Macroeconomic Fundamentals, Economic Growth and Poverty in Ecowas Franc Zone: Does Single Currency Matter?

Abstract

The paper investigated the role of single currency macroeconomic variables (exchange rate, central government tax and grant revenue, central government fiscal balance, inflation rate, external public debt stock, and gross capital formation) on output, poverty, international trade volume and unemployment in ECOWAS Franc zone. The question was about the state of symmetry of these factors and its effects on economic growth. The core objective was to examine the pattern of relationship these variables have with economic growth. The paper covered the period 1980 to 2019 and countries in the zone. Romer endogenous growth model, optimum currency theory (OCA) and PMG-ARDL methodology were used. From the group coefficients, fiscal balance (0.03) and inflation (0.15); exchange rate (-0.29) and inflation (-4.50); GCF (0.01); and tax/grant revenue (4.10e-10) were significant at the 5% level in the output, poverty, international trade volume and unemployment models, respectively. While the poverty model indicated two OCA groups in the region, the output, international trade and unemployment models showed four OCA groups each. The long run error correction terms in the output, poverty, international trade volume and unemployment models were 0.61, 0.11, 0.10, and 0.093 respectively and significant at the 5% level, meaning divergence from long run equilibrium. A minimum of two OCAs and a maximum of four OCAs were found. The paper therefore concluded that the zone does not fulfill OCA requirements and recommended that appropriate policy mix should be developed to align these single currency macroeconomic factors towards achieving sustainable economic growth in the zone.