I thought I was going to do finance, while in banking, before I switched back to engineering. But while in banking, all my academic studies focused on Currency and Trade. Even as a PhD student in Johns Hopkins University, I was attending summits of economists, working with African Union and World Bank. This morning I made a comment on the challenges of AfCFTA and the potential welfare losses on a single currency, even in ECOWAS. Some questions via inmails. Here is a lead paper I wrote and delivered in the African Union Congress, making a case that prior convergence of our regional economies is important before anything continental.
Our markets are evidently heterogeneous with pockets of dominant nations in each block. For example, in ECOWAS, if we have a supranational bank, controlling the monetary policies of all the nations (each country will lose the autonomy of its central bank), one of the most important tools, at national levels, will go. Take Nigeria, the ability to devalue the naira during severe oil price misalignment will vanish.
So without the Central Bank of Nigeria being in existence to do that, any shock Nigeria is experiencing will ripple through to other small nations like Ivory Coast and Benin Republic even though they have nothing to do with oil.
So a nuanced and careful implementation is necessary before Nigeria’s mess becomes ECOWAS mess, and in that process makes Nigeria the denominator. Yet, the AfCFTA is a necessary initiative as Africa needs to trade more closely. But rushing to any currency union would be a mistake.
We have pockets of currency unions but they have not delivered any special miracle. If you do not improve productivity, your currency efficiency gains become marginal. I listed some pertinent enablers in this Harvard Business Review piece.
Comment: I find it interesting you suggest convergence of regional heterogeneous economies, before anything continental can occur, while simultaneously explaining the importance monetary policy has on dominant nations like Nigeria to affect currency values to offset fluctuations in commodity prices – all the while advocating for a single currency. In one hand you’re saying dominant nations need the autonomy to control their own currency, then in the other hand you’re saying they don’t (“each country will lose the autonomy of its central bank”).
China’s success is because they had sole ability to affect their currency. Keeping their currency artificially low allowed massive amounts of FDI inflows to invest in industrialization, and as you mention, ultimately AI. But creating one currency for the entire 54 nation trading block will be extremely difficult and will have unbalanced affects throughout the continent. One of the reasons Brexit occurred is because England wanted complete autonomy over their own currency value decisions.
AfCFTA’s implementation and success is hugely important to the continent but a single currency is not mandatory for the agreement to be successful. We only have to look at other successful trading blocks..
USMCA(NAFTA), AEC, and APEC to name a few. Those trading blocks are successful and do not have common currencies. It is true that a common currency will remove some inherent barriers for intra-continental trade but may have negative affects (reduced FDI for example) on smaller nations who’s comparative advantage is a lower currency value – as you point out, “The smaller economies affected could experience welfare losses, making them worse off than before the integration.” I wonder if you would advocate for a single continental currency if you were from Sierra Leon and not Nigeria.
You also mention improving infrastructure and education as ways to advance the continent. Of course, these are low hanging fruits. But I submit that according to Maslow’s Hierarchy of Needs, one can not obtain or concentrate on higher level needs until the lower level has been achieved/satisfied. With secure, consistent, and nutritious food being the lowest level. One can’t attend school while searching for food, or concentrate in class on empty bellies. First and foremost Africa needs to develop sustainable agribusiness. the level of agriculture in much of Africa is hundreds of years behind that of advanced nations all around the world.
Currently Africa sells its natural resources to obtain capital to spend on food. They are a net importer of food. This has to stop. Africa should be a net exporter not importer. Capital inflows from resource sales should be used to invest in infrastructure, (Instead loans from external governments, like China, are used for infrastructure) and investing in creating a sustainable and profitable agribusiness sector and to protect REGIONAL currencies. Loans should be used to create industries that attract FDI and investment in value added products that support continued operational revenue and ultimately accumulate wealth. Only with the elimination of wide spread poverty, and uplifting millions, can Africa realize their own sustainable industrial and technological revolutions like China.
Focusing only on Intra-African trade serves to recycle the same currency throughout the continent. Without capital inflows there will be no growth for sustainable business sectors.
-Resource sales for agribusiness, infrastructure, & currency value hedging.
-Loans to produce industry, value added products, & increased FDI.
=Sufficient food for the continent, greatly increased employment & drastic decrease in poverty.
My response: good points there. I must confess that all the options have challenges and I am not saying that any option is easy. Looking at my paper in the African Union, I had argued that if we MUST have a single currency, we must stabilize the regions first before we move continental. Yet, we will struggle to stabilize the regions if the dominant economies continue to struggle. For example, under ECOWAS, if we have one monetary union, the impact of Nigeria will become asymmetric, neutralizing anything Gambia, Benin Republic etc do.
Nonetheless, because things are not well optimized currently, I also do think we need to do something since we are underperforming. So, we could take risks even though they could be extremely “economically suicidal” if things get out of hand. But in all, I do not think these initiatives will matter if Africa does not improve productivity. But I recognize that some do argue that AfCFTA can indeed improve productivity. The debate continues…
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