Book reviews

The Monetary Geography of Africa

Paul R. Masson, Catherine Pattillo, Brookings Institution Press, Washington, DC,

2005

Paul R. Masson and Catherine Pattillo, in their excellent The Monetary Geography of

Africa, analyze the long-standing question of the potential benefits and costs of proposed

monetary unions in Africa. Monetary unions have been a recurrent proposal for addressing

the problems of the region in hope of achieving long-term growth and fostering regional

solidarity. Yet scholars and policy makers have not paid sufficient attention to the varied

and interesting monetary arrangements in Africa and the trade-offs inherent in the choice

to create a common currency. Masson and Pattillo fill this gap in our knowledge extremely

well, and their book deserves a wide audience among economists, policymakers, and

anyone interested in Africa.

Dating to French colonial occupation of Africa, the two CFA franc zones1–West

African Economic and Monetary Union (WAEMU) and Central African Economic and

Monetary Community (CAEMC)–are common currency areas characterized by joint

decision making among member countries. The Common Monetary Area (CMA), an

arrangement among South Africa, Lesotho, Namibia, and Swaziland in which South

Africa sets monetary policy, dates back to the early twentieth century. In addition, several

monetary integration initiatives are being considered in Africa. By July 2005, for example,

Gambia, Ghana, Guinea, Nigeria, and Sierra Leone expect to establish a unified West

African Monetary Zone (WAMZ) with a common central bank and a common currency.

The Economic Community of West African States (ECOWAS) envisions the merger of

WAMZ and WAEMU to achieve a single West African currency. In East Africa, Kenya,

Tanzania, and Uganda have agreed to revitalize the East African Community (EAC). The

project includes a single currency (at an unspecified future date). In Southern Africa,

consideration has been given towards expanding the CMA zone centered on the rand to

1 The CFA franc zone is a common currency area that uses the CFA franc which is pegged to the euro

with the assistance of the French Treasure. Its African members compromise two groups of countries (plus

Comoros), WAEMU and CAEMC, each one with its own central bank and currency. WAEMU stands for the

West African Economic and Monetary Unity and includes Benin Burkina Faso, Cote D’Ivoire, Guinea-

Bissau, Mali, Niger, Senegal and Togo. CAEMC stands for Central African Economic and Monetary

Community, and includes Cameroon, Central African Republic, Chad, Equatorial Guinea, Gabon and

Republic of Congo.

Journal of International Economics 67 (2005) 515–528

www.elsevier.com/locate/econbase

include other Southern Africa Development Community (SADC) countries.2 bGrandschemesQ include a common currency by 2025 for the Common Market for Eastern and

Southern Africa (COMESA)3 and a common currency for Africa, long a pillar of the

African Unity, by merging six different regions that encompass all of the continent.

Considering the proposed completion dates of some of these initiatives, the overlap

among many of them, and the competing and sometimes conflicting objectives, there is a

clear need to analyze these monetary projects in order to determine how best to proceed.

Masson and Pattillo, drawing from their work on international monetary issues and vast

knowledge of Africa, provide an important examination of monetary arrangements in the

postwar period. They present a useful framework to evaluate the economic costs and

benefits of the different monetary union proposals, while not ignoring political

considerations. Their model expands the traditional criteria for an optimal currency area

(OCA)–a region where a single currency and a single monetary policy are most

advantageous–to include issues relevant to the African economies, such as the absence of

institutions that effectively insulate the central bank from pressures to monetize the fiscal

deficits. In addition, based on their rigorous analysis and lessons from history, the authors

offer reasoned speculation about the evolution of African exchange rate regimes. The

Monetary Geography of Africa presents such an analysis and empirical evaluation more

thoroughly and effectively than any other work of which I am aware of.

In this review I really cannot do justice to all the material presented. Therefore, I will

present a brief summary of the main topics in each chapter, highlight some interesting

points, and outline some lessons to be learned from them. Those who read the book should

thoroughly study each chapter to gain further insight into the research. As the authors

explain, the book is intended for policymakers, general readers, as well as economists with

technical training. In this regard, more technical details are presented in the appendix.

Chapter 1 provides an overview of the main issues and summarizes the main findings.

Chapter 2, bAfrican Currency Regimes Since World War II,Q in itself, is a great

contribution to the historical literature. Current monetary systems within Africa cannot be

understood without a proper knowledge of their historical roots.4 The historical context

sheds light on the potential success of current initiatives. In the first part of the chapter, the

authors describe the conditions that led to the CFA franc zones, the CMA around South

Africa, and the dissolution of other existing exchange rate unions after independence from

colonial rule. In the second part of the chapter, the authors continue the journey through

history and characterize the current monetary geography of Africa. Summarizing historical

background is not easy, and the authors performed this task both succinctly and effectively.

I personally would have preferred even more detail about the origins of these unions, in

3 The Common Market for Eastern and Southern Africa (COMESA) includes Angola, Burundi, Comoros, DR

Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles,

Sudan, Swaziland, Uganda, Zambia, and Zimbabwe.4 bCurrency systems always evolve in historical and political context and no economic analysis of them can be

complete that does not take into account their sociological significance in history.Q Mundell (1972, p.17).

2 The Southern Africa Development Community (SADC) includes Angola, Botswana, Democratic Republic of

Congo, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania,

Zambia, and Zimbabwe.

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particular, the details behind the CFA and the CMA and the decisions by different

countries to join or not.

The authors conclude chapter 2 by noting that the African experience with monetary

unions underscores the importance of political forces—the need for strong shared

commitment to regional integration or a hegemonic power. The authors add that continued

episodes of regional conflict suggest that the bases for such solidarity do not seem to exist

among many of the candidates of regional monetary integration in Africa. (The authors add

the caveat that the same could have been said of Europe in the immediate postwar period.)

Chapter 3, bCriteria for Currency Unions or the Adoption of Another Currency,Qpresents the model used to evaluate the monetary projects based on the OCA literature. As

Masson and Pattillo explain, a common currency saves transactions costs—an advantage

that increases with trade among countries. The costs of monetary integration are associated

with the loss of independent monetary policy, which is likely to be more constraining the

more asymmetric shocks the countries face (i.e., the more dissimilar the countries).

Flexibility, labor mobility or compensating capital flows, such as transfers, can mitigate

the effects of asymmetric shocks. A different set of criteria advanced in the literature is

based on the benefits of monetary independence and nominal anchors.5 A new currency

will be more attractive if the monetary union provides an institutional framework for

achieving more discipline over fiscal policies and insulates the (regional) central bank

from pressures to provide monetary financing.

However, the authors argue that some of the existing literature is less applicable to Africa

because the region faces fundamental institutional problems, such as a lack of central bank

independence and severe lack of fiscal discipline that lead to pressures to monetize deficits.

Although monetary unions are often adopted in the hope that a new regional central bank

might be more independent and restrain fiscal policies, the authors argue that the experience

in Africa suggests otherwise.6 Hence, in their model, the regional central bank is assumed

not to be fully independent to set monetary policy. In a monetary union, fiscal policies

are still at the country level, but monetary policy is at the regional level and reflects the

interests of the members proportionally to their weight in the union (capturing the loss

of independent monetary policy). A monetary union reduces somewhat the incentives to

expand money because the central bank internalizes the costs of competitive

devaluations. Countries, however, will not want to join other countries that face

asymmetric shocks or countries with less fiscal discipline, because this creates incentives

to inflate. The authors use data on government revenue, spending, and inflation from

1995 to 2000 to fit the model and estimate its parameter values. The comparison of

these variables across countries with independent currencies and those in a monetary

union pins down the bdisciplining effectQ of a common currency. In Appendix A, the

authors present the full derivation of the model and details behind the calibration.

In this chapter, the authors raise several interesting points for the region. Given the low

levels of within region trade, the potential savings in transaction costs appear to be low.

5 See Frankel (1999).6 The CFA zones have independent central banks, yet the independence was compromise in the 1980s by large

countries bypassing limits on monetary financing through borrowing by state-owned bank, leading to crisis and

devaluation in 1994. Since then, both WAEMU and CAEMC have attempted to put additional institutional

mechanisms to reinforce fiscal discipline.

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Although there is evidence that joining a union can lead towards greater symmetry of

shocks ex-post,7 the authors argue that in Africa, at least in the short run, this is unlikely

since countries are usually dependent on a few primary exports. Also, this implies high

asymmetry in terms of trade shocks (the prices of primary exports tend not to move

together). This situation, in addition to the low degree of fiscal discipline, points toward

high costs of integration. Political conflicts limit labor mobility and given the few financial

resources, the authors do not see a big role for fiscal transfers. However, the authors do not

see the loss of monetary policy as worrisome since such policy often has been misused.

Finally, the authors note that although their model focuses on fiscal distortions and shock

asymmetries, political factors should not be overlooked being that they are extremely

important in terms of the success or failure of monetary union projects. The political

motives behind the different projects are discussed on a case-by-case basis in each chapter.

Chapter 4, bAfrican Monetary Integration in Practice,Q presents a detailed institutional

analysis of the CFA franc zone and CMA. The chapter is rich in institutional details

relating to how different monetary arrangements function. The authors discuss different

issues addressed in the literature, such as whether the monetary policy has increased trade

and growth, lowered inflation, or allowed greater integration in the region. The authors

find that, despite neither WAMEU nor CAEMEC being perfectly integrated monetary

zones, over time CFA franc zones have reinforced some other aspects of cooperation, such

as trade and macroeconomic surveillance. This is an important point since this implies that

it may be difficult to disentangle in empirical work the effects due to a purely monetary

union from other aspects of regional integration. More important perhaps is the finding

that the CFA experience refutes the hypothesis that a monetary union in itself

automatically provides an agency of restraint that would discipline fiscal policies. (This

is an important lesson the Argentineans learned the hard way but could have learned from

the 1994 devaluation in the CFA franc zone following the fiscal excesses of some of the

larger countries, such as Cote d’Ivoire and Cameroon.) I found the authors overall

appreciation of the CFA and CMA experience a bit more negative than my own reading of

the evidence they present.

Chapter 5, bExperiences of Countries in Managing Independent Currencies,Q follows upthe analysis of current regimes in Africa. The authors find that following the liberalization

process of the 1980s and 1990s, de jure flexible regimes are more prone in Sub-Saharan

Africa (outside the CFA and CMA zones). As the authors note, the designation of some of

these regimes as flexible is questionable because rates are often managed.8 The chapter

highlights the institutional requirements for successfully dealing with a flexible regime, an

issue often neglected in the literature. Underdeveloped financial markets, poor fiscal

discipline, fear of floating, export structures dominated by a few commodities and players,

and lack of private speculators have limited African countries from successfully operating

flexible exchange rate regimes. A very interesting discussion in Appendix B (Country

Vignettes) details some of the cases used to draw these lessons.

Overall, comparing the experience of the existing regimes in Africa, the authors find that

CFA countries experienced slightly lower inflation than the rest of Sub-Saharan Africa, but

8 See Reinhart and Rogoff (2004).

7 See Frankel and Rose (1998).

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no better growth performance. Due to the conservative monetary policy followed by South

Africa, CMA countries have also benefited from low inflation. Adjustable fixed rates have

contributed to low-to-moderate inflation, macroeconomic stability, and periods of strong

growth. In contrast to Southern Africa, the experience of independent currency regimes has

been associated with higher inflation and periodic devaluation. However, for Africa, the

authors argue that flexible regimes have successfully reduced corruption and inefficiencies

associated with non-market allocation of foreign exchange.

In the last section of the book, the authors use the theoretical framework and the lessons

derived from history and the existing regimes to analyze the different monetary

arrangements proposed for Africa.

Following detailed analysis, in Chapter 6, bProposed Single Currency for West Africa,Qthe authors conclude that countries in ECOWAS most likely would lose from a monetary

integration because the countries involved are highly dissimilar in terms of shocks and

fiscal needs. An important point the authors make is that it is unlikely that France would

continue to provide convertibility guarantee for the monetary envisioned by ECOWAS.

Although a monetary union is not yet an objective with an explicit timetable, the authors,

in Chapter 7, bRegional Integration in SADC,Q conclude that, despite the economic

disparities and weak linkages among the members, there could be some partial SADC

welfare enhancing to members as long as South Africa continued to dictate monetary

policy. However, as the authors note, this does not seem like a viable political union which

will limit the expansion of CMA. In Chapter 8, bEAC and COMESA,Q the authors

conclude that plans by Kenya, Tanzania, and Uganda to revive an old monetary union are

unlikely to produce enormous economic gains limiting the political will in support of the

union. The authors conclude as well that due to a lack of macroeconomic stability and a

wide rage of development levels and economic and political conditions, the wide project

of COMESA also seems unlikely. In Chapter 9, the authors evaluate the case for

establishing bA Single Currency for Africa?Q a proposal long envisioned by African

leaders as a symbol for regional solidarity and backed by Robert Mundell, the father of the

OCA literature.9 The authors, however, argue against such a proposal. Their estimations

show that most regions would lose because a single monetary policy would impose severe

costs on dissimilar economies. Their view is that corruption and lack of fiscal discipline

are likely to make African countries poor partners.

A recurrent theme in the book is that a regional central bank does not ensure its

independence. Another theme is the skepticism about the effectiveness of monetary

solutions for non-monetary problems such as civil conflicts, absence of rule of law,

undisciplined fiscal policies, and poor infrastructure. The authors argue that at best, a

monetary region supported by fiscal discipline and good structural policies provides a

framework for low inflation and a stable exchange rate, but it cannot guarantee growth.10

Instead, the authors share the optimism of the African leaders in support of a parallel

9 Indeed, 30 years after expressing his views in favor of an African currency, Mundell (2002) makes a strong

case in favor of a single currency in Africa, pointing to the benefits of increased macroeconomic stability; see

Mundell (1972).10 Mundell (2002, p.57) agrees that monetary stability is not everything, but he goes on to argue that bwithout it,the rest is nothingQ.

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initiative for Africa, the New Partnership for African Development (NEPAD), whose goal

is to promote growth and good governance.

In the final Chapter, Masson and Pattillo venture into bAfrica’s Monetary Geography in

the Coming Decades.QWhat emerges as a clear conclusion from their work is that Africa is

unlikely to establish a common currency. By 2024, the authors envision a North Africa

pegged or adopting the euro, an expanded rand area in Southern Africa, and a different

CFA zone either adopting the euro or a regional currency with a regime of managed float.

For anyone interested in currency and monetary arrangements and African develop-

ment, The Monetary Geography of Africa, is an excellent resource. I enjoyed and learned

much from reading this book. Africa is a continent on the move, and Masson and Pattillo

have captured the critical requirements for a successful journey.

References

Frankel, J., 1999. No single currency regime is right for all countries or at all times. Essays in International

Finance, vol. 215. Princeton University Press.

Frankel, J., Rose, A., 1998. The endogeneity of optimum currency area criteria. The Economic Journal 108,

1009–1025.

Mundell, R., 1972. African trade, politics and money. In: Temblay, Rodrigue (Ed.), Africa and Monetary

Integration. Les Editions HRW, Montreal.

Mundell, R., 2002. Does Africa need a common currency. Defining Priorities for Regional Integration. UN

Economic Commission for Africa, Addis Ababa.

Reinhart, C.M., Rogoff, K., 2004. The modern history of exchange rate arrangements: a reinterpretation.

Quarterly Journal of Economics 119, 1–48.

Laura Alfaro

Harvard Business School, Morgan Hall 263,

Soldiers Fields, Boston, MA 02163, United States

E-mail address: lalfaro@hbs.edu.

Tel.: +1 617 495 7981; fax: +1 617 496 5994.

Giorgio Barba Navaretti, Anthony J. Venables, 2004, Multinational Firms in the

World Economy, Princeton University Press

As a profession, economists have been relatively late in analyzing the operations of

multinational firms and their role in the globalization of the world economy. Our

colleagues in political science, business, sociology, etc., have much longer histories of

examining the multinational firm and conveying their research to students. Why is this?

On the theory side, one explanation is the stranglehold that the bpureQ theory of

Heckscher–Ohlin trade models had on our discipline for so long. This meant modeling

assumptions of perfect competition and treatment of multinational firm investment as just

doi:10.1016/j.jinteco.2005.05.002

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