Monetary Union, Competitiveness and Raw Commodity Dependence: Insights from Africa

Abstract

This paper investigates macroeconomic interactions in sub-Saharan African (SSA) countries, and more specifically, in the franc CFA zone. The CFA monetary zone is a unique case study because it is the only one that uses a common currency pegged to another currency, namely the euro. Additionally, the SSA region is heavily dependent on raw commodities. How monetary policy constraints affect trade, competitiveness and growth level of commodity-dependent economies? We estimate a Panel Vector Auto-Regressive model using four key macroeconomic variables: growth, current account, real exchange rate, foreign direct investment and the terms of trade. The analysis relies on a sample of 25 SSA countries including 14 belonging to the CFA zone. Two key results emerge from our analysis. First, the results show that foreign investments in CFA countries fail to generate the same positive spillover effects in the extra-CFA countries, highlighting the adverse effect of capital flight. Secondly, this paper shows that the Marshall–Lerner condition is not verified in the CFA context. As a consequence, nominal devaluation could not be used to stimulate the CFA trade balance. In terms of public policy, the most efficient ways to address the challenges generated by raw commodity dependence are through the close monitoring of foreign inbound investments, as well as complimentary domestic investments dedicated to sectors contributing to diversification and long-term growth.