2009-11-11 tralac Newsletter
2009-11-11 tralac
Hotseat Comment
Colin McCarthy, a tralac Associate, comments on Monetary integration in Africa (IV).
In earlier instalments the benefits of using money as social institution that reduces the transaction cost of trade were highlighted. This was followed with a brief overview of the models of regional monetary integration that exist in Africa (the Common Monetary Area [CMA] and the CFA franc Zone) and the model of full or complete monetary union with an independent regional currency issued by a regional central bank. The latter model is the one that is envisaged in African monetary integration arrangements.
In this instalment the following question is addressed: what benefits can be expected of single currency and central bank for the region?
To answer this question one first has to consider the benefits of regional integration in general. Without going into the detail of the theoretical distinction between the static and dynamic outcomes of regional integration, it is possible to argue that in the African context, noted for the predominance of countries with small markets (the combined production of Sub-Sahara Africa, excluding South Africa, is significantly smaller than the gross domestic product of the Netherlands), regional integration can overcome the obstacle to growth of smallness. By integrating neighbouring economies into a larger market with free trade among member states the scope for firms in the region to benefit from economies of scale (average cost of production falling as the scale of production increases) increases. Scale economies can of course also be achieved by selling in the world market but for firms located in the developing world it is easier to produce for and compete in the markets of neighbouring economies.
Monetary union with a single currency means that the same currency is used as the means of payment and unit of account in the common currency area. Prices can be compared directly across the region and transactions can be concluded by using the same currency. This reduces the transaction costs of trade by avoiding the need for and costs of currency conversions and the risk and uncertainties of being exposed to the vagaries of exchange rate variations.
But monetary union will not only benefit trade in goods. A single currency in an integrated region will also integrate money and capital markets and will facilitate capital flows within the region. An integrated money and capital market will bring with it the integration of the market in financial services (banking and non-bank financial services), subject to regional supervision, either by the regional central bank or a separate regional regulatory institution.
In such an environment firms will find it easier and less costly not only to trade in the region but also to invest since the uncertainties that the exchange rate introduces to the evaluation of investment risk and expected returns are removed.
Many advocates of monetary union will recognise the commercial benefits of such integration but might attach more significance to more abstract advantages. In the economic field they would argue the benefit that monetary union could have in improving macro-economic stability, building sophisticated arguments on the positive impact of having an independent central bank and monetary policy that will act as an agency of constraint on spending by the governments of the member states.
In the political domain there will be those who argue that a single currency will build regional cohesion and identity. For them bank notes and coins that represent the region articulates a regional identity in the same way that a country’s currency expresses a national identity. In Africa, where regional integration has a strong political driving force, this element of monetary union may be regarded as very important. A currency becomes more than a social institution with economic functions; it becomes a symbol of identity, which in the case of monetary union has a regional manifestation.
In considering these benefits it would seem that monetary integration should be an unqualified success and a worthy goal of regional integration. Unfortunately, it is not so simple. Money is not the neutral institution in its impact on the real world of production that many would like to believe. This facet will become clear when in the next instalment the costs of monetary union are addressed.
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Special Features
Discussion Note: The SACU Trade Policy Review: Trade in Services
JB Cronje, a tralac Researcher, discusses he SACU Trade Policy Review: Trade in Services: On 4 November the WTO Secretariat published the trade policy review of the Southern African Customs Union (SACU). The purpose of the report is to review the trade policies and practices of the five member states (South Africa, Botswana, Lesotho, Namibia, Swaziland). The report shows that in 2007, for example, the services sector accounted for 59.3% of SACU’s Gross Domestic Product (GDP). According to the table below Lesotho is the only country in the region where the services sector contributed a minority share of GDP. 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.- New article: Don’t run away from the table! The Barcelona Climate Change Talks held from 2 to 6 November 2009 were overshadowed by continuing disagreement regarding the cut of greenhouse gas (GHG) emissions and the boycott of one day’s negotiations by the African countries. The African delegation members walked out of a working-group session as a reaction to the hesitancy of industrialised countries in regard to GHG reduction levels. Read more here...
tralac Media Library
- View a NEW interview by Dr Patrick Low, Chief Economist of the WTO. He comments on whether food miles is a valid argument or hidden protection.
- View all previous interviews here...
Weekly Customs, Excise, Tariff and Trade Remedy Summary Notification
- Download the notification here.
News
WTO Voices Concern Over High Tariffs in Sacu States
Members of the World Trade Organisation's (WTO's) trade policy review committee raised its concern last week over the relatively extensive use of anti-dumping and other tariff measures by SA on behalf of the Southern African Customs Union (Sacu).
'Meltdown Takes Toll On Tourism Industry'
The 2009 World Travel Market (WTM) and Euromonitor International Global Trends Report, released yesterday said the global economic meltdown is taking a heavy toll on the travel and tourism industry, with business travel revenues down globally by 40 percent in July 2009 compared to the previous 12 months.
East Africa: Regional Trade Hits U.S.$2.7 Billion, Just Five Years Into Customs Union
In just five years of the Customs Union, trade within the East African Community has risen by 49 per cent.
Roadmap for Cape to Cairo free trade
Three African trade blocs that have agreed to form a free trade area covering more than half a billion people, created a long overdue roadmap towards that goal yesterday.
G20 officials agree to continue rescue measures, Climate change agreement remains elusive
Finance officials from rich and developing countries pledged to maintain emergency support for their economies until recovery was assured, but failed to reach agreement on the cost of fighting climate change.
No climate deal better than a weak one, says Sonjica
South Africa’s Environment Minister Buyelwa Sonjica has expressed reservations about a about a deal on climate change being hammered out at the forthcoming Copenhagen conference. She noted that a no deal would be better than a weak deal and that South Africa as a developing nation would not commit itself to specific emission reduction targets.
Namibia: EU's Trade Stance 'Very Regrettable', Says Pohamba
Namibia President Hifikepunye Pohamba, earlier this week likened the European Union's trade negotiations with Namibia to the days of apartheid, saying the powerhouse is refusing to treat the country as an equal and listen to its concerns about the controversial economic partnership agreement (EPA).
SACU Trade Policy Review
The five member states of the Southern African Customs Union (SACU) (Botswana, Lesotho, Namibia, South Africa and Swaziland) need deeper integration for more balanced development, according to a WTO Secretariat report on the trade policies and practices of the customs union published on 4 November 2009.
Events
Updated: tralac Annual Conference 2009
The tralac Annual Conference 2009 Report and audio recordings of speakers' presentations are now 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 Prof. 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
Trade data to September to be updated shortly
New AGOA trade data to September will be released by US authorities shortly, with the first batch available late on Friday. All data will be updated on AGOA.info.
Data for trade under AGOA is currently to August 2009. 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.
Other AGOA data includes 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. Clothing export 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 recently completed most recent quota period commenced in October 2008 and terminated in until September 2009. October 2009 should be published shortly (official release date is 13 November). 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
- Gambia: US embassy, government to host international trade forum
- Nigeria, ECOWAS partner to boost bilateral trade
- Development Bank president set to discuss cooperation and IT during official visit
- Kenya asked to work closely with trade negotiators
- USTR leads trade and investment talks with largest African regional economic community
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