African Monetary Research Articles

Nonlinear Effect of Financial Development on Income Inequality: The Case of Ivory Coast

From the mid-1980s until the 1990s, many developing countries, particularly the countries of the West African Economic and Monetary Union, undertook major reforms of their financial systems in order to free them from numerous internal constraints that limited their development, such as interest rate ceilings, high reserve requirements, administrative credit allocations, etc. This financial liberalisation will promote rapid financial development in these countries. Thus, in most of these countries, there is a relative deepening of the financial sector and an improvement in financial policies. The economic and financial literature suggests that a well-functioning financial system can promote the accumulation of physical capital, improve economic conditions and thus promote long-term growth (Demetrides and Andrinova, 2004), and thus reduce inequality between rich and poor (Anand & Segal, 2017). However, studies conducted so far indicate that the effects of financial development on income inequality remain mixed. Thus, the objective of this study is to analyse the effect of financial development on the reduction of income inequality in Côte d'Ivoire. To do so, we used annual data from the World Bank (2018) and the IMF (2018) covering the period 1986-2016. From the estimation of the ARDL and NARDL models, the results show that financial development reduces income inequality in the short run. However, in the long run financial development increases income inequality in Côte d'Ivoire. The results also show that financial development has an asymmetric effect on income inequality in the short and long run in Côte d'Ivoire.

Full Modified Ordinary Least Square Analysis of the Relationship between New Technologies of Information, Financial Development and Growth in WAEMU Zone

This paper aims to study the relationship between financial development, information, and communication technology (ICTs) diffusion and economic growth by examining the effects of interactions between finance and ICT on economic growth. The study covers eight West African Economic and Monetary Union (WAEMU) countries and spans the period from 2000 to 2018. The empirical results, after applying the fully modified ordinary least squares (FMOLS) estimator can be generalized as follows. First, regardless of the financial development indicator used, the empirical results show that financial development negatively influences economic growth in the WAEMU. This counter-intuitive relationship may be related to many phenomena, but there are no clear explanations in the literature yet. Second, ICTs diffusion improves economic growth in the zone. This implies that WAEMU countries should strengthen their ICTs policies and improve the use of new information and communication technologies. Finally, the interaction between ICTs diffusion and financial development is positive and significant in explaining growth. This implies that the economies of the WAEMU region can only benefit from financial development once a level of ICTs development is reached.

Linking Budget and Policies: The Case of Ivory Coast

In the case of Ivory Coast, some budgetary reforms have been implemented since 1999 in order to improve the budget allocation and ensure a better translation of development strategies into budget. Unfortunately, taking into account national strategies and policies have not always been the main preoccupation during budgeting. However, the requirements of managing for results bring the fiscal authorities to pay particular attention to the establishment of the link between policies and budgets. Moreover, establishing this link between policies and budget is becoming a major issue since the West African Economic Monetary Union (WAEMU) adopted in 2009 new budgetary reforms to promote performance budgeting. So, this study addresses the issue of linking policies and budgets in the specific case of Ivory Coast. To that end, it focuses on the existing gaps between the budgeting process and policies through the Poverty Reduction Strategy Papers (PRSPs) or simply the National Development Plans (NDPs). The analysis of the current budgeting process shows that the budgeting is not based on the PRSPs and sectoral plans; the integration between planning and budgeting is low, the budgeting is done through a resource-based approach and the medium and long-term budgeting is not established. Moreover, the Parliament has not been involved in the budget process and PRSP elaboration especially in the last years. Only the civil society has been involved in the PRSP elaboration but they are not consulted during the budget process. Therefore, attention should be given to the challenges related to strategic planning, management style and actors to be involved. This must be done through (i) the drafting of sectoral plans based on the NDPs/PRSPs; (ii) the integration between planning and budgeting; (iii) the introduction of a strategic phase and a medium-term perspective to the budget process; (iv) the shifting from a resource-based to a results-based approach; (v) the increase of the involvement of parliament and civil society in the budget process. Further, the MTEF process that started in 2010 should be reinforced through the completion of a Macro-economic framework and a Medium Term Budgetary Framework, a national MTEF to give the ceilings on expenditure to line ministries for a medium and long-term view in order to establish their sectoral MTEFs. Moreover, the public financial management reforms should continue in order to reinforce the budget credibility which is essential in the establishment of good and reliable MTEFs.

West African Economic and Monetary Union: Selected Issues

West African Economic and Monetary Union: Selected Issues

Fiscal Policy and Economic Growth in the Countries of the West African Economic and Monetary Union (WAEMU)

This article focuses on the relationship between certain fiscal policy instruments and economic growth in the countries of the West African Economic and Monetary Union (WAEMU), namely Benin, Burkina Faso, Ivory Coast, Mali, Niger, Senegal, and Togo. Our growth model was estimated using the "Generalized Method of Moments (GMM) in a system" dynamic panel over the period 1990-2020. The results obtained show that total public revenue excluding grants, total expenditure, external public debt, the active population, and credits to the economy over GDP positively and significantly influence the GDP growth rate. On the other hand, an inflationary environment and poor quality of the Institutions negatively and significantly affect the rate of GDP growth. By way of economic policy implications, the WAEMU countries should reduce the distortions associated with taxation in order to maintain a fairly substantial level of resources and gradually break away from external forms of financing. Finally, financial development must be promoted so that companies can obtain more loans from banks.

Road infrastructure and intra-community trade in the Central African Economic and Monetary Community

We examine the contribution of domestic and interstates road infrastructures to trade flow between member countries of the Central African Economic and Monetary Community (CEMAC). Theories of international economics as well as those of the new economic geography suggest a positive contribution of both road infrastructures to intraregional trade. A gravity model of international trade is estimated to evaluate this theoretical prediction in the CEMAC zone. Results confirm a positive contribution of interstate road infrastructure to intra-Community trade, but show no evidence of a positive contribution of domestic road infrastructure to intra- CEMAC trade.

An Analysis of the Effects of Taxation on Income Inequalities in WAEMU

This article analyses the potential effect that tax instruments have on income inequalities in sub-Saharan Africa particularly in the West African Economic and Monetary Union (WAEMU). Tax instruments are represented by various types of levies and taxes whereas income inequalities are estimated by the Gini index. Using the generalised method of moments over the period from 1990 to 2017, the results demonstrate that value-added tax, excise duties, and port charges have no effect on income inequalities whereas personal income tax and corporate income tax improve income distribution in the WAEMU. However, the globalisation of economies reverses the effect of corporate income tax. Moreover, tax progressivity reduces inequalities while the tax structure has no significant effect on income inequalities. To this end, the study recommends using direct and progressive tax instruments for the fight against inequalities. Similarly, the fight against aggressive tax optimisation must take a central stage in tax policies within an economy that is increasingly open to multinational companies.

Estimating the Property Taxation in WAEMU Countries: an Analysis

The question of efficient domestic tax revenue mobilisation in developing countries has continued to receive particular attention in recent years. This article evaluates the potential of property tax revenues in Western African Economic and Monetary Union (WAEMU) countries. To this end, three methods were employed using data from the Government Financial Statistics (GFS) of the International Monetary Fund (IMF) and the World Bank’s World Development Indicators (WDI). The Hodrick-Prescott filter method (1980) further allowed for a chronological estimation of the potential of property taxes while the optimisation model of Scully (1995) facilitated a punctual estimation of the potential informs concerning the significance of the parameters. Finally, the quadratic model of Laffer (1981) completed the results of Scully’s model. Overall, the results demonstrate the existence of sub-optimality in the collection of property taxes in WAEMU countries.

The role of international courts’ decisions in the system of sources of international financial law

The paper deals with the analysis of the legal nature of international courts’ decisions and their impact on the international financial legal order. The author claims that decisions of international courts, creating no new international legal financial norms, act as an additional source of international financial law, having no autonomy, and in combination with other sources of international law, performs the following functions: 1) regulatory-prescriptive (via opinio juris of existing traditions in interstate practice in the financial sphere transforming them into international customary law); 2) regulatory-affirming (confirming the legal nature of the international agreement between the subjects of international financial legal relations which caused a disputable situation). The judicial practice on financial issues and specificity of functioning of such judicial institutions as the Permanent Court of International Justice, the International Court of Justice, the CIS Economic Court, the Court of Justice of the European Union, the Court of Justice of the Central African Economic and Monetary Community, etc. are examined. The features of the provisions of international agreements on financial issues regarding the procedure for resolving disputes between the parties of the agreement about its implementation are analyzed. The paper explores particularities of the origin and development of the idea of the creation of an international financial court. Amid modern processes of the rapid growth of the amount of cross-border financial flows in the context of globalization, which is the consequence of the implementation of numerous international financial agreements, the idea of creation of an international financial court, which was first suggested in 1935, due to the complexity of legal nature of interstate financial disputes, is an objective necessity. The following features intrinsic to decisions of international courts (including decisions on financial issues) have been identified: 1) locality (binding only on the parties involved in the case, and only in the current case); 2) situatedness and unprompted appearance; 3) impartiality (due to the judges’ lack of political interest); 4) authority (international courts include generally recognized experts in international law).

Regional Stock Exchange Development and Economic Growth in the Countries of the West African Economic and Monetary Union (WAEMU)

This study used panel data covering 27 years to investigate the causality between regional stock exchange development and economic growth in the West African Economic and Monetary Union (WAEMU) countries. We performed a homogeneous Granger non-causality with an autoregressive distributed lag model (ARDL) and Markov-switching analysis, using six indicators for the stock and financial market and six for control. The results showed a close economic relationship between WAEMU countries and causality from the regional stock exchange, which supports the supply leading hypothesis. The causality was confirmed in the short and long run, depending on the variable. The causal relationships that support the demand-driven hypothesis were recorded from the economic growth for four market measurements.

Challenges in Trade openness, Governance and Industrial Productivity in West African Economic and Monetary Union (WAEMU) Countries

Inward-looking development strategies can lead to marginalization and slow growth especially for the small African domestic markets. However, when weak economies try to participate in the global economy studies in Southeast Asia show they end with significant challenges. Therefore, this paper analyzed the effects of trade openness on industrial development in West African Economic and Monetary Union (WAEMU) countries. However, due to data availability, the study covered seven countries over the 1996 – 2018 period. The pooled-mean group method was used in the analysis. The results of the analysis showed that, in the long run, trade openness did not benefit the development of the industrial sector in all the countries studied. However, in the short run, the results revealed the specificities of each country. These short-run results showed that trade openness has a positive and significant effect on the industry added values observed in countries such as Burkina Faso, Niger and Togo. The results also showed that government inefficiency has a negative impact on the development of the industrial sector in the long -run for all the countries studied. Furthermore, the indicator capturing the degree of freedom of corruption had a positive impact on the development of the industrial sector in the short or long run. Therefore, active engagement with the forces of globalization need strategic approaches in their integration in developing countries.

Analysis of the Determinants of Domestic Savings in the WAEMU

This article analyses the determinants of domestic savings in the West African Economic and Monetary Union (WAEMU), except for Guinea-Bissau. Members of the WAEMU are Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo. WAEMU member countries are working toward greater regional integration with unified external tariffs. The economic dynamism sought by each country could be beneficial to the mobilization of savings. Research into the determinants of savings is therefore of crucial importance for countries with a financing gap. The study covers the period from 1982 to 2017. The data used for this study come mainly from the World Bank (WDI). Using Dynamic Least Squares (DOLS), the study finds that domestic saving behavior is positively influenced by gross domestic product per capita, investment, life expectancy at birth, and the lending rate. On the other hand, primary school enrolment, trade openness, and inflation negatively affect domestic savings.

International trade and inclusive growth in West African Economic and Monetary Union (WAEMU) countries

The aims of this study is to analyze the relationship between trade and inclusive growth in WAEMU countries. To do this, an inclusive growth indicator is constructed using Multiple Factor Analysis (AFM) methods, to apprehend inclusive growth. Trade is apprehended by the degree of openness. The relationship between trade and inclusive growth was estimated using a VAR model on panel data. Then to consider the composition of the exchanges, a dynamic panel model was estimated. The results of the econometric analysis show that the inclusive growth of a year depends positively on the delayed value of the degree of openness and the share of imports from the WAEMU. On the other hand, inclusive growth does not have a significant impact on the degree of openness. A more in-depth analysis of the components of exports and imports revealed a significant and positive effect of the delayed export value of manufactured goods on inclusive growth. The stand-off between the two analyzes shows on the one hand that it is beneficial for the countries of the Union to open up to international trade, but this openness must be much more focused on the export of manufactured goods.

Analysis of the Competition for the Location of the Optimal Hub in the WAEMU (West African Economic and Monetary Union) Zone

The objective of this study is to analyze the contribution of governance (political stability) as well as per capita income and traffic past measured through the number of passengers traveling by air during a period of one year within each country of the zone to the formation of a hub in the WAEMU zone. Governance has been apprehended through Kaufman indicators which summarize the six dimensions of governance. Three control variables have been added in the model to better explain per capita income and reduce bias in the estimation. To achieve this objective, the study proceeded first with a descriptive analysis which revealed the existence of a positive linear correlation between governance indicators and the level of air traffic, and then with a dynamic panel approach. To this end, the Generalized Moment Method (GMM) showed that the overall contribution of governance to economic performance is not significant in the sample, as well as for each dimension of governance taken individually. However, the results differ when dissociating the specific effect of Senegal, where political stability, government effectiveness, regulatory quality and rules and laws each have a positive and significant impact on per capita income.

West African Economic and Monetary Union

Selected Issues

Effect of the Quality of Institutions on the Tax Structure in West African Economic and Monetary Union Countries (WAEMU)

The objective of this paper is to analyze the effect of the quality of institutions on the different types of tax revenues, in particular on the total tax revenue, the direct tax revenue, the domestic indirect tax revenue and the trade tax revenue. The econometric analysis used the Pooled Mean Group (PMG) estimator over the period from 1996 to 2015. The results of the estimates show that in the WAEMU zone, the quality of institutions has a positive and significant effect on all types of tax revenues except for trade tax revenue. These results are robust because they do not change according to the different indicators used to measure the quality of institutions. Furthermore, overall, GDP per capita positively and significantly affects total and indirect domestic tax revenue, while it has a negative effect on direct tax revenue. Trade openness has a positive and significant effect on all types of tax revenues, except for indirect domestic tax revenue. The share of agriculture has a positive and significant effect on all types of revenue except trade tax revenue. Inflation has a negative and significant effect on all types of tax revenues. The share of natural resources and the size of the informal sector show mixed results.

Natural Resources and Fiscal Policy in CEMAC: The Role of Institutional Quality

This article aims to analyze the effects of institutional quality through natural resource rents on the orientation of fiscal policy in the Central African Economic and Monetary Community (CEMAC). The methodology adopted for this purpose is based on panel data (over the 1996-2016 period) and the GMM system estimator. The results show that natural resource rents are a means by which institutional quality affects the orientation of fiscal policy. Indeed, economic and institutional governance complements natural resource rents in the countercyclical orientation of total public spending. Thus, there is an absence of the indirect effects of institutional quality on the orientation of total public revenue behavior. Similarly, during natural resource booms, the orientation of total public spending remains countercyclical. Thus, political and institutional governance reinforces the effects of natural resource booms on the countercyclical orientation of total public spending. With regard to the decline in natural resource rents, total public spending remains countercyclical. Only institutional governance reinforces the effects of the decline in natural resource rents on the countercyclical nature of total public spending. Thus, the procyclical orientation of the behavior of total public revenue remains, regardless of whether there are periods of boom or collapse in natural resource rents. Political governance amplifies the effects of the decline in natural resource rents on the procyclical behavior of total public revenue. These results lead to economic policy implications.

Effect of Tax Revenue Mobilization on Income Inequalities in West African Economic and Monetary Union Countries (WAEMU)

This research examines the effect of different types of tax revenues on income inequality in WAEMU countries over the period 1996 to 2015. Double least squares (2SLS) are used as an estimation technique to analyze the effect of these different types of tax revenues, including total tax revenues (the sum of all revenues), direct tax revenues (which include profit and income taxes), domestic indirect tax revenues (e.g., value added tax and excise duties) and commercial tax revenues (e.g., customs duties). The results show that an increase in direct tax revenues leads to a reduction in income inequality. In other words, progressive income taxation allows for an efficient redistribution of income from richer to poorer people, which contributes strongly to the reduction of income inequality. On the other hand, indirect domestic tax revenues and commercial tax revenues are found to be neutral in income distribution. In fact, WAEMU countries, in order to compensate for the fiscal losses resulting from the reduction of customs tariffs, have adopted a reform of domestic taxation focused mainly on the development of non-progressive indirect taxes, i.e., taxes governed by liberal principles of fiscal neutrality: taxation must not disrupt individual choices of resource allocation. These tax reforms thus explain the neutrality of the effects of indirect taxation in the WAEMU zone. In the light of these results, the paper suggests that WAEMU countries should strengthen the progressivity of direct taxes and always maintain the neutrality of indirect taxes.

Urbanization, Gender and Economic Growth in the Waemu Zone: Evidence from Pooled Mean Group Estimation

This study empirically analyses the influence of urbanization and the participation of men and women in the labour force on economic growth in the countries of the West African Economic and Monetary Union (WAEMU). Using data from the World Bank (2017) on the member States between 1990 and 2016, we show from Pesaran’s PMG estimator, Shin and Smith (1999) that in the short term, youth and women are very useful for economic growth. In the long term, urbanization, industrial added value and the elderly make a positive contribution to economic growth. The study urges governments to create better living conditions by ensuring adequate income levels and care, i.e., public policies should aim to increase employment, establish or improve social protection, social integration, health and the fight against discrimination.

Informal Economy and Urbanization of West African Economic and Monetary Union (UEMOA) Cities

Urbanization is a growing phenomenon in the UEMOA countries, in a context of the increasing informalization of its economies. Based on these facts, this research set out to analyze the relationship between urbanization and the size of the informal economy. This research uses the Pooler Mean Group (PMG) model to analyze the effects of urbanization on informality, and the Panel Threshold Regression (PTR) model for nonlinear analysis. It appears that the rate of urbanization has a positive effect on the size of the informal economy. Also, that the quality of institutions can reduce the above positive effect, reducing the rate of urbanization. Keywords : Informal economy, Urbanization, Institution, PMG estimate, PTR estimate. DOI: 10.7176/DCS/10-12-05 Publication date: December 31 st 2020