The Brookings Institution POLICY BRIEF July 2003 Policy Brief #121 Related Brookings Resources Africa’s Economic Morass— A Strategic Vision for Africa: Will a Common Currency Help? The Kampala Movement Francis M. Deng and PAUL MASSON AND HEATHER MILKIEWICZ I. William Zartman (2002) frica, like other regions of the world, is fixing its sights on creating a common currency. Already, Transatlantic Perspectives on the Euro A there are projects for regional C. Randall Henning and Pier monetary unions, and the bidding process for Carlo Padoan Brookings/European an eventual African central bank is about to Community Studies Association begin. Is it worth the effort, and will it provide (2000) an important solution to Africa’s problems? African Reckoning: Most observers judge that those problems are A Quest for Good Governance Francis M. Deng and linked to civil conflicts, corruption, absence of Terrence Lyons rule of law, undisciplined fiscal policies, poor (1998) infrastructure, and low investment—the last of Managing Ethnic Conflict which is due in part to foreign investors’ in Africa: Pressures and Incentives mistrust of African governments. for Cooperation In Abidjan, a man stands in Donald Rothchild Monetary union can in fact address very front of a poster explaining the (1997) few of Africa’s fundamental ills. At best, it can exchange between the CFA franc and the euro—no longer produce low inflation, but it cannot guarantee as simple as converting to growth, and at worst, it can distract attention French francs. The launch of the euro has stimulated interest from essential issues. A more promising in a single currency for Africa. initiative is the New Partnership for African Development (NEPAD), through which African countries hope to exert peer pressure to correct governance failures and thus make progress in correcting Africa’s problems. It is too early to see how effective that process will be, but if it succeeds, monetary union can crown that achievement. If not, monetary union will almost certainly fail, and highlight Africa’s more fundamental policy failures. Africa has suffered from decades of economic policies, civil wars, and The decline and marginalization, as the kleptocratic rulers. This tragedy has Brookings early hopes of rapid development and led, first, to a reexamination of the Institution enlightened government after effectiveness of aid by the major donor 1775 Massachusetts Ave., N.W. Washington, DC 20036 independence were dashed by poor countries, and second, a recognition All Policy Briefs are available on the Brookings website at www.brookings.edu. POLICY BRIEF by Africans that they need to take charge to be completed by approximately of their own destiny. Two years ago 2028. In the early stages, regional NEPAD was launched as a vehicle for cooperation and integration within improving economic and political gover- Africa would be strengthened, and this nance by Africans, and thus of assuring could involve regional monetary donors (and private investors) that unions. The final stage involves the resource flows to Africa would not be establishment of the African Central wasted. Its importance for continuing Bank (ACB) and creation of a single aid flows from the rich countries was African currency and an African reiterated at the June 2003 summit of Economic and Monetary Union. the G-8 countries in Evian, France. However, if African countries do not get In addition to establishing the African their macroeconomic policies right, they Union, the 1999 Sirte Declaration calls will not benefit from better economic for shortening implementation periods and political governance and the in order to speed up the process for associated capital inflows. Instead, they creating institutions such as the African will continue to stagnate, and rich Central Bank. Though the bank would countries will draw lessons from past aid not be created until around 2020, the ineffectiveness and increasingly shun bidding process for its location is likely the continent. to begin soon, and Ghana and Botswana are among those that would like to host One important aspect of macroeco- it. In the meantime, there are plans for nomic policies is the choice of the creating various regional monetary Paul Masson is a exchange rate regime and the associated unions, which would presumably form visiting fellow in Economic Studies at monetary policy. In this context, a policy building blocks for the single African the Brookings proposal currently receiving much central bank and currency. However, the Institution. attention addresses the creation of a various subregional groupings currently common African currency. The project, in place (and which do not necessarily though not explicitly linked to NEPAD, correspond to those that would is intimately associated with the newly- ultimately form the single African formed African Union (AU), which is the currency) have very different starting larger institutional framework within points with respect to macroeconomic which NEPAD operates. A common stability, and there is even more diversity currency was also an objective of the within the regions. This calls into Organization for African Unity and the question whether a common currency is African Economic Community, the possible, even over the fairly long Heather Milkiewicz is predecessors of the AU. horizon embodied in the AU Treaty. a senior research assistant in Economic Studies at the The 1991 Abuja Treaty establishing the WHY MONETARY UNION? Brookings Institution. African Economic Community outlines There are two principal reasons for the six stages for achieving a single enthusiasm for monetary union in Africa. monetary zone for Africa that were set First, it is clear that the successful 2 Policy Brief #121 July 2003 POLICY BRIEF launch of the euro has stimulated currency may be the symbol of interest in other regions. From Latin weakness, not strength—as was the America to the Middle East and East case for the ruble in the dying days of Asia, monetary union is seen as a way of the Soviet Union and at the time of reinforcing regional cohesion and the creation of the Commonwealth of demonstrating a commitment to Independent States. A currency that is regional solidarity. However, it is ill-managed and subject to continual sometimes forgotten just how long the depreciation is not likely to stimulate “It is sometimes road to monetary union in Europe pride in the region or give the member forgotten just how actually was. The transition was fraught countries any clout on the world stage. long the road to with obstacles and missteps, and even in Moreover, as Robert Mundell, the official circles there were doubts until 1999 Nobel Prize winner in monetary union in the ultimate day of the changeover economics, emphasizes, it is great Europe actually whether the replacement of national countries (or regions) that make great was. The transition currencies by euro notes and coins in currencies. While the countries in the was fraught with January 2002 would go smoothly. euro zone are important enough Designing new institutions that were economically for the euro eventually obstacles and able to deliver stability-oriented to rival the dollar, that is not likely to missteps.” monetary policy—particularly the be the case for an African currency European System of Central Banks— even in the best circumstances. Africa’s was complicated, as was creating the Gross Domestic Product (GDP) is, and Solidarity and Growth Pact, which is likely to remain, only a small fraction provides for regional coordination of of that of Europe or the United fiscal policies. Despite the intense States—in fact, at present it is roughly planning process, the institutions are equal to Belgium’s. still the object of considerable contro- versy and contention. If the process was THE STATE OF AFRICAN so difficult for a set of rich countries CURRENCIES with highly competent bureaucracies Africa already has two functioning which have cooperated closely for more monetary unions: the CFA franc zone than fifty years, then realistically, the (composed mainly of former French challenge for African countries must be colonies, with the currency linked to the considered enormous. euro) and the Common Monetary Area, (CMA, centered on South Africa’s The second important motivation in rand). Both are longstanding and have Africa has been the desire to been generally successful in providing counteract perceived economic and low inflation. However, both have also political weakness by putting in place suffered from periods of instability. In regional institutions, of which a 1994, the CFA franc was devalued by common currency and monetary union 50 percent, while the rand has experi- would be potent symbols. What is less enced a marked depreciation against well understood is that a common major currencies since 1990, and a Policy Brief #121 July 2003 3 POLICY BRIEF recent period (1998-2002) of especially would find undesirable. Without an high volatility. Moreover, trade remains effective way of disciplining countries’ low in the CFA zone—intra-CFA trade fiscal policies and in the absence of is only 7 percent of total trade—and the similar shocks to the prices of zone has not grown noticeably faster countries’ exports and imports (or than neighboring countries. In southern “terms of trade”), a single currency for Africa, the smaller CMA members have ECOWAS would not seem advisable. tended to converge toward South “A common Africa’s higher per capita income, but In Southern Africa, countries that the same is even more true for comprise the Southern African currency may be Botswana, which left the monetary Development Community (SADC) the symbol of union in 1976. intend to form a monetary union, weakness, not though this is a much vaguer and more strength—as was PROSPECTS FOR REGIONAL distant project. Many SADC members MONETARY UNIONS are in any case very far from macroeco- the case for the As mentioned above, there are already nomic stability.