their currency; your problem: africa and the new international financial architecture11 adeyinka...
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THEIR CURRENCY; YOUR PROBLEM: Africa and the New International Financial Architecture11
Adeyinka AdeyemiSenior Regional Adviser and NEPAD Focal PointHead, Regional Integration and Infrastructure ClusterCapacity Development Division, ECA(International Tax Justice Academy, 10-15 August, 2015 Nairobi)
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SummaryWe highlight a brief history of the international financial architecture, how it impacts Africa, the rationale/imperatives for a new architecture and probe its relevance for Africa.
Lastly, we argue that an African finance/monetary architecture will help curtail IFFs and promote regional integration.
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A brief history of the International Financial Architecture
• Emergence of financial globalization: 1870–1914 (Panic of 1907 and birth of the U.S. Federal Reserve System in 1913)
• Interwar period: 1915–1944 (Smoot–Hawley tariff of 1930; abandonment of the Gold Standard and the start of trade liberalization in the United States)
• Rise of the Bretton Woods financial order in 1945 (General Agreement on Tariffs and Trade in 1947)
• Resurgence of financial globalization (Flexible exchange rate regimes of 1973; the post-Bretton Woods financial order of 1976; European Monetary System in 1979 and the birth of the World Trade Organization in 1994
Financial integration and systemic crises: 1980-present (Birth of the European Economic and Monetary Union 1992; Global financial crisis and Eurozone crisis)
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What does it look likeCompletely lopsided; Africa is either a
bystander or unintegrated meaningfully.
“Their currency; our problems” (financial instruments, incl reserves are in foreign currencies. When the currencies collapse, they create national problems.)
Stifles inter-African trade and enables IFFs
Offers little protection to Africa at times of need
Opens Africa to vulnerability, volatility and shocks
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Impact on AfricaShocks lead to:
Tightening of credit
Weakening currencies
Declining stock markets, especially for some of the major stock exchanges in Africa;
Decline in African exports, trade credits, investments, remittances and tourism receipts; reduction of aid.
Overall the (2009) crisis reduced growth in Africa by 1.5 percent)
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Rationale for a new architecture
It is non-inclusive: (Andrew Sheng): “The system designed in 1944 is broken. It is a non-system… Even though G20 accounts for 85% of world GDP, 80% of world trade and two-thirds of world population … it is essentially self-appointed.
Poverty and inequality keep increasing.
It failed, plunging the world into crisis.
The world is now multi-polar and G7 can no longer dictate standards or structures.
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Imperatives for a new financial architecture
(Soludo and Rao)All countries to converge to an Anglo-
American model of capitalism
Market is supreme –all ills are due to the intrusive state.
Free trade and free movement of financial resources
Foreign investment is key to growth, employment and technological progress in developing countries
Growth will always trickle down
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Imperatives for a new financial architecture
Are these imperatives relevant for Africa?
Will they help fight poverty (IMF says: “…the fight against poverty is an essential component of the reform of the international monetary and financial architecture.”
Will they result in a new order?
Should Africa stay out or get on the global financial ship? Does it have a choice?
Can a common currency help?
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Questions (on the new architecture):
Will the architecture work for Africa?
Should Africa care about a new architecture (if you were not part of the old; do you care about the new?)
Can Africa afford not to care?
What sort of architecture works for Africa?
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Towards a regional financial architecture
Rationale: Their currency; your problem. Your currency; your opportunities.
UEMOA (300 million people) use CFA (underwritten by France at the rate of 1 CFA=0.0015 euro—offering some stability).
By 2020, West African CFA zone to start using the Eco
EAC to form a common currency union by 2023
African Central Bank by 2028
Resources abound in Africa for Africa’s finance and monetary institutions
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Tax Revenue: US$520bn p.a. Rapidly Growing Pension Assets
Mineral Earnings: US$168bn p.a. International Reserves, US$400bn
Diaspora Remittances: US$40bn p.a.
Diaspora Excess Remittance Costs: US$2.884bn
Remittances Securitization Potential: US$5-10bn
Stock Market Capitalization: US$1.2tr (2007)
Private Equity Market: US$30bn Private Equity Market: US$30bn
Bank Revenues: US$60bn, etc. Illicit Financial Flows: US$854bn
over 10 years/ $50 billion pa
Tax Revenue: US$520bn p.a. Rapidly Growing Pension Assets
Mineral Earnings: US$168bn p.a. International Reserves, US$400bn
Diaspora Remittances: US$40bn p.a.
Potential savings from Remittance Costs: US$2.884bn
Remittances Securitization Potential: US$5-10bn
Stock Market Capitalization: US$1.2tr (2007)
Bank Revenues: US$60bn, etc. Private Equity Market: US$30bn
Illicit Financial Flows: US$854bn over 10 years/ $50 billion pa
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DRM potentials abound for Africa’s finance institutions
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Towards an African financial architecture
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Common currency will:Enhance Africa’s integration
Savings on transaction costs.
Enhance mobility of labour, finance,
Wage flexibility
Price flexibility
Help check IFFs
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On the other hand…
Some studies say only ECOWAS and COMESA will benefit from a common African currency (Paul Masson and Catherine Pattillo, 2004).
Benin, Burkina Faso, Cote d’Ivoire, Mali, Niger, Senegal, Togo may lose within ECOWAS (Ghana, Nigeria, Sierra Leone, Gambia will gain)
In COMESA, Egypt, Kenya,Madagascar, Mauritius, Namibia, Swaziland and Uganda may lose; Angola, Ethiopia, Malawi, Seychelles, Sudan, Zambia and Zimbabwe will gain.
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On the other hand…
Others have argued that it took the better resourced, more physically connected/integrated European Union to evolve Euro.
Poor governance, poor institutions, Central Banks that are usually mis-used, may lead to currency depreciation and loss of value/appeal internationally
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On the other hand…
We must keep studying the factors and institute corrective measures.
An African financial architecture embedded with a common monetary instrument is crucial for Africa’s integration.
