Transcript Slide 1

MONETARY UNIONS AMONG DEVELOPING AND EMERGING MARKETS:
A REASSESSMENT OF THE PROSPECTS FOR ECOWAS
PROFESSOR BEN E. AIGBOKHAN
DEPARTMENT OF ECONOMICS
AMBROSE ALLI UNIVERSITY
EKPOMA
OUTLINE
Introduction
Alternative Forms of Monetary Union
Benefits and Costs of Monetary Union
Feasibility of Regional Monetary Union in ECOWAS
Conclusion
INTRODUCTION
-
The desirability of economic and monetary integration
-
Evolution of common market programme in West Africa
-
UMOA 1948-93, 1994 to date, 50 CFA and 100 CFA = 1Frf. Resp.
-
ECOWAS common market programme 1975
-
ECOWAS monetary cooperation programme 1987, with 1994 as target date
-
ECOWAS WAMZ project 2000 with 2003, and later 2005 as target date.
-
-
WAMZ expected to create necessary conditions for MU.
-
WACB scheduled for 2003
-
WAEMU and WAMZ expected to merge into ECOWASMU.
How feasible is ECOWASMU
ALTERNATIVE FORMS OF MONETARY UNION
-
informal exchange rate union
-
formal exchange rate union
-
full monetary union
Table 1: Characteristics of different types of monetary integration
Informal exchange-rate union
Formal exchange-rate union
Full monetary union
Yes
Yes
Yes (within margins)
No
Separate
Multiple, independent
No
Separately
Yes
Yes
Yes (narrower or zero margins)
No
Separate
Multiple, strongly coordinated
Yes
By single agency
Yes
Yes
Yes (zero margins)
Yes
Single
Single
Yes
By single agency
Characteristics
Between members
Current account convertible
Capital market integrated
Exchange rate fixed
Ex ante credibility of parities
Currencies
Central banks
Reserve pooling
Foreign-exchange market
Interventions
Source: ACMS (1991)
-
choice of strategy: EU model
two-stage scenario: committed to MU and committed to MI.
preparatory period: convergence and convertibility, and regional CB
transition period: new single currency
currency competition strategy: free circulation of national currencies until
one dominates
parallel currency strategy: a new currency created, competes and dominates
other national currencies
challenges for ECOWAS countries:
(i)
limited trade and financial flows, so intensive competition unlikely;
(ii)
national rivalries
(iii)
multiple currencies in each country and problem of controlling
money growth and inflation
lesson from EU model: two-stage strategy and essence of greater economic
convergence before MU.
Table 2: Costs and benefits of different forms of monetary integration
(1)
(2)
(3)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Costs
Loss of exchange rate as instrument vis-à-vis
other members
Initial disinflation where necessary
Loss of seigniorage and inflation-tax revenue,
due to lower inflation
Advantages
Improved price stability (actual and expected)
leading to better resource allocation
Reduced exchange rate variability (actual and
expected) leading to increased trade and
investment flows within the union
Reduced transactions costs and improved
price transparency leading to increased trade
and investment within the union
Interest savings on government debt from
lower nominal interest rates and reduced
exchange-rate risk premium
Resource savings from pooling of foreignexchange reserves
Resource saving from centralization of
monetary policy
Dynamic gains
Source: ACMS (1991)
Informal
exchange rate
union
Formal
exchange rate
union
Full
monetary
union
Yes
Yes
Yes
Partially
Partially
Partially
-
Yes
Yes
Yes
Yes
Partially
Partially
(if zero
margins)
Partially
Partially
Partially
Partially
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
FEASIBILITY OF REGIONAL MONETARY UNION IN ECOWAS
WAEMU already exists, characterized by:
macroeconomic stability, low inflation, low monetary growth, budgetary
discipline (Medhora 1997,
Coboham and Robson 1997)
dissenting view Chang (2000): growth -3% to 1.8% relative to 3.4% to 4.3% for
developing countries
strong institutional support and external anchor
WAMZ, 1987 to date. Eco proposed by end-2009
Challenges:
economic convergence not yet met
differences in external shocks
Nigeria’s fiscal dominance and its negative effects on ECOWAS MU
prospects
disciplined leadership
traditional national rivalries
political commitment.
Table 3: Performance on WAMZ Convergence Criteria, 1999 – 2004
Primary
Criteria
Budget Deficit (excel.
Grants)/GDP
Consumer Price Inflation
Rate (End Period)
Central Bank Financing
of Budget Deficit/Pre.
Year Tax Revenue
Gross Reserves (in
months of imports)
Target
≤5%
≤4%
≤5%
≤5%
≤10% ≤10%
≤10%
≤10%
≤10% ≤10%
≤10%
≤10%
≤3% ≤3%
≤3%
1999
2002
2000
2001
1999
2002
2000
2001
1999
2002
2000
2001
1999
2002
2000
2001
4.4
8.4
7.7
7.9
5.8
8.3
8.9
5.4
17.1
19.7
3.6
9.8
0.2
8.1
0.0
7.3
40.5
21.3
57.9
0.0
0.8
1.2
5.2
7.8
7.2
1.1
17.6
0.0
2.2
2.8
2.5
5.4
14.5
16.4
0.0
0.0
17.3
16.7
-2.8
3.4
32.7
8.9
7.3
5.5
1.4
2.3
2.7
2.1
7.6
11.3
2.0
3.1
7.5
13.1
0.0
0.0
3.0
12.1
16.5
23.9
0.0
0.0
0.0
10.1
1.7
13.0
13.8
15.2
6.2
6.1
0.2
12.2
36.7
-3.1
13.6
9.9
2.8
2.3
The
Gambia
Ghana
Guinea
Nigeria
Sierra
Leone
Number
of
countrie
s
meeting
criterion
1
0
2
0
3
2
1.9
3
3
3
3
2
5
2
3
2
Number of Criteria Met and
Average Score
≤3%
2
1999 2000 2001 2002
2003
4
0
1
3
0
40%
4
0
1
3
1
45%
3
1
2
2
2
50%
2
0
0
0
2
3
40%
Table 3 (continued)
Primary Criteria
Budget Deficit (excl
Consumer Price
Inflation
Central Bank Financing
of Budget Deficit
Gross Reserves
Target
≤4%
≤10%
≤10%
≤3%
2003
The Gambia
Ghana
Guinea
Nigeria
Sierra Leone
14.5
No. of countries
1
2004
1.8.6
2.8.8
3.4.0
4.-10.9
12.5
1
Number of Criteria met
2003
2004
2003
2004
2003
2004
03
04
17.6
23.6
14.8
23.8
11.3
8.0
11.8
27.6
10.0
14.4
63.1
0.0
18.8
18.1
29.0
0.0
1.6
23.1
0.0
0.0
3.1
3.9
1.8
8.4
1.7
5.1
3.8
1.5
18.7
3.3
2
2
0
2
0
3
2
1
4
2
3
4
0
Source: West African Monetary Institute (2001, 2003, 2006).
1
1
4
Table 5(a): WAEMU: Net Benefits 1/
ω
Country
Benin
Burkina
Cote d’Ivoire
Mali
Niger
Senegal
Togo
0.0824
0.0985
0.4137
0.0987
0.0729
0.1816
0.0521
Gain Rel. to
Indep.
Correlation
Ψ
0.0217
0.0793
0.0349
0.0609
0.0148
0.0310
0.0346
0.6911
0.6009
0.7737
0.4905
-0.3161
0.8331
0.5628
1.0939
0.7847
1.0300
0.8719
1.1780
1.0581
1.0276
1/ a=0.9657,b=9.0759,=1.7723,c=1, π =1, μ =0.50,ӨA=0.0399
Source: Debrun et al (2002) p.20
Table 5(b): ECOWAS Monetary Union: Net Benefits for Participants 1/
ω
Country
Benin
Burkina
Cote d’Ivoire
Mali
Niger
Senegal
Togo
The Gambia
Ghana
Guinea
Nigeria
Sierra Leone
0.0340
0.0406
0.1706
0.0407
0.0301
0.0749
0.0215
0.0061
0.1078
0.0597
0.4037
0.0104
Gain Rel. to
Indep.
Correlation
Ψ
Gain Rel. to
WAEMU
-0.0175
0.0425
-0.0042
0.0236
-0.0242
-0.0075
-0.0032
0.0238
0.0692
-0.0275
0.1155
0.0147
0.2677
0.1979
0.0508
0.1523
-0.2465
0.3455
0.4255
0.2277
-0.2748
0.5914
0.9429
-0.1986
1.4922
1.0704
1.4051
1.1893
1.6069
1.4434
1.4017
1.1499
0.9232
1.6706
0.7594
1.2447
-0.0392
-0.0367
-0.0390
-0.0373
-0.0390
-0.0386
-0.0378
n.a
n.a
n.a
n.a
n.a
1/ ӨA=0.0591
Source: Debrun et al (2002) p.20
Table 6: Adding Countries Individually to WAEMU
ω
Gain Rel. to Indep.
Correlation
Ψ
Gain Rel. to WAEMU
Adding The Gambia1/
0.0221
0.0797
0.0353
0.0614
0.0152
0.0315
0.0350
0.0615
Adding Ghana 2/
0.0150
0.0729
0.0285
0.0544
0.0081
0.0243
0.0278
0.1017
Adding Guinea 3/
0.0227
0.0806
0.0361
0.0623
0.0162
0.0324
0.0359
0.0117
Adding Nigeria 4/
-0.0382
0.0228
-0.0251
0.0035
-0.0453
-0.0282
-0.0236
0.0996
Adding Sierra Leone 5/
0.0208
0.0784
0.0340
0.0601
0.0139
0.0301
0.0337
0.0524
0.6808
0.6058
0.7735
0.4921
-0.3251
0.8459
0.5497
0.4915
0.6104
0.4780
0.8416
0.3691
-0.1956
0.6869
0.4436
0.8466
0.6335
0.6426
0.7206
0.5478
-0.3366
0.8844
0.5644
0.2176
0.2246
0.1548
-0.0539
0.1201
-0.2394
0.2764
0.3939
0.9746
0.6861
0.5931
0.7825
0.4809
-0.3090
0.8245
0.5622
0.5075
1.0969
0.7868
1.0328
0.8742
1.1812
1.0610
1.0304
0.8452
1.2022
0.8623
1.1319
0.9581
1.2945
1.1628
1.1292
0.7438
1.0685
0.7665
1.0061
0.8516
1.1506
1.0336
1.0337
1.1963
1.5249
1.0938
1.4358
1.2153
1.6420
1.4749
1.4324
0.7760
1.0965
0.7865
1.0325
0.8739
1.1808
1.0606
1.0300
0.9147
0.0005
0.0005
0.0005
0.0005
0.0005
0.0005
0.0004
n.a
-0.0066
-0.0064
-0.0064
-0.0065
-0.0067
-0.0067
-0.0067
n.a
0.0010
0.0013
0.0013
0.0014
0.0015
0.0014
0.0013
n.a
-0.0599
-0.0564
-0.0599
-0.0574
-0.0601
-0.-592
-0.0582
n.a
0.0009
0.0008
0.0008
0.0008
0.0009
0.0009
0.0009
n.a
Country
Benin
Burkina
Cote d’Ivoire
Mali
Niger
Senegal
Togo
Gambia, The
Benin
Burkina
Cote d’Ivoire
Mali
Niger
Senegal
Togo
Ghana
Benin
Burkina
Cote d’Ivoire
Mali
Niger
Senegal
Togo
Guinea
Benin
Burkina
Cote d’Ivoire
Mali
Niger
Senegal
Togo
Nigeria
Benin
Burkina
Cote d’Ivoire
Mali
Niger
Senegal
Togo
Sierra Leone
0.0812
0.0971
0.4077
0.0973
0.0719
0.1790
0.0513
0.0145
0.0653
0.0781
0.3280
0.0783
0.0578
0.1440
0.0413
0.2072
0.0720
0.0860
0.3614
0.0862
0.0637
0.1587
0.0455
0.1265
0.0416
0.0498
0.2090
0.0499
0.0369
0.0918
0.0263
0.4947
0.0804
0.0961
0.4035
0.0963
0.0711
0.1771
0.0508
0.0247
1/ ӨA = 0.0408
2/ ӨA =0.0486
3/ ӨA =0.0377
4/ ӨA =0.0445
5/ ӨA =0.0394
Source: Debrun et al (2002) p.25.
Table 7: ECOWAS Monetary Union: Net Benefits for Participants when Nigeria’s Spending Distortion is Equal to Average
ω
Country
Benin
Burkina
Cote d’Ivoire
Mali
Niger
Senegal
Togo
Gambia, The
Ghana
Guinea
Nigeria
Sierra Leone
0.0340
0.0406
0.1706
0.0407
0.0301
0.0749
0.0215
0.0061
0.1078
0.0597
0.4037
0.0104
Source: Debrun et al (2002) p.26
Gain Rel. to
Indep.
Correlation
Ψ
Gain Rel.
to
WAEMU
0.0278
0.0853
0.0407
0.0672
0.0215
0.0375
0.0417
0.0672
0.1105
0.0185
0.0540
0.0587
0.2677
0.1979
0.0508
0.1523
-0.2465
0.3455
0.4255
0.2277
-0.2748
0.5914
0.9429
-0.1986
1.1721
0.8408
1.1037
0.9342
1.2622
1.1338
1.1011
0.9032
0.7252
1.3123
1.0000
0.9778
0.0061
0.0060
0.0059
0.0063
0.0068
0.0065
0.0071
n.a
n.a
n.a
n.a
n.a
CONCLUSION:
Desirable and benefitial as ECOWAS MU would be, the
necessary and sufficient conditions are yet to be met.