Thursday, October 22, 2009

Colin McCarthy, a tralac Associate, comments on Monetary integration in Africa

European monetary integration and the successful establishment of the Euro as a prominent world currency have revived the discourse on the contribution that the integration of monetary systems can make to economic development and macro-economic stability. In Africa, in particular, this debate found fertile ground. Three reasons can be identified that will explain this.

The first is the preference in Africa for the linear model of regional integration and consequently the adoption of regional integration agreements that as final step envisages monetary integration and the adoption of a single currency. At the pinnacle of African integration arrangements, the African Union from the start adopted the goal of a single African currency along the lines of the Euro.

The Southern African Development Community (SADC) serves as an example in southern Africa of many integration arrangements in Africa that envisages the adoption of a single currency. For SADC the latter development is expected to occur in 2018.

In addition, Africa is home to two successful monetary integration arrangements, namely the CFA franc Zone in francophone Africa, and in southern Africa, the Common Monetary Area (CMA). Both these arrangements are legacies of Africa’s colonial past but they remain examples of how monetary integration have contributed and still can contribute to stability and growth.

The third reason is associated with the fact that Africa has an unfortunate history of economic regression and macro-economic and political instability in many countries. Combine this with the fragmented nature of the continent into a multitude of very small and poor economies and the idea of a single regional currency and its benefits as an anchor of stability (an agent of restraint) and facilitator of intra-regional trade becomes attractive.

To contribute to this discussion and specifically to clarify many of the issues and questions that characterise monetary integration as a regional integration arrangement tralac has decided to contribute to the debate. This explanatory note is the first in a series that will be published as hot seat comments. The intention is to clarify concepts and highlight the costs and benefits of monetary integration in the African context. The finer and more detailed technicalities of the topic will be avoided in order to enhance accessibility for non-specialists.