Why doesn't regional monetary cooperation follow trade cooperation?

Abstract

ABSTRACT Conventional theories in political economy argue that monetary cooperation is more likely in regions with trade interdependence. In practice, however, regional trade cooperation usually does not lead to monetary cooperation. I argue that this disparity results from different political economy logics in the two issue areas. In contrast to trade cooperation, the domestic actor that sacrifices the most in a regional monetary agreement is the government itself, which loses a significant tool for domestic economic adjustment as well as an important political symbol. Thus, monetary cooperation is only likely if there are direct benefits to the government to compensate for its lost monetary control. Benefits to the aggregate economy or to particular economic sectors are usually insufficient compensation. Experience with earlier monetary institutions, however, can in some cases reduce the costs to governments enough to make cooperation feasible. I explore these arguments with two sets of case studies: Central America and West Africa. Central America has had the highest level of trade cooperation in the developing world, but never successfully implemented monetary cooperation. West Africa, by contrast, developed a strong regional currency despite its very low intra-regional trade. West Africa did have, however, experience with prior regional monetary institutions that lowered the costs of new cooperation for newly independent African governments.