The Monetary Geography of Africa

Chapter 1. Monetary Union in Africa: Past, Present, and Future

Africa finds itself at an important juncture in its history as the twenty-first century gets under way. There is widespread consensus that Africans must take responsibility for their destiny. Nearly fifty years have passed since the beginning of decolonization and early hopes of rapid development have faded. In recent decades, the continent has suffered from abysmal economic performance. Africa has failed to benefit from the increase in prosperity experienced by the rest of the world, prosperity resulting from expansion of trade and other aspects of globalization. Instead, African countries have become increasingly marginalized, with their share of world exports falling from already low levels of 4 percent in 1980 to 1.6 percent in 2000. Per capita incomes almost everywhere on the continent have declined relative to world averages and have fallen in absolute terms in a number of countries. Figure 1-1 provides a conventional country map of the continent, and figure 1-2 classifies the countries into ranges of per capita GDP. Incomes are very low when compared to the typical developing country, except for southern and northern Africa, even when calculated using PPP exchange rates, as is the case in figure 1-2.1 1 Monetary Union in Africa: Past, Present, and Future 1 1. PPP exchange rates correct for differences in the cost of living when calculating real incomes across countries. Using market exchange rates would give much lower U.S. dollar income levels, because prices (in particular of nontraded goods and services) are very low in these countries. 2284-01_CH01.qxd 10/27/04 11:13 Page 1 2 monetary union in africa The causes of this poor performance are many and diverse, and include inappropriate development strategies that are dependent on inward-looking policies meant to capture rents rather than foster growth; obstacles to trade, especially in agricultural products, imposed by OECD countries; undemocratic politics that have produced kleptocratic leaders; and the persistence of tribal and ethnic conflicts leading to civil strife and wars with neighboring countries. Figure 1-2. GDP per Capita at PPP Exchange Rates, 2002 1 – 600 600 – 1,200 1,200 – 2,400 2,400 – 5,000 More than 5,000 No data In international dollarsa Source: World Bank, World Development Indicators database (2004). a. An international dollar would buy in the cited country a comparable amount of goods and services a U.S. dollar would buy in the United States. 2284-01_CH01.qxd 10/27/04 11:13 Page 2 monetary union in africa 3 Africa since independence has seen a series of regional integration initiatives aimed at defusing conflicts and promoting economies of scale in production and distribution. Starting in the mid-1980s, some countries liberalized payments and trade regimes in an attempt to stimulate growth. Despite a few success stories, however, there has not been a generalized takeoff toward rapid growth or expansion of trade. With the passage of time, there has been increasing recognition in Africa by the general population and their leaders of the need to carry out further structural changes and take responsibility for the success or failure of economic policies. This has led to a stronger consensus in favor of formulating outward-looking and efficiency-enhancing policies, making leaders accountable for their shortcomings, and favoring regional cooperation . The formation of the AU and its implementation plan, NEPAD,2 are manifestations of this determination. The summit of African leaders in Lusaka, Zambia, in July 2001 heralded the replacement of the OAU and the creation of NEPAD, and the inaugural summit for the AU took place in Durban, South Africa, in July 2002. Another manifestation has been the renewed impetus given to subregional integration initiatives, in particular, projects to create monetary unions. Monetary unions, groupings of countries sharing a common currency and central bank, are a particular type of monetary integration linking countries. The popularity of these unions has been dramatically increased by the creation of the euro zone in January 1999 and the January 2002 introduction of euro notes and coins to replace the German deutsche mark, French franc, Italian lira, and other currencies of the (at present) twelve member countries. Box 1-1 explains some of the forms that monetary integration can take. There are a number of regional monetary integration initiatives presently being considered in Africa. In West Africa, ECOWAS since its formation has had the objective of constructing a free trade area and single currency union. The absence...