2009-11-17 tralac Newsletter

2009-11-17 tralac

News > Newsletters

Hotseat Comment

 Colin McCarthy

Colin McCarthy, a tralac Associate, comments on Monetary integration in Africa (V).

Recalling the benefits of monetary integration discussed in Instalment IV, one would think that the acceptance of monetary union as a goal of regional integration is an obvious decision, a no-brainer. Is it therefore surprising that authorities on the subject like Paul Masson and Catherine Pattillo are not exactly positive about the prospects of monetary union for Africa and its regions?

A consideration of its downside should make it clear that monetary integration is a difficult road to travel, one full of obstacles. Most of these obstacles are associated with the fact that the management of money and the money supply is not a neutral activity as far as the real economy (volume of production, investment, employment and trade) is concerned.

A first obstacle to cross is the macro-economic conditions for successful monetary integration.  Without venturing into the complexities of the optimal currency area theory on the conditions for successful monetary integration, the necessity of macro-economic convergence as a prerequisite for integration must be contemplated. The experience of the EU and the conditions stipulated for admission to the euro currency union and its orderly operation, for example, reflect the importance of macro-economic stability (notably with respect to inflation rates and fiscal deficits) and convergence as goals of monetary integration.

But even if the condition of convergence and stability is met the question remains whether monetary union is desirable.

A complication arising from monetary union is the loss of important elements of national policy sovereignty when a single currency issued by an independent regional central bank is adopted. If monetary union is the final chapter in a linear process of regional integration, member states would already have sacrificed national control over a crucial instrument of trade and industrial policy, namely the import tariff, when a customs union was established. This loss of policy independence would have been further extended when labour and capital markets were integrated in the development of a common market. Continuing to monetary union would have a radical impact on macro-economic management because a single currency and a single monetary authority (central bank) would mean that member states lose control over the exchange rate and the interest rate.

The policy space of member states will now be severely curtailed. Should the central bank be independent, which is an essential requirement for successful monetary union, the central bank will not monetize government deficits (by lending money to governments or by adopting a lenient monetary policy in lowering the rate of interest and so decrease the borrowing cost of governments), member states will have to align fiscal policies with the monetary policy adopted for the region. National policy space will be restricted further.

Under these conditions the downside of monetary union is that the ability to deal with or absorb asymmetric shocks to the member states will be severely constrained. If, for example, the composition of member states’ exports should differ, a fall in the world price of the principal export commodity of a member state, coinciding with price increases in the export commodities of other member states (this implies that the terms of trade of the member states are negatively correlated), will not allow an appropriate depreciation of the currency and a rise in the rate of interest to address the predicament of the member state experiencing a deterioration in its terms of trade.

In Africa the likelihood of asymmetric external shocks is high. This follows because of the high degree of African countries’ export concentration in very few primary commodities, often subject to sharp fluctuations in their world prices, and the differences between neighbouring states in the composition of their principal export commodities. In one country diamonds or oil could be the principal export while the neighbouring state depends on copper exports. Under these circumstances it would not seem appropriate to sacrifice national control over the interest rate and the exchange rate.

Finally, one also has to venture outside the realm of economic technicalities. In Instalment IV it was noted that in the political domain there are those who argue that a single currency will contribute to regional cohesion and identity. But the other side of the coin is that enhancing regional cohesion and identity requires a sacrifice of national identity. Some would argue it to be irrational, but in the real world of national politics the absence of a national currency and the identity it symbolises could be seen as too big a price to pay.
  
Tell us what you think...

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Special Features

Discussion Note:  Non-tariff barriers to intra-Southern African Customs Union (SACU) trade

Willemien Denner, a tralac Researcher, discusses Non-tariff barriers to intra-Southern African Customs Union (SACU) trade:  The Uruguay Round of Multilateral Trade Negotiations made significant progress in lowering tariff barriers and other distortions in international trade. The reduction in tariffs has increased the importance of non-tariff barriers (NTBs) as a key market access concern for developing countries.  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

Weekly Customs, Excise, Tariff and Trade Remedy Summary Notification

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News

COMESA in plans to triple trade
The Common Market for Eastern and Southern Africa (COMESA) has announced a number of measures to triple intra-regional trade. The bloc will intensify efforts to reduce non-tariff barriers to trade, address communication and transport problems, improve customs procedures and charges, and improve access to market information.

China-US trade war unlikely, say analysts
Though trade friction between China and the United States is likely to rise in the months ahead as the US economic recovery remains in limbo, there is little possibility that the two countries will become embroiled in a full-blown trade war, analysts have said.

India, SA to expand trade basket
India and South Africa have agreed to work towards an early conclusion of a preferential trade agreement (PTA) between India and the Southern African Customs Union (SACU) as well as a bilateral investment promotion and protection agreement (BIPA) to give fresh impetus to trade in goods and investment between the two countries.

Developing nations get backing for easier trade
World Trade Organisation (WTO) members have tentatively approved new proposals to give developing nations special treatment as assistance in meeting trade standards on food safety and animal health, the WTO said on Friday.

Africa unity urged ahead of WTO talks
Developing nations are being urged to have a unified stance at the World Trade Organisation (WTO) ministerial conference to be held in Geneva next month.

Africa needs $93 billion a year for infrastructure: report
Sub-Saharan Africa needs to double its infrastructure spending to $93 billion a year, 15 percent of regional output, to drag its road, water and power networks into the 21st century, a report said on Thursday. The research compiled by the Infrastructure Consortium for Africa (ICA) identified the continent's woeful electricity grids as its most pressing challenge, with 30 countries facing regular blackouts and high premiums for emergency power.

South Africa: Clarity Needed On Country's Bilateral Treaties (opinion)
On assuming responsibility for the Department of Trade and Industry, Minister Rob Davies ordered an immediate review of SA's bilateral investment treaties, and his department is now confidentially fashioning a proposal for Cabinet approval.

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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.

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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...

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AGOA.info

Trade data to September has been updated

All AGOA data has been updated on AGOA.info to include September 2009 trade flows. These statistics reveal that aggregate trade between AGOA eligible countries and the US has declined from $50bn to $24bn in the year to September, compared to last year. Much of the decline is due to much lower oil exports from Africa. However, even non-oil exporters like South Africa have seen a decline in US-bound exports, down 42% year-on-year to $1.8bn. While virtually all SADC countries have seen a contraction in exports, one country stands out: Malawi has more than doubled its exports to the US to $53mn. See aggregate export data here,  and AGOA exports at this link.

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). For the new quota year (October 2009 - September 2011, the fill rate for October was 1.2% and 2.33% under the LDC sub-quota. A new overall quota has also been set: details at this link.

Bilateral Trade Profiles

Bilateral US-Africa trade profiles on a country-by-country basis have been updated. Follow this link  to individual country profiles as well as various regional country configurations.

Trade acronyms and terminology

Visit AGOA.info's alphabetically-ordered database of trade-related acronyms and terminology

Latest AGOA news

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