This paper examines the trade promoting effects of monetary union in the context of the CFA franc zone. Using the gravity model as a basis for predicting the volume of trade between countries, the study attempts to estimate the potential for increased trade within the CFA franc zone. The study shows that the CFA countries have experienced relatively low monetary growth, relatively strict budgetary disciplines, and consistently low inflation. However, the results of the study indicate that monetary union in the case of the CFA franc zone did not promote economic integration among member countries in the form of expanded trade. The actual trade among these countries remained small despite the use of common foreign exchange policy and free transferability of resources among these countries.
The Franc Zone brings together fourteen African countries, grouped into two economic and monetary unions (WAEMU1 and EMCCA2 and the Comoros3, linked to France by financial cooperation agreements. It is administered by two central banks, one for each monetary union [
In the Monetary Cooperation Convention between the Member States of the Central Bank of Central African States and the French Republic of 23 November 1972, as well as in the Cooperation Agreement between the Member States of the West African Monetary Union and the French Republic of December 4, 1973, four founding principles were enunciated. It is:
➢ Convertibility guaranteed by the French Treasury. The convertibility of the currencies issued by the various issuing institutes of the Franc Zone is guaranteed without limit by the French Treasury.
➢ The fixity of the parities. The currencies of the Zone are convertible with each other, at fixed parities, without limitation of amounts.
➢ Free transferability. Transfers are, in principle, free within the zone, be they current transactions or capital movements. But recently member countries impose capital controls on intra-zone transactions.
➢ The centralization of foreign exchange reserves. In return for the unlimited convertibility guaranteed by France, the central banks of the CFA Zone are required to deposit at least 65% of their foreign exchange reserves (with the exception of the sums required for their current cash position and those relating to their transactions. with the International Monetary Fund) from the French Treasury, on the account of operations opened on behalf of each of them. This initial provision has been reduced for the BCEAO to 50% since the 2005 reform and to 60% (in July 2007) and 50% (in July 2009) for the BEAC. Since 1975, these assets benefit from a foreign exchange guarantee vis-à-vis the DTS.
Devaradjan and Melo [
On 1st January 1999, the euro became the currency of eleven European members countries of the European Economic and Monetary Union (EMU) and the French franc became a non-decimal subdivision of the euro. The euro replaced the French franc as monetary anchor of the CFA franc. This substitution automatically determined the euro parity of the CFA franc. It does not affect the monetary cooperation mechanisms of the Franc Zone5.
The peg to the euro did not result in a change in the parities of the CFA franc. On 31 December 1998, the Council of the European Union set the irrevocable conversion rate between the euro and the French franc (1 euro = 6.55957 FRF). This rate automatically determined the value of the euro in the CFA franc. As the CFA franc traded in French francs at the rate of 100 FCFA for a FRF 1, the parity of the CFA franc is now 1 euro = 655,957 FCFA.
The general objective of this study is to capture the impact of monetary union in force in the countries of WAEMU and EMCCA on bilateral trade flows in the context of development of trade (Appendix).
The article is organized as follows. Section 1 surveys economic performance and institutional structure of the CFA area. Section 2 sketches an econometric model. Section 3 presents and analyses the results of estimation.
Membership in a monetary union could influence trade since it implies a reduction of the uncertainty of the exchange rate [
The ex-post analysis of the effects of monetary unions has been the subject of much empirical work. So Rose [
Alesina, Barro and Tenreyro [
Other more recent work focuses on experiences of monetary integration in Africa. Thus, Carrère [
Moreover, Tsangarides, Ewenczyk and Hulej [
However, when a country is a member of a monetary union, it loses its monetary independence. It therefore follows that the costs of monetary union will be measured in terms of:
- Loss of the exchange rate instrument as an adjustment variable and;
- Loss of seigniorage.
What about in the WAEMU and ECCAS zones? The CFA zone countries experienced relatively slow monetary growth, strict fiscal discipline and lower inflation than other African countries. Over the period 1970 to 1990, the rate of inflation averaged 7.3% per year compared to 18.4% a year for other African countries south of the Sahara (World Bank, World Tables). A study by Devarajan and Melo [
Despite a fairly low domestic inflation, the fixed exchange rate of the CFA franc vis-à-vis the French franc is seen by some critics as being at the origin of the external competitiveness of the member states of the zone [
However, greater attention was paid to the relative performance of CFA countries in the 1980s and 1990s. GDP growth rates fell below those of sub-Saharan African countries outside the zone. CFA [
The central question is whether the CFA franc zone has contributed significantly to the promotion of the economic integration of its member countries in the direction of the development of their trade and the flow of cross-border investment. Studies of integration patterns in Africa reveal that inter-regional trade has not only been insignificant but almost stationary [
Other studies [
In this work, we are interested in only one of the factors, that of the impact of the monetary union in the promotion of bilateral trade between the countries members of the CFA franc zone. In addition to the standard factors affecting trade, the study will try to estimate the determinants of bilateral trade within the countries of the CFA franc zone.
There are several techniques and methods for evaluating regional trade7. Among these is the gravity model. This is a simple tool and often gives very good results in predicting bilateral trade volumes. Inspired by Newton’s theory8, the gravity model expresses trade flows between two countries as proportional to their economic weight and inversely proportional to the geographical distance separating them.
The gravity model is a generic name for the family of quantitative models developed by the astronomer Stewart in 1940 [
As we can see and as Martinez-Zarzoso and Nowak-Lehmann [
The work of these authors consisted in taking into account two main determinants that characterize the models of the new theory of trade, namely: economies of scale combined with product differentiation and transport costs.
Empirically, the gravity model has proved to be a particularly useful tool for analyzing bilateral trade between countries [
While the applications of the gravity model are numerous in Europe and Latin America [
In order to circumscribe intra-African trade, Elbadawi [
Other interesting work has been done [
The originality of our work compared to the studies carried out lies in the empirical approach adopted. The study is based, in this case, on the estimation of a gravity model, intended to circumscribe the determinants of bilateral trade between WAEMU and ECCAS member countries and especially to capture the commercial potentialities of within these two groups since the implementation of the two currency unions in the mid-1990s.
Empirical analysis is based on an augmented form of the traditional gravity model. The use of this augmented model makes it possible to determine the effect of distance and belonging to the same monetary zone on the intensity of trade between CFA Franc Zone member countries. This distance is usually measured between the economic centers or capitals of the two countries considered. Formally, the gravity equation, in its simplest form, is given by:
X i j = A ∗ ( Y i Y j / D i j )
where Xij represents the value of trade flows (for example, exports) between a country i and a country j, Y, their national income, Dij a measure of the distance between these countries and A, a coefficient of proportionality. It is generally estimated in logarithmic form. In addition to the traditional variables of GDP and distance, various variables have been added to this basic formulation in order, among other things, to capture certain specificities of the bilateral relationship: the sharing of a land border, the effect of the oil and cotton countries. . The per capita GDP variable has also been introduced to measure the level of development of each country, as it is assumed that as a country develops, it tends to become more specialized, and to trade more [
A positive relationship between GDP and trade is expected. Transport costs are usually captured by the distance between co-traders, to which are added dummy variables relating to the isolation and/or sharing of common borders by the economies of the grouping. The sharing of a common border is measured by a binary variable equal to unity when countries i and j share a common border and to zero otherwise. Contiguity is expected to have a positive impact on bilateral trade. A priori we can say that distance has a negative correlation with the volume of trade.
The estimated gravity equation is:
L o g ( X I J C O R i j ) = β 0 + β 1 log ( G D P i ∗ G D P j ) + β 2 log ( G D P T i ∗ G D P T j ) + β 3 log ( D i j ) + β 4 U M i j + β 5 log L A N D + β 6 O I L i j β 7 C O T O N i j + ε i j
where XIJCORij is the flow of exports between countries i, and j at period t,
GDP is the total real GDP,
GDPT is the real GDP per capita,
Dij is the distance between i and j from the CEPII website.
UM is a dummy variable that is 1, when i and j share the same currency area. She is broken down into WAEMU and Customs and Economic Union of Central Africa during the period from 1990 to 1994, and into UEMOA and ECCAS, over the period from 1994 to 2006.
LAND is a dummy variable that is 1, if i and j share a border.
OIL is a dummy that takes into account the oil producing countries,
COTTON is a dummy that takes into account cotton countries,
εij is the error term.
The sample taken into account includes all eight (8) WAEMU countries and all six (6) CEMAC countries.
The augmented gravity equation was estimated on panel data using non-effects GCMs with heteroskedasticity correction. The estimator used is CPSE (Panel Cross Section Error). The results obtained were more robust than those obtained with GCMs with fixed and random effects. The sample comprises 2358 observations, from 1990 to 2006. The variable dependent is the flow of exports. The sample was divided into two sub-periods (1990-1994 and 1995-2006) before and after the reforms. There is no missing data. For each of the sub-periods, we average the data in order to avoid the cyclical biases (business cycle) that sometimes occur when the estimates are made for a year.
The interest of this division is twofold. The first period takes into account the effect of the structural adjustment programs applied in several economies of the subregion. During this period it is estimated that SAPs are assumed to have affected the structure and trend of production and trade of these economies. The second period makes it possible to test changes in the institutions of the CFA zone countries with the advent of UEMOA and CEMAC. For each of the two periods we measure the flow of exports as the volume of imports from country i as recorded in country j. In doing so this measure takes into account transport costs since imports are recorded in CIF value (freight insurance costs). Moreover, the choice of imports in place of exports or total trade (imports + exports) takes into account the quality as well as the availability of data. Indeed, the data relating to imports are generally reported with more precision, with regard to the duties and taxes to be collected [
The data for this study (annual exports and imports) are in constant millions of US dollars from 1988 and come from the IMF’s “Direction of Trade” and the World Bank’s “African Development Indicators”. Data for real and per capita GDP cover the period from 1990 to 2006, which is 17 years. They are extracted from the World Bank Economic and Social Data Bank (ESDP) and AfDB African Development Reports. GDP in constant millions of US dollars in 1988 is at market price and GDP per capita is the standard of purchasing power. Data on the distance (in kilometers) between the coexchangers comes from the CEPII website (Center for Prospective Studies and International Information) (
One of the characteristics of trade between African countries is the scarcity of data for a large number of bilateral relations. Thus, the value of trade between two countries can be zero. With a specification in logarithm, such an observation will become indeterminate. To solve this problem, there are two possibilities. Zero values can be eliminated if their percentage in the observations is small and subsequently used the ordinary least squares (OLS) method for estimating the model. If the proportion of nil observations is high, the use of OLS leads to biased results. This can be verified by averaging the error term. It is common in this case to use a non-linear estimation technique such as Tobit, which explicitly recognizes the existence of the null values of the dependent variable and treats them as non-registered trade flows while normalizing the distribution. In addition, if estimating from a Tobit is not a problem, the measurement of the model’s performance is not the subject of a consensus. The measure generally used in the literature, Pseudo-R2, comes in several forms (Veall and Zimmermann, 1994). We use in this work the Mac Fadden Pseudo-R2 which is the most widespread. The results of the estimates for the two sub-periods are summarized in Tables.
The results of our estimates are presented in
This phase corresponds to the period during which most of the CFA zone countries have been applying (for some years) structural adjustment programs following macroeconomic imbalances. The results obtained above (
The explanatory power of the model is 94.3%, and the model is globally significant. All variables except GDP per capita are significantly different from zero. The estimates obtained are consistent with the empirical results obtained in previous work. The remoteness of two countries reduces trade by 0.73%, while increases in real GDP and GDP per capita intensify them. The sharing of a common border is also one of the determining factors that explains the increase in bilateral trade. GDP and monetary union dummy variables (CEMAC, UEMOA) and the common border (Land) contribute most to the increase in export flows. The Countries in the Franc Zone with a common border trade three times more than other countries.
In addition, the results show that bilateral trade increases in the WAEMU zone (ex CEAO) by 22.27 times and in the CEMAC zone (formerly UDEAC) by 3.28 times. In other words, trade in the WAEMU zone is 6.78 times more intense than in the CEMAC zone (see
The analysis of IMF statistics confirms the results obtained. During this sub-period, the share of intra-zone trade in UEMOA’s total trade is greater than in the CEMAC zone. This is between 8% and 11% in the UEMOA, while in the CEMAC zone, it fluctuates between 0.90% and 3.51%. In view of these results, it can be said that the objective of CEAO, which was, inter alia, to promote trade between these countries in response to market problems, has been achieved.
Oil producing countries trade more with each other than cotton producers. In the 1990-1993 sub-period, trade between oil-producing countries increased by 1.38%, while that of cotton producers increased by only 0.87%. This can be explained by the fall in export prices of agricultural commodities (especially cotton) during this period, following the deterioration of the terms of trade and the competitive devaluation policies of neighboring countries not belonging to the region, not at the CFA zone.
During the sub-period 1994-2006, we add to the gravitational model CEMAC, UEMOA, LAND, OIL and COTON indicator variables to take into account the
Dependant Variable: LOG (XIJCOR). Method: Pooled Least Squares. Cross-sections included: 128. Total pool (unbalanced) observations: 1370. Cross-sections weight (PCSE) standard error & covariance (no d.f. correction).
Dependant Variable: LOG (XIJCOR). Method: Pooled Least Squares. Cross-sections weight (PCSE) standard error & covariance (no d.f. correction).
effect of the different monetary zones, borders and oil and cotton producing countries. The Franc Zone on bilateral trade. The quality of the adjustment evaluated by the coefficient of determination R2 indicates that 43% of the fluctuations in exports are explained by the model. All the coefficients associated with the estimated variables are significantly different from zero. The model is globally significant. The introduction of LAND, OIL and COTTON variables in the model shows that the flow of exports does not depend only on the traditional variables of the gravity model. Trade increases by 4.17% more in countries sharing a common border than in other Franc Zone countries, and the effect of distance on the exogenous variable decreases by half (
In addition, GDP in countries i and j positively explains trade flows between them. When GDP increases by 1%, the flow of exports increases by 0.1%. The introduction of CEMAC and UEMOA dummy variables indicates that belonging to a common currency area has a positive effect on bilateral trade. The countries of the WAEMU zone trade 13.87 times more than the countries of the CEMAC zone.
However, the effect of currency areas is not the same. One could conclude that the formation of monetary and economic unions in both zones has only a negligible effect on bilateral intra-zone trade. Beyond the facilitation of the circulation of goods and services, the objective of the creation of these institutions is to catalyze exports, in general, and intra-zone trade, in particular. Bilateral trade among oil-producing countries is increasing by 2.8%, while cotton producing countries have grown by 0.38%.
These results conceal the weakness of intra-zone trade. According to the IMF, intra-WAEMU trade is still hampered by significant non-tariff barriers (national standards, quantitative restrictions on certain imports, treatment discrimination of national and regional products, etc.). As for the CEMAC zone, the preferential tariff adopted in 1994 on intra-Community trade is applied unequally.
As can be seen in the sub-periods under consideration, the oil producing countries trade more with each other than the cotton producing countries, certainly because most of these countries are landlocked.
The purpose of this paper was to analyze the impact of currency unions on bilateral trade.
From an overall point of view, the main expected effects of the adoption of a common currency and monetary policy fall into two main areas. On the one hand, the reduction in transaction costs related to currency differences allows the expansion of trade and the growth of activity. On the other hand, the strengthening of the credibility of the Monetary Authority resulting from its regional status contributes to the stabilization of the macroeconomic framework.
On the trade side, most ex-ante analyzes have highlighted the weakness of intra-regional trade potential, mainly related to structural barriers.
Based on gravitational models, this study has attempted to highlight the determinants of bilateral trade and, in particular, the impact of the existing monetary union, in this case UEMOA and CEMAC.
It thus appeared that the geographical and structural factors, but also the membership of the monetary union, determine the intensity of bilateral trade flows within these two unions. In addition, the impact of the common currency is reflected in significant trade creation.
However, the potential for intra-regional trade could be strengthened by putting more emphasis on the structural reforms needed to diversify economies and thus promote complementarities, develop infrastructure and enhance convergence of macroeconomic performance and policies.
In a panel of bilateral trade between CEMAC and WAEMU countries over the period analysed, it appears that economic size, geographical and political factors are the major drivers of bilateral trade between UEMOA and CEMAC members countries. More importantly, our results show that a generalized model which includes all the possible dimension of trade effects (both the main and interaction effects) is more appropriate for the analysis of bilateral trade in UEMOA and CEMAC. Therefore, ignoring any of these effects gives misleading inferences as suggested by the results of the analysis carried out.
In terms of policy implications, we recommend that concerted efforts should be geared at increasing the productive capacity and value addition in countries in the ECOWAS region. This will not only promote trade and output but result into more employment opportunities, increased revenue and attract the much needed capital inflow into the region. Also, despite the fact that infrastructure is inevitable for growth in intra-regional trade; it is currently insufficient and dilapidating in nature in ECOWAS as a whole. This calls for adequate attention. Giving the importance of political stability to trade, we recommend that all stakeholders should strive for the prevention and prompt resolution of conflict and political instability in the region. Finally, analysis of bilateral trade in UEMOA and CEMAC should always take cognizance of all the dimensions of the panel, especially since countries in the region differ or change over time and space.
The author declares no conflicts of interest regarding the publication of this paper.
Sirpe, G. (2019) Monetary Union and Bilateral Trade among CFA Franc Zone Member Countries: An Empirical Analysis. Modern Economy, 10, 412-428. https://doi.org/10.4236/me.2019.102028
Source: Own construction.