The Monetary Geography of Africa

Foreword

What has taken the place of the cold war as the defining division in world politics? One answer is the chasm between, on the one hand, those who feel that they are benefiting from globalization and, on the other, those who feel left behind. Today the split is, very roughly, 50-50; but the gap between the two is widening, and because of unsustainable population growth in poorer regions of the world the ratio of globalization’s selfperceived winners and losers is shifting in the wrong direction. Africa is a continent especially afflicted by this trend. Hence the importance of this book by Paul Masson, who was in 2002–03 a visiting fellow in the Economic and Governance Studies programs at Brookings, and Catherine Pattillo, who is a senior economist at the International Monetary Fund and has written widely on African issues. Africa has had a bad half century. In the 1950s, per capita income levels were about the same in many African countries as in Asian countries at that time. Ghana’s per capita GDP, for instance, equaled that of South Korea. But over the intervening decades, many Asian countries have experienced explosive economic growth and dramatic improvements in education, health, and wellbeing . Africa, by contrast, has been left behind. Indeed, in a number of African countries per capita incomes have actually fallen over the past several decades. The causes of the differential performance have been much discussed. Among the most important are surely inadequate government policies in a ix Foreword 2284-00_FM.qxd 10/27/04 11:12 Page ix x foreword number of areas. In too many African countries, kleptocratic leaders of authoritarian regimes held on to power by rewarding their supporters and attracting grants from both sides in the cold war. Instead of investment in productive activities, aid has led to enrichment of politicians and their coteries . Countries have followed inward-looking policies that have protected domestic cartels rather than benefiting from trade liberalization. While monetary policy is by no means the only factor in economic development , it has its role to play. Most African countries abandoned colonial currencies at independence and created new currencies and their own central banks. These new moneys soon lost their value—except, notably, in the former French colonies—even if nominally pegged to some international currency . They became inconvertible and access to foreign exchange was rationed, opening the door to corruption and inefficiencies in allocation. In a number of countries, inflation was used as a way to close the gap between excessive government spending and meager tax revenues. African populations and policymakers have become aware of the inadequacies of past policies and governance structures. As early as the 1980s and 1990s there were moves in some countries to liberalize domestic economies and open them to foreign competition: to stress export development rather than import replacement, to make currencies convertible in the context of exchange rate flexibility. The end of the cold war has removed some of the sources of aid available to African dictators, as well as the unquestioning support of the donors. More attention is now being given to whether aid will serve the purpose of development. On the African side, the newly created African Union is attempting to mobilize peer pressure to improve governance and government policies through the New Partnership for African Development , or NEPAD. One way countries can apply peer pressure is through regional organizations . Regional integration may also yield other economic benefits through improved transportation and communication links and expanded trade. In this regard, several groups of African countries have come up with plans for regional integration that would also include currency unions—that is, the replacement of existing national currencies with a new, supranational currency . The hope is that a regional currency will stimulate other aspects of regional integration, especially expanded trade, and produce lower inflation, since the new central bank will be (at least nominally) independent from national treasuries. Doubtless, too, the example of Europe is at the forefront of the minds of proponents of currency unions, who hope to see the creation of an African currency to rival the euro. 2284-00_FM.qxd 10/27/04 11:12 Page x Since resources—financial, technical, and personnel—are in short supply in Africa, it is important to look hard at whether the recent enthusiasm for monetary integration is justified. If the expected benefits are not likely to be forthcoming, then governments...