16 July 2019 0 Comments

La CEDEAO : zone monétaire optimale ? P-1

“A common currency  will facilitate trade”

Les chefs d’états de la CEDEAO réunis en session à Abuja ont officialisé la création d’une monnaie unique qui devrait être mise en circulation à compter de 2020. Au-delà du caractère hautement symbolique que revêt cette initiative, cette nouvelle réalité devrait en principe mettre un terme au débat qui agite l’opinion publique africaine sur l’opportunité du F CFA présenté par beaucoup comme un des vestiges de la colonisation française en Afrique (même si la gestion de la BCEAO a rarement été sujette de débats). Je voudrais exprimer dans ce post, les principes fondamentaux de la réussite d’une zone monétaire optimale (à l’image des U.S. avec le dollar) et me projeter sur les conséquences immédiates de la mise en application d’une telle décision. Je vais d’abord présenter les avantages d’une intégration monétaire sur le long-terme mais aussi analyser les mesures qui doivent être prises par les Etats membres afin que la nouvelle union monétaire soit pérenne. Je tiens à préciser avant tout que je salue l’initiative et que dans un monde multipolaire, l’Afrique n’a d’options économiques que de se fondre dans un bloc économique qui lui permettrait d’exister dans les négociations multilatérales. Les réserves portées ci-dessous sont destinées en priorité à dépassionner le débat de la monnaie unique et contribuer aux discussions au travers de mon expertise en Economie. Je voudrais aussi vous prévenir que l’argumentaire qui suit est exprimé en ‘Anglais’ juste par simplicité et aussi parce que certains termes techniques dont je ferai référence n’ont pas d’équivalent direct en Français.

Why do countries trade? Specialization and productivity

The main objective of a modern society is to promote economic growth which ultimately allows its citizens to enjoy a higher standard of living. Trade and specialization are acknowledged by the vast majority of economists as major drivers of economic prosperity. Through specialization, a country could increase productivity and output while trade expands the size of the market which domestic producers could cater to. Trade is even more beneficial when it involves geographic neighbors or countries with similar economic structures. But not all trade is efficient or created equal. Most trades are driven by differentials in domestic prices and transportation costs. Benin imports apparel and shoes from China because they are cheaper than the ones produced in say France. But if the shoes produced in France are available at the same price as those produced in China, local mercantilists would rather import them from France because of the absence of a currency risk (CFA is locked in fixed parity exchange regime with the Euro). The same argument can be made for fruits and vegetables produced in other African countries which cannot possibly make their way to the shelves in the markets of their neighbors because of different legal tenders.

A state’s currency affects who it trades with…

Therefore, trade is disproportionally biased towards countries with similar (or associated in a somewhat predictable fashion) currencies which could be inefficient specially when this distortion involves geographic neighbors. Countries in the West African and Economic and Monetary (WAEMU) have been sharing a common currency since the early days of their independence. This could have distorted the behavior of economic agents with respect to geographic neighbors (using different currencies) and promote inefficiencies. Consider an economic agent who lives in Ivory Coast and wishes to purchase a good that is available in Burkina Faso and Ghana for the same price. Abstracting from transportation costs, importing the good from Ghana would involve an exchange rate risk given that Ghana uses a different currency with a parity that is not directly linked to the F CFA. This distorts economic behavior and diverts choices from the first best optimal decision.

The same consideration applies to supply decisions which would be inevitably skewed towards Burkina Faso because these transactions would not involve any exchange rate risks. This also explains why a significant share of many African countries’ trade happens with Europe even when similar products could be found in other neighboring countries. The fixed (or managed with a target band) parity exchange regime between most African currencies and the euro explains this reality. For business owners, purchases made in euros involve a limited degree of uncertainty and exchange rate risks given that most African legal tenders are linked to the euro. This is inefficient if similar goods are available in neighboring states that use different currencies. It also suggests that some countries have an interest to form monetary unions with their geographic neighbors in order to promote more trade and a higher productivity at home. The inception of the unique currency ECO is economically called for as it eliminates exchange rate risks between west African countries and should promote trade among these countries, eliminate distortions caused by the use of different currencies in the union, and create one of the largest currency areas in the world. However, this new development would also mutualize economic risks that spread through the common monetary policy and would limit the possibility of external devaluation for country-members in the face of negative demand shocks.

I will discuss in part two of this blog post, the implications of the new currency on the economies of the parties involved in this arrangement and emphasize how the size of Nigeria in the Union would affect interest rates on public treasuries, the balance of payments of each member-state and the exposition of all member-states to global external shocks. A third post coming up later will address institutions and arrangements that must be created to : (i) avoid the mistakes that plagued the success of similar projects (Eurozone for instance), (ii) ease up the transition on member-states and (iii) sustain a prosperous monetary union.      

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