2009-10-28 tralac Newsletter
2009-10-28 tralac
Hotseat Comment
Colin McCarthy, a tralac Associate, comments on Monetary integration in Africa (II).
In the first instalment in this series reasons were identified for the current popularity of monetary integration in the discourse on African regional integration. In this, the second instalment, the role of money as a social institution is considered. This elementary introduction to monetary integration is helpful in identifying the essential benefits of having a commonly accepted medium of exchange in an economy, which are the same for a region that shares a common currency.
The fundamental benefit of money is that it lowers the transaction cost of trade, thus enabling specialisation in production and the trading of surplus production, that is, the goods that are produced in excess of an individual household’s needs. In a barter economy, in which goods are traded for goods, the cost of doing business would be exorbitant in terms of the time and energy required to find a trading partner with a surplus and quantity of a product that you would like to have and a demand (want) in the proper proportion for the product that you have produced in excess of your own needs. Satisfying what is known as the ‘double coincidence of wants’ is a prerequisite for trade in a system of unorganised barter, and a moment’s consideration would make it clear that this would be an extremely cumbersome and time-consuming process. The transaction cost of trade would be so excessive that a household would rather fall back on a subsistence existence, producing for its various own needs only, thus refraining from specialisation and trade.
The division of labour and specialisation lie at the heart of economic efficiency and any economic system, such as our hypothetical barter system, would result in a low level of material welfare and an absence of development and growth. However, if society should agree to accept a specific good as a generally accepted means of exchange, production through specialisation and subsequent trade would be immensely simplified. The prices (trade ratios) of all goods would be expressed in terms of this good and in all buying and selling transactions this good would be accepted as a means of payment in full recognition that it can be passed on in further transactions, immediately and at any time in the future. Simultaneously, all values would be expressed in terms of this good.
We now have a totally different situation. The object that is accepted as a general means of payment is called money, which also acts as a store of value and a unit of account. All prices are expressed in terms of the money good, which reduces the number of possible prices dramatically (for a simple economy of 100 goods, selecting one as money will reduce the number of prices from 4950 in to 99) and this reduction in the transaction cost of trade now enables the division of labour and specialisation to the fullest extent. The division of labour, specialisation, the production of surpluses and trade, as Adam Smith in his The Wealth of Nations (1776) so lucidly explained, become the source of wealth of individuals, enterprises and also nations.
At this point we fast forward our story through the development of money from objects with a high intrinsic value - whether shells, salt or gold and silver – to modern fiat money which circulates as legal tender in transactions (empowered by law) in the form of banknotes and coins, issued by the central bank, and supplemented by transferable deposits of clearing banks that create deposit money through the fractional reserve system. Of critical importance is to recognise that under these conditions the cost of creating money is absolutely minimal compared to the immediate purchasing power of money. This means that strict monetary discipline is required to avoid that most devious form of taxation, namely inflation. This issue, it will later be argued, is an important element to take into account when monetary integration is considered.
National currencies are only legal tender for transactions in the domestic economy. For international payments, reserves of foreign exchange (accumulated through exports and capital inflows) must be accessed (gold, US dollars, Euros) with values converted from one currency to another through the exchange rate, which is the price of a currency in terms of another currency. The exchange rate of a currency can be fixed by linking it to another currency or a weighted basket of currencies, or it can be determined in the foreign exchange market through demand and supply.
Trading and investing across borders, therefore, add transaction cost to trade that arise from having to access the foreign exchange market and in doing so are subject to the uncertainty of exchange rate fluctuations. The question now is whether intraregional trade and investment would not benefit if neighbouring countries should integrate their monetary systems by adopting a single currency for the region. The answer would seem to be simple. Having a single currency, supported by all the legal arrangements this requires, will lower the transaction cost of regional trade in goods and services (for example, imagine the convenience of tourists and business people using the same currency at home and in the region), and will facilitate cross-border investment by removing the exchange rate risk.
Hence, it would seem that monetary integration will be an advantageous development and that its pursuit should be a rational policy path to follow. If only it was so simple. This doubt will be elucidated in further instalments in this series in which the forms of monetary integration and the conditions for it to be successful, will be addressed.
Special Features
Discussion Note: Subsidies on trade in services
Paul Kruger, a tralac Researcher, discusses subsidies on trade in services: The horizontal section of the GATS schedules must be carefully considered when determining the specific conditions in each of the committed sub-sectors. It is in effect a binding, either as a measure which constitutes a limitation on market access (GATS Art. XVI) or national treatment (GATS Art. XVII), or it refers to a situation in which there are no such limitations (Guidelines for the scheduling of specific commitments under the GATS S/L/92). So these measures can either include horizontal commitments (going beyond what was agreed in the specific commitments) or horizontal limitations (further restricting the specific commitments). Read more here...Discussion Note: The implications of the impending IUU EC Regulation on developing countries
Taku Fundira, a tralac Researcher, discusses the implications of the impending IUU EC Regulation on developing countries: Illegal, unreported and unregulated (IUU) fishing threatens the sustainable exploitation of living aquatic resources. It contributes to overexploitation of fish stocks and is a hindrance to the recovery of fish populations and ecosystems (MRAG, 2009). IUU fishing is mainly driven by economic incentives where species that have been overexploited and in short supply are of high value and hence targeted by pirate fishers. Read more here...Monitoring Trade and Climate Change
tralac is monitoring preparations for the United Nations Climate Change Conference taking place in Copenhagen, Denmark in December 2009.tralac Media Library
- View an interview by Dr Patrick Low, Chief Economist of the WTO. He comments on the relationship between trade policy and climate change.
- View all previous interviews here...
Weekly Customs, Excise, Tariff and Trade Remedy Summary Notification
- Download the notification here.
News
Africa pays high price for Europe’s illegal plate of fish
Europeans are eating “laundered” fish, harvested illegally from African coastal waters by pirate Asian trawlers while governments deny African fishermen the right to sell their catch within the European Union.
Newly launched initiative to strenghten solar research capabilities
A three-year ‘Soltrain’ regional solar thermal initiative has been launched in Pretoria and was said to be on course to develop solar research capabilites in southern Africa. Soltrain is sponsored by the Austrian Development Agency, and is aimed at transforming energy systems from fossil based to more sustainable solar energies, specifically targeting solar thermal applications in South Africa, Mozambique, Namibia and Zimbabwe.
India's Top Bank Coming to Gaborone
Botswana's fledging but vibrant banking sector continues to grow with another bank from India expressing interest to open shop in the country. India's largest bank - the State Bank of India - this week announced its intention to open an office in Botswana, where Indian companies are involved in diamond cutting and polishing businesses.
Land grabs for food production under fire
A move by governments and rich investors to raise food crops on farmland purchased in some of the world's poorer countries is coming under fire.
Developing Countries Must Boost Broadband
Developing countries risk missing out on the benefits of information technology because of their lack of broadband infrastructure, an UN agency said.
Africa heading for 2009 growth due to China
All African economies bar South Africa will grow this year because of China's demand for their raw materials, a leading South African analyst said. Out of 53 African states only the continent's biggest economy, South Africa, will not grow this year, Martyn Davies, executive director of Stellenbosch University's Centre for Chinese Studies, told a conference.
US pressing China on import surge causes
The United States is pressing China to change policies that overfuel its exports and led to the slapping of duties on Chinese-made tyres by President Barack Obama last month, a US trade official said on Thursday.
SA, China in new trade row
South Africa’s ferrochrome producers are calling for state aid against their Chinese counterparts in what has emerged as another trade row between the two countries.
SACU must think about its future
International Trade and Economic Development Deputy Director General Xavier Carim said on Wednesday that there is an understanding among members of the Southern African Customs Union (SACU) that it would have to improve or it would become redundant.
Events
Updated: tralac Annual Conference 2009
The tralac Annual Conference 2009 Report and audio recordings of speakers' presentations are available. Click here to access the Annual Conference 2009 page on tralac's website.Publications
Measuring the gains from currency union membership in southern Africa
New working paper: Measuring the gains from currency union membership in southern Africa by Johan Fourie and María Santana-Gallego. African countries have latched on to growing empirical evidence that creating a currency union may result in large trade gains. This is based on the belief that lower transaction costs would lead to large increases in intra-regional trade volumes, augmenting growth. Yet there is growing evidence that not all countries may benefit from entering a currency union. This paper is an attempt to measure the gains from trade that are realised when entering a currency union. Using a standard gravity framework, we find that countries that decide to give up their currency and adopt an existing one or create a new common currency area stand to benefit significantly from a shared currency. However, these benefits are greater for a select few and the gains in terms of trade will depend on how open the country is and the intensity of trade flows with the other members of the currency union. Read more here...Anti-dumping on TOFA: Hopping a country too far?
New working paper: Anti-dumping on TOFA: Hopping a country too far? by Gustav Brink, a tralac Associate. The circumvention of anti-dumping duties has given rise to significant discussion on the topic in the World Trade Organisation. At present the WTO Anti-Dumping Agreement does not contain any anti-circumvention provisions and it is up to each country to regulate the use thereof. South Africa’s Anti-Dumping Regulations provide for several different forms of anti-circumvention, including country hopping, i.e. where an importer switches supply from a producer in one country to a related producer in a third country as a result of the imposition of preliminary or definitive anti-dumping duties or the initiation of an investigation against the exporter in the first country. This is not recognised as circumvention by any other country. Read more here...Safeguards and trade remedies in the SADC and ESA Economic Partnership Agreements
New working paper: Safeguards and trade remedies in the SADC and ESA Economic Partnership Agreements by Gerhard Erasmus, a tralac Associate. This paper discusses the “Trade Defence Instruments” in the Economic Partnership Agreements (EPAs) currently being negotiated between the European Union (EU), on the one hand, and different configurations of ACP (African, Caribbean and Pacific) countries on the other. These “instruments” cover remedies against unfair trade practices (anti-dumping and countervailing measures) as well as safeguards. ACP concerns about infant industry protection, food security and agriculture are also on the agenda. Read more here...AGOA.info
July trade data published
Trade data under AGOA was updated a few days ago to include August 2009 data. As a result of major declines in the value of exports from the largest traders Nigeria and Angola (-65% and -60% respectively), aggregate AGOA exports are down 61%. Although each of the leading exporting countries under AGOA have seen a contraction in their US-bound exports this year, there are some notable examples within the Southern African and East African region where this is not the case. Lesotho (-4%), Kenya (-4%) and Swaziland's exports (-1%) have remained relatively stable for the year to August, while Malawi has recorded a 118% increase thus far to US$ 45mn.
Updated bilateral US-Africa country trade profiles
Profiles of disaggregated bilateral US-Africa trade, by country, has been updated to reflect July 2009 data. This also includes various regional profiles - SACU, BLNS, COMESA, ECOWAS, and CEMAC. Follow this link.
Other updated AGOA data sections include disaggregated bilateral trade profiles for each AGOA country individually (as well as within various regional configurations), aggregate bilateral trade, preferential trade under AGOA / GSP and sectoral data from AGOA-eligible countries by value and as a proportion of US imports, as well as sectoral new AGOA and GSP AGOA data. Textile data, is available by value and by volume. Data to August 2009 shows exports of clothing are down 12% year-on-year (clothing exports made from third country fabrics are 9% lower in the current year). Export data is available at this link.
The most recent quota period commenced in October 2008 and lasted up until September 2009. Quota utilisation for the full year was 15.7%, and 30.5% under the LDC sub-quota (applicable to the use of third country fabrics). Follow the link to the data here.
Trade acronyms and terminology
Visit AGOA.info's alphabetically-ordered database of trade-related acronyms and terminology
Latest AGOA news
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- Did you know? You can search AGOA.info's news archive (now containing over 1,000 articles) through the built-in search functionality.
- Read these and other AGOA-related news articles in AGOA.info's news area, which is continuously updated with articles sourced from a wide range of African and foreign publications.
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