African Union and the Prospects of Common Monetary Regime

AFRICAN UNION AND THE PROSPECTS OF A COMMON

MONETARY REGIME

INTRODUCTION

Monetary Union process entails the harmonization of macroeconomic policies, legal frameworks and institutional architectures, towards nominal and real convergence. The objective of monetary union is the enlargement and diversification of market size. Monetary integration may evolve from trade links, as well as, historical and cultural ties. The major benefit of a common currency that has been emphasized is that it facilitates trade (in both goods and services) and investment among the countries of the union (and hence increases income growth within the region) by reducing transaction costs in cross-border business, and removing volatility in exchange rates across the union.

A currency is like language (Barro2001). As a common language facilitates effective communication among people, a common currency could promote trade and investment among countries. In an environment of different currencies, transaction costs, including the costs of obtaining information about prices, would be higher. This would be a disincentive to trade, commerce, and investment.

Because of the dominance of the major industrial economies in shaping international monetary arrangements, developing countries have generally been bystanders to these shifts in international monetary policies. Yet, they have been affected by these changes. On the contrary, the costs of this instability have been proportionately higher for developing countries compared with larger developed countries.

Despite Africa's well-documented low and declining share of world trade and the continent's marginal financial integration with the rest of the world, based on a share of GDP, the average African country is far more open to trade than the average developed country (Mold, 2006).

African countries are consequently more vulnerable to volatile shifts in their terms of trade than comparable developed countries, and in spite of recent initiatives to reduce the debt burden, African countries are also vulnerable to shifts in exchange rates due to the need to repay foreign borrowings in hard currency.

In the absence of monetary integration, intraregional free flow of trade and investment, remained exposed to currency rate fluctuations, especially for investment, as modern capital-intensive investments generally large-scale, involve long-term uncertainty and risk. Free movement of labour also remains exposed. It is on this note that African countries have set themselves the goal of achieving deep regional integration.

This is a political project, motivated by deeply felt pan Africanism. But it also has an underlying economic logic, which says that by maximizing exchange and economic ties on a regional level, it may be possible to promote development and reduce vulnerability to external volatility. This is reflected by efforts in Africa and elsewhere in the developing world to promote regional integration

In August 2003, the Association of African Central Bank Governors announced that it would work for a single currency and common central bank by 2121. This Paper discusses the kind of theoretical blueprint that underlies this ambitious project, and will attempt analyze;

* the costs and benefits of monetary union for African countries?

* The extent to which monetary integration could lead to greater trade

between countries

* The possible means or the criteria to which such monetary integration

could be achieved and what would be the institutional requirement.

THEORTICAL FRAMEWORK

The theoretical framework that best explains monetary integration is Neo-functionalism approach. Neo-functionalism describes and explains the process of regional integration with reference to how three causal factors interact with one another:

(a) growing economic interdependence between nations,

(b)organizational capacity to resolve disputes and build international legal

regimes, and

(c) supranational market rules that replace national regulatory regimes.

It predicted that, gradually, elected officials, interest groups, and large commercial interests within states would see it in their interests to pursue welfarist objectives best satisfied by the political and market integration at a higher, supranational level.

According to its propounder Haas, three mechanisms that thought drive the integration forward are:

positive spill over; which is the notion that integration between states in one economic sector will create strong incentives for integration in further sectors.

Increased number of transactions; intensity of negotiations takes place hand in hand with increasing regional integration. And this leads to a creation of institutions that work without reference to "local" governments.

Transfer in domestic allegiances; can be best understood by first noting that an important assumption within neo-functionalist thinking is of a pluralistic society within the relevant nation states. Neo-functionalists claim that, as the process of integration gathers pace, interest groups and associations within the pluralistic societies of the individual nation states will transfer their allegiance away from national institutions towards the supranational institutions. They will do this because they will, in theory, come to realise that these newly formed institutions are a better conduit through which to pursue their material interests than the pre-existing national institutions.

Technocratic automaticity; described the way in which, as integration proceeds, the supranational institutions set up to oversee that integration process will themselves take the lead in sponsoring further integration as they become more powerful and more autonomous of the member states.

In the Haas-Schmitter model, size of unit, rate of transactions, pluralism, and elite complementarities are the background conditions on which the process of integration depends. Greater regulatory complexity is then needed and other institutions on regional level are usually called for. This causes integration to be transferred to higher levels of decision-making processes. Political integration will then become an inevitable