelihood of a significant move toward monetary cooperation over the next few years.