Optimal Currency Areas Theory and Evidence for an African Single Currency ESDS International Conference November 2005 Paul Adams M.Sc Development Economics Manchester University

Objectives of Presentation To present my findings regarding an African Single Currency To highlight the importance of international datasets for this paper To indicate data gaps which I found whilst undertaking this research Re-affirm the importance of reliable data for developing countries

The Theoretical Backdrop Mundell (1961) and McKinnon (1963) begin the debate on the size of Optimal Currency Areas (OCAs) –Central concept of asymmetric shocks and labour mobility Many theoretical advancements, often from unexpected areas of economics Impending European Monetary Union saw a more rigorously empirical approach to OCA theory See Tavlas (1993) for a thorough overview

The African Backdrop Single currency a political aim since 1963 when the Organisation for African Unity was founded Renewed emphasis since the Abuja Treaty in 1994 Tito Mboweni, Governor of the South African Central Bank, now indicates 2021 as the target date for monetary integration Poor intra African trade levels – just 10% of total African trade

African Data Problems 1.Relatively large area to assess 53 countries compared to 15 originally in EU 2.Mostly constituent of developing nations 3.More straightforward economic indicators only reliably available since the 1980s Certain countries have no economic data More complex financial data still missing for many countries

The Way Forward Objective 1.An assessment of regional economic communities to remove duplication 2.Investigation into the possible trade effects of monetary integration in Africa Solution 1.An OCA Index to predict convergence of average bilateral exchange rates within groups 2.A Gravity Model of intra-African trade

Regional Economic Communities ECOWAS: Economic Community of West African States COMESA: Common Market for Eastern and Southern Africa ECCAS: Economic Community of Central African States SADC: Southern African Development Community AMU: United Maghreb Arab

Successive Allocation to Regional Economic Communities StageCountry REC Chosen (Rejected) 1 MauritiusSADC (COMESA) 2 Congo, Democratic RepublicECCAS (COMESA, SADC) 3 AngolaSADC (COMESA) 4 SeychellesCOMESA (SADC) 5 ZambiaSADC (COMESA) 6 BurundiECCAS (COMESA) 7 ZimbabweCOMESA (SADC) 8 MalawiSADC (COMESA) 9 RwandaECCAS (COMESA)

Gravity Model Rationale: Things that effect trade Common colonial history Common nationality Shared language Geographical distance Geographical size Economic Size Population Island Status Landlocked Status Membership in Customs Unions Membership in economic communities Common currency

The Scary Bit Or, Gravity Model Estimation The estimating equation: The simple explanation Countries trade for various reasons, the gravity model seeks to include as many of these as possible. Specifically, the variable of interest is CU: the currency union variable Accounting for all these variables, does membership in a single currency increase trade

Gravity Analysis: Data requirements and sources Real Bilateral TradeInternational Monetary Fund Direction of Trade Statistics PopulationWorld Bank World Development Indicators Real GDPWorld Bank World Development Indicators Other geographic and political dummies Mostly CIA World Factbook

Estimates of the Currency Union Effect on Intra- African Trade Pooled Panel OLS with robust Standard errors 3.27* Time-Fixed Effects2.93* Rose (2000)1.21 Rose and Glick (2002)1.3 Masson and Patillo (2005) 1.29 Other Estimates of the Currency Union Effect

Time Series Data Problem Short time scale Equatorial Guinea CFA1985 (entry) Guinea BissauCFA1997 (entry) MadagascarCFA1982 (exit) MaliCFA1984 (entry)

Conclusions In general, the currency union effect on intra-African trade is positive and significant This was robust to a number of sensitivity tests The point estimate is of a similar magnitude to comparable studies There remains the need for further investigation

Epilogue: The Search for Data The availability of data has been instrumental in expanding the OCA debate into more empirical areas. The dissemination of good data practices needs to continue in developing countries –To act as a real-time monitor –To enable detailed research which benefit from longer and wider datasets. –PARIS21 spreading this message Ability of data to form a virtuous circle with development.

The Virtuous Circle Data Research Quality of Policy Decisions Growth/Development