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M t Ui Monetary Unions: Convergence Criteria Some recent developments Jean Imbs Paris School of Economics The Future of Monetary Integration, Mauritius, 8-9 March 2016 Jean Imbs

Jean Imbs, PSE, IBFI-Banque de France High Level Seminar on Monetary Integration in Africa

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Page 1: Jean Imbs, PSE, IBFI-Banque de France High Level Seminar on Monetary Integration in Africa

M t U iMonetary Unions:Convergence Criteria

Some recent developments

Jean ImbsParis School of Economics

The Future of Monetary Integration, Mauritius, 8-9 March 2016Jean Imbs

Page 2: Jean Imbs, PSE, IBFI-Banque de France High Level Seminar on Monetary Integration in Africa

1 000

1.200

0.800

1.000

Exports / (GDP – Exports), Nigeria 2000-2010

0.600

0.400

0.200Exports / (GDP – Exports), USA 1950 - 1960

The Future of Monetary Integration, Mauritius, 8-9 March 2016Jean Imbs

0.000

Page 3: Jean Imbs, PSE, IBFI-Banque de France High Level Seminar on Monetary Integration in Africa

Domestic Markets

• Population Nigeria 2000 around 160 millions• Population USA 1950 around 160 millionsPopulation USA 1950 around 160 millions

• USA 1950 – Domestic Markets vast majority of value added.• Nigeria 2000 Foreign Markets vast of majority of value added• Nigeria 2000 – Foreign Markets vast of majority of value added.

But…

• Oil in Nigeria• USA is a continent-country

The Future of Monetary Integration, Mauritius, 8-9 March 2016Jean Imbs

y

Page 4: Jean Imbs, PSE, IBFI-Banque de France High Level Seminar on Monetary Integration in Africa

Exports / (GDP – Exports): East African Community (in discussion)

0 500

0.300

0.400

0.500Kenya 2000-2010

Tanzania 2000-20100.300

0.400

0.500

0.100

0.200

0.300

France 1950-1960 0.100

0.200

Italy 1950-1960

0.000 0.000

0.350

0.450

U d 2000 20100.200

0.250

Portugal 1975-1985

0.150

0.250

Uganda 2000-2010

0.100

0.150 Rwanda 2000-2010Portugal 1975 1985

The Future of Monetary Integration, Mauritius, 8-9 March 2016Jean Imbs

-0.050

0.050 Spain 1975-1985

0.000

0.050 Burundi 2000-2010

Page 5: Jean Imbs, PSE, IBFI-Banque de France High Level Seminar on Monetary Integration in Africa

• Population Kenya 2000’s: 40M, Population France 1950’s: 40M.France only reached current Kenya level in 2000.

• Population Tanzania 2000’s: 40M, Population Italy 1950’s: 45M.Italy only reached current Tanzania level in 2010.

• Population Uganda 2000’s: 30M, Population Spain 1970’s: 35MSpain only reached current Uganda level in 1996.

• Population Rwanda et Burundi 2000’s: 8-9M, Population Portugal 1970’s: 9 5M Rwanda and Burundi are an exception:

The Future of Monetary Integration, Mauritius, 8-9 March 2016Jean Imbs

Population Portugal 1970 s: 9.5M. Rwanda and Burundi are an exception: domestic markets dominate. Perhaps for other reasons?

Page 6: Jean Imbs, PSE, IBFI-Banque de France High Level Seminar on Monetary Integration in Africa

Exports / (GDP – Exports): Central African Monetary and Economic Community

1.4 Guinee Eq. 2005-2010

1

1.2Chad 2000-2010

14

16

18

20 Guinee Eq. 2005 2010

0.4

0.6

0.8

Cameroun 2000-20106

8

10

12

Rep. Congo 2000-2010

0

0.2

CAF 2000-2010

Cameroun 2000 2010

0

2

4

Gabon 2000-2010

The Future of Monetary Integration, Mauritius, 8-9 March 2016Jean Imbs

Page 7: Jean Imbs, PSE, IBFI-Banque de France High Level Seminar on Monetary Integration in Africa

Exports / (GDP – Exports), 2000-2010West African Economic and Monetary Union

1

1.2

Cote d’Ivoire

0.8 Togo

0 4

0.6

S lMali

Niger

0.2

0.4 Senegal

Guinee Bissau

Benin

The Future of Monetary Integration, Mauritius, 8-9 March 2016Jean Imbs

0

Burkina Faso

Page 8: Jean Imbs, PSE, IBFI-Banque de France High Level Seminar on Monetary Integration in Africa

Exports / (GDP – Exports), 2000-2010Economic Community of West African States (discussed)

1

1.2Ghana

Nigeria

0.8

Liberia Guinee

0.4

0.6 Guinee

0.2

Gambia

Sierra Leone

The Future of Monetary Integration, Mauritius, 8-9 March 2016Jean Imbs

01 2 3 4 5 6 7 8 9 10 11 12

relativeGMB relativeGHA relativeGIN relativeLBR relativeNGA relativeSLE

Page 9: Jean Imbs, PSE, IBFI-Banque de France High Level Seminar on Monetary Integration in Africa

Domestic Markets and Diversification

• Holding population constant, the majority of African countries are more open to foreign markets.more open to foreign markets.

• Reflects limited integration of domestic markets.

• Very relevant for economic and monetary integration because it• Very relevant for economic and monetary integration, because it affects directly the diversification of the economy.

• Local specialisation occurs in integrated markets: whether it happens via international trade or local trade.

• The lack of domestic integration creates high levels of specialisation.

The Future of Monetary Integration, Mauritius, 8-9 March 2016Jean Imbs

g g p

Page 10: Jean Imbs, PSE, IBFI-Banque de France High Level Seminar on Monetary Integration in Africa

Domestic Markets and Diversification

Gini Index for Sectoral SpecializationGini Index for Sectoral Specialization(Census Data, all sectors, 1-digit)

Mali South Africa Spain France Austria USA

0.861(1987)

0.233(2001)

0.350(1981)

0.369(1962)

0.403(1971)

0.375(1960)

0.904(1998)

0.266(2007)

0.295(2001)

0.318(1999)

0.385(1991)

0.332(2000)

The Future of Monetary Integration, Mauritius, 8-9 March 2016Jean Imbs

Page 11: Jean Imbs, PSE, IBFI-Banque de France High Level Seminar on Monetary Integration in Africa

Domestic Markets and Diversification

Gini Index for Sectoral SpecialisationGini Index for Sectoral Specialisation(Manufacturing, 2-digit, UNIDO)

> 0.70Benin, Burkina Faso, Burundi, CAF, Gambia, Ghana, Kenya,

Malawi, Niger, Nigeria, Tanzania, Uganda 0.70 Malawi, Niger, Nigeria, Tanzania, Uganda

> 0.4Botswana, Cameroon, Congo RP, Cote d’Ivoire, Gabon,

Mauritius, Senegal, south Africa, Sudan.

= 0.25 Developed Economies

Le futur de l’integration monetaire, Ile Maurice, 8-9 Mars 2016Jean Imbs

Page 12: Jean Imbs, PSE, IBFI-Banque de France High Level Seminar on Monetary Integration in Africa

Domestic Markets and Diversification

• Sub-Saharan Africa trending towards more specialisation. • International integration dominates domestic integration.International integration dominates domestic integration.

• No apparent trend in Europe / Advanced Economies.• EU had only limited impact on the specialisation of member countries• EU had only limited impact on the specialisation of member countries.• These are economies with already integrated domestic markets when

they entered union. • And thus that were highly diversified already.

The Future of Monetary Integration, Mauritius, 8-9 March 2016Jean Imbs

• Why is that relevant?

Page 13: Jean Imbs, PSE, IBFI-Banque de France High Level Seminar on Monetary Integration in Africa

Diversification and Monetary Union

• Extreme Specialisation has important macroeconomic consequences:

• Cycles are not synchronized1. First because of extreme specialisation in different activities

(typically commodities)(typically commodities)2. Second because of the lack of any local integration (e.g. intra-

African trade)3. Global integration is not helpful, as it favors synchronization

with the North (e.g. global value chain, MNC).

The Future of Monetary Integration, Mauritius, 8-9 March 2016Jean Imbs

Page 14: Jean Imbs, PSE, IBFI-Banque de France High Level Seminar on Monetary Integration in Africa

Integration and Diversification

DiversificationSynchronisation

Domestic Integration

Diversification

International Integration

Specialisation

The Future of Monetary Integration, Mauritius, 8-9 March 2016Jean Imbs

De-Synchronisation

Page 15: Jean Imbs, PSE, IBFI-Banque de France High Level Seminar on Monetary Integration in Africa

Diversification and Monetary Union

• Extreme Specialisation has important macroeconomic consequences:

• Little structural convergence: 1. Labor market integration: How to serve border areas without

domestic mobility?domestic mobility? 2. Financial markets integration: Risk sharing gains are limited to

local consumption3. Productivity convergence: Productivity gains are limited

without local specialisation of labor.4. GDP is volatile, no convergence in GDP per capita.

The Future of Monetary Integration, Mauritius, 8-9 March 2016Jean Imbs

, g p p

Page 16: Jean Imbs, PSE, IBFI-Banque de France High Level Seminar on Monetary Integration in Africa

Diversification and Monetary Union

• Peter Kenen: Product diversification is a fundamental element in the list of Optimal Currency Area criteria.list of Optimal Currency Area criteria.

• Linked directly with domestic market integration: it is first and foremost through local markets that diversification takes offforemost through local markets that diversification takes off..

• A high level of diversification is a pre-requisite of monetary union.1. First because it makes it easier to satisfy OCA criteria.2. Second because it creates a diversified base from which the re-

specialisation triggered by MU has fewer macroeconomic

The Future of Monetary Integration, Mauritius, 8-9 March 2016Jean Imbs

p gg yconsequences.

Page 17: Jean Imbs, PSE, IBFI-Banque de France High Level Seminar on Monetary Integration in Africa

Recommendations

• Compute directly a measure of diversification if sector-level data are available (unusual at 1-digit for the region as of now)available (unusual at 1 digit for the region as of now)

• Alternative: Exports / ( GDP – Exports)

• Facilitate local trade through a border or not• Facilitate local trade – through a border or not.• Accompany (at least) economic and monetary union with domestic

infrastructure projects. • Roads, bridges, harbors. Phone networks. Wifi networks.

• Monetary union is more viable if built on diversified nations whose

The Future of Monetary Integration, Mauritius, 8-9 March 2016Jean Imbs

y fdomestic markets are integrated.

Page 18: Jean Imbs, PSE, IBFI-Banque de France High Level Seminar on Monetary Integration in Africa

Recommendations

• Especially relevant when the “synchronizing” effects of monetary i b ll h i l h hunions may be smaller than previously thought.

(“Currency and Trade: A Post EMU Mea Culpa”, Glick et Rose 2015)

• Synchronizing effects of diversification constitute an attractive alternative for Sub-Saharan Africa.

• Especially relevant for Sub-Saharan Africa, where ethnic fragmentation within borders is rampant because of colonial borders. This fragments l l k d f i li i

The Future of Monetary Integration, Mauritius, 8-9 March 2016Jean Imbs

local markets, and fosters specialisation.