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2284-00_FM.qxd 10/27/04 11:12 Page i the monetary geography of africa This page intentionally left blank 2284-00_FM.qxd 10/27/04 11:12 Page iii The monetary geography of africa paul r. masson catherine pattillo brookings institution press Washington, D.C. 2284-00_FM.qxd 10/27/04 11:12 Page iv Copyright © 2005 the brookings institution 1775 Massachusetts Avenue, N.W., Washington, D.C. 20036 www.brookings.edu All rights reserved Base map art © Mountain High Maps Library of Congress Cataloging-in-Publication data Masson, Paul R. The monetary geography of Africa / Paul R. Masson and Catherine Pattillo. p. cm. Includes bibliographical references and index. ISBN 0-8157-5500-7 (cloth : alk. paper) 1. Monetary policy—Africa. I. Pattillo, Catherine A. (Catherine Anne) II. Title. HG1325.M377 2004 332.4'96—dc22 2004020089 9 8 7 6 5 4 3 2 1 The paper used in this publication meets minimum requirements of the American National Standard for Information Sciences—Permanence of Paper for Printed Library Materials: ANSI Z39.48-1992. Typeset in Adobe Garamond Composition by Circle Graphics Columbia, Maryland Printed by R. R. Donnelley Harrisonburg, Virginia 2284-00_FM.qxd 10/27/04 11:12 Page v To Betsy and To Dave, Camille, and David Michael This page intentionally left blank 2284-00_FM.qxd 10/27/04 11:12 Page vii Contents Foreword ix Preface xiii Acknowledgments xv Abbreviations and Acronyms xvii 1 Monetary Union in Africa: Past, Present, and Future 1 2 African Currency Regimes since World War II 12 3 Criteria for Currency Unions or the Adoption of Another Currency 33 4 African Monetary Integration in Practice: CFA Franc Zone and South African CMA 45 5 Experiences of Countries in Managing Independent Currencies 77 6 Proposed Single Currency for West Africa 95 7 Regional Integration in SADC 113 vii 2284-00_FM.qxd 10/27/04 11:12 Page viii viii contents 8 EAC and COMESA 129 9 A Single Currency for Africa? 147 10 Africa’s Monetary Geography in the Coming Decades 162 Appendixes A Calibration of the Model 171 B Country Vignettes 182 References 197 Index 207 Maps Figure 1-1. Political Divisions of Africa xx Figure 1-2. GDP per Capita at PPP Exchange Rates, 2002 2 Figure 2-1. Currency Areas, 1964 18 Figure 2-2. Exchange Rate Volatility against the U.S. Dollar, 2000–01 28 Figure 2-3. Exchange Rate Volatility against the Euro, 2000–01 29 Figure 9-1. Membership in Regional Arrangements 149 2284-00_FM.qxd 10/27/04 11:12 Page ix Foreword hat has taken the place of the cold war as the defining division in Wworld 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 self- perceived winners and losers is shifting in the wrong direction. Africa is a continent especially afflicted by this trend. Hence the impor- tance 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 well- being. 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 2284-00_FM.qxd 10/27/04 11:12 Page x 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 coter- ies. 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 devel- opment, 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 for- mer French colonies—even if nominally pegged to some international cur- rency. 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 inade- quacies 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 sup- port 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 Develop- ment, or NEPAD. One way countries can apply peer pressure is through regional organiza- tions. 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 cur- rency. 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 xi foreword xi 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 are better advised to devote resources to other essential activities that aim to improve health, stimulate investment, and boost economic development. Paul and Catherine take a hard look at the economic benefits and costs— and also the apparent political motivations—of proposed monetary unions in western, eastern, and southern Africa, as well as the proposal for a single African currency. Moreover, they for the first time present a history of the use of currencies and monetary policies on the African continent since World War II. And they go on to speculate as to what Africa’s “monetary geography” will look like two decades from now. The authors highlight some of the limitations of assuming that the Euro- pean example can be translated directly to the African context. First, ensuring the independence of the regional (or continental) African central banks will not be easy, since there is no evidence that monetary unions will in them- selves discipline fiscal policies. Therefore, government deficits will tend to put upward pressure on inflation. Second, levels of intraregional trade are much lower in Africa than in Europe and are likely to remain so, limiting the gains from a single currency. Finally, a continentwide currency will not have a major global impact while Africa’s economic size (in terms of GDP) remains modest. We at Brookings are proud that this book bears our imprint, since it is an example of a project that cuts across subject areas in addressing some of the most important issues facing the world today: poverty reduction and eco- nomic development. Strobe Talbott President, Brookings Institution Washington, D.C. October 2004 This page intentionally left blank 2284-00_FM.qxd 10/27/04 11:12 Page xiii Preface his book describes the present use of currencies in Africa as well as Ttheir use in the recent past and attempts to draw conclusions concern- ing the evolution of exchange rate regimes in the future. Before getting into the substance, two questions need to be answered: what is the meaning of monetary geography, and why is it an interesting topic for Africa? We have adapted the term monetary geography from the title of a book published by Benjamin Cohen in 1998, The Geography of Money. In that book, Cohen argues forcefully that money has become “deterritorialized,” that is, the circu- lation of a particular money is no longer coterminous with the country of issue. A prime case in point is the creation of the euro, which is not associ- ated with a single country but rather with a supranational central bank.

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