Potential impacts of the proposed West African monetary zone on cowpea trade

Abstract

AbstractMember countries of the Economic Community of West African States (ECOWAS) are expected to form a West African Monetary Zone (WAMZ) by December 2009, whereby members would use a common currency in an attempt to promote regional integration. Evidence suggests that reduction in transaction cost as a result of a decrease (or elimination) of nontariff barriers (NTBs) and real interest rates in response to elimination of exchange rate differentials positively influence trade. The objective of this study is to quantify the effects of (a) a 7% real interest rate on capital and (b) zero NTBs within ECOWAS countries, on cowpea (Vigna unguiculata (L.) Walp) trade to provide a measure of the potential impacts of the WAMZ on grain trade. The study applies a spatial and temporal price equilibrium model formulated in a mixed complementary programming (MCP) framework and solved using GAMS/PATH. The focus is on the Nigerian cowpea grainshed (NCG) comprising Benin, Burkina Faso, Côte d'Ivoire, Ghana, Mali, Niger, Nigeria, and Togo in ECOWAS, and Cameroon, Chad, and Gabon in the Central African Economic and Monetary Community (CAEMC). The results show that if WAMZ results in reduced real interest rates within ECOWAS, the larger of the two monetary unions, consumers in the relatively larger coastal economies and producers in the smaller Sahelian economies would benefit while all others lose. However, net social welfare would increase by 0.19% over the base case of 6.3 billion US$ (bUS$). Removing NTBs among countries in the larger trading bloc may alter the pattern of cowpea flows with total trade volume increasing by 3%, but inter‐bloc trade decreasing by about 8%. The net total regional social welfare would increase by 0.14%, or 15 million US$ (mUS$), benefiting only consumers in importing countries and producers in exporting countries. The results emphasize the importance of specialization based on regional comparative advantage, but also draw attention to the need to devise ways to ensure acceptable welfare distribution among producers and consumers in line with policy objectives of the individual countries within the proposed WAMZ. Finally, this article contributes to the literature on the application of spatial and temporal models incorporating both ad valorem tariffs and differential interest rates in developing economies.