AN EXAMINATION OF THE POTENTIAL EFFECTS OF ADOPTING A COMMON CURRENCY FOR COUNTRIES IN WEST AFRICA

CHAPTER ONE

INTRODUCTION

Background of the study: Monetary unification entails three basic arrangements; common  currency, common central bank, and hence common monetary policy  (Plasmans et al., 2006). The theory that is often used in the monetary  unification literature is the Optimum Currency Areas (ocas), the development of which is attributable to Mundell (1961). oca is one of the theories used to assess the costs and  benefits of forming or joining a mu (Plasmans et al., 2006; Bayoumi and  Eichengreen, 1997, or the nature of macroeconomic shocks among the members  of a mu.  Monetary unification comes with both benefits and costs. Members  benefit from reduced transaction costs, end of the beggar-thy-neighbor  policies, the elimination of exchange rate uncertainty, and more transparent price among other things (De Grauwe, 2000). A monetary union  that meets the criteria tends to be beneficial to all members, otherwise,  it is costly. Loss of country’s sovereignty over monetary policy, especially  loss of control over monetary policy instruments/shock absorbers such  as exchange rate and interest rate, is one of the major potential costs for  the membership of mu. The magnitude of this cost is largely explained  by the frequency, nature, and transmission of the shocks which impact  the mu. If the nature of the shocks is asymmetric, the cost of joining an mu is substantial (Plasmans et al., 2006).

Although the world has witnessed many monetary unification arrangements (Gros and Thygesen, 1998), the European Monetary Union (emu) has attracted more attention than others,  particularly when the Euro was created in 2002. The emu is a union of  19 out of 28 members of the European Union. The emu members met  certain convergence criteria adopted in the Maastricht Treaty signed in  February, 1992. Chown (2003) provides a detailed history of monetary  arrangements in the world. One of the regional organizations that follow  the footsteps of the European Union in terms of structure and operation  is the Economic Community of West African States (ecowas) . Established by the Treaty of Lagos on 28th May, 1975, ecowas members have  undergone series of deliberations, meetings, and policies that would lead  to creating a single currency to be called Eco, similar to Euro, among  its members. One of the main purposes for its establishment is to have  a common currency across all the members. The designated date for  actualizing this vision is 2020. As the date is fast approaching, scholars  and policymakers/advisors assess the level of preparedness of the member countries for the Monetary Union (mu). For example, the ecowas conducts a convergence survey every year in the form of Convergence  Report. The report evaluates the members based on the convergence  criteria adopted that are similar to those of the European Union.  ecowas region, very few empirical studies were conducted to assess the  level of members’ preparedness. Moreover, these studies employ other  methodologies than the Blanchard-Quah (BQ) decomposition and focus  on CFA Franc Zone (cfz). and West African Monetary Zone (wamz);  see for example Hefeker (2010), Tsangarides and Qureshi (2008), Masson  and Pattillo (2001), and Fielding and Shields (2005). This study joins

other studies conducted to assess the fit of various established monetary  unions such as the emu, cfz, and other proposed unions such as wamz,  Association of Southeast Asian Nations (aseans) and pan-ecowas monetary union. It is devoted to assessing the suitability of forming an mu among the members of ecowas. It differs from other similar studies in  terms of methodology, variables, data frequency and sample size. This  paper investigates how ecowas countries respond to inflationary shocks  as well as to output shocks using BQ decomposition in comparison to  emu. Following the oca, this paper will evaluate the ecowas bloc in  terms of symmetry of inflationary shocks and business cycle synchronization. It is expected that the outcome of this study will contribute

to the current debate about the feasibility of creating the ecowas single currency, or/and at least guide the policymakers and governments  of the ecowas members about the decision to join the mu. Furthermore,the outcome can help the governments of ecowas members determine their position on the cost-benefit ladder.

​​​​​​​Statement of the problem     

The proposed usage of common currency for west African  countries was seen as a welcome development, as it would further  unify Africa and boost it economy in the international scene. Although this is not the first time common currency would be used by countries, as it is been used in Europe where we have the euro currency, and Europeans can enter into each others countries without a passport. However in spite of the numerous effort made by the ECOWAS member state to create a common currency in west Africa which will help to foster economic integration. Internationally the sub-region by implementing ECOWAS monetary measures. However, the issue of of common currency is still a mirage because of some certain factors which are but not limited to  the strength of the economy of west African countries vary, divergent tariff structure among west African countries, low level of intra-regional trade, political instability in some of the countries etc. It it against this problems that the researcher undergoes the study on the implication of common currency for west African countries.

​​​​​​​Purpose of the study  

The primary objective of the study is as follows

1. To examine the need for a global common currency

2. To examine west African countries and the problem of ECOWAS

3. To find out the problems facing the establishment of common currency in west Africa

4. To examine the concept of common currency.                 

Research questions        

The following questions have been prepared for this study

1. Is there a need for common currency in west Africa?

2. What are the problems facing ECOWAS?

3. What are the challenges facing the establishment of common currency in west Africa?

4. What is a common currency?              

Significance of the study      

The significance of this study cannot be underestimated as:

This study will examine the implication of common currency for west African countries

The findings of this research work will undoubtedly provide the much needed information to government organizations, ECOWAS and academia              

​​​​​​​Scope and limitation of the study   

This study will examine   the implication of common currency for west African countries.it will look into the formation of ECOWAS , the challenges in running it, it will also look into the proposed formation of a single currency note for west African states. Hence the study will be delimited to

REFERENCE

Plasmans, J.E.J.K., Engwerda, J., van Aarle, B., di Bartolomeo, G., and Michalak, T. (2006). Dynamic Modeling of Monetary and Fiscal Cooperation Among Nations. United States: Springer US.

Mundell, R.A. (1961). A theory of Optimum Currency Areas. The American Economic Review, 51(4), pp. 657-665.

Bayoumi, T., and Eichengreen, B. (1997). Ever closer to heaven? An Optimum-Currency-Area index for European countries. European Economic Review, 41(3-5), pp. 761-770

De Grauwe, P. (2000). Monetary policies in the presence of asymmetries.Journal of Common Market Studies, 38(4), pp. 593-612.

Gros, D., and Thygesen, N. (1998). European Monetary Integration: From the   European Monetary System to Economic and Monetary Union. 2nd edition. New York: Addison-Wesley Logman Ltd.

Chown, J.F. (2003). A History of Monetary Unions. London: Routledge.