Download Africa in the international financial architecture

THEIR CURRENCY; YOUR
PROBLEM: Africa and the
New International Financial
Architecture11
Adeyinka Adeyemi
Senior Regional Adviser and NEPAD Focal Point
Head, Regional Integration and Infrastructure Cluster
Capacity Development Division,
ECA
(International Tax Justice Academy, 10-15 August, 2015
Nairobi)
Summary
We highlight a brief history of the international financial
architecture, how it impacts Africa, the
rationale/imperatives for a new architecture and probe
its relevance for Africa.
Lastly, we argue that an African finance/monetary
architecture will help curtail IFFs and promote regional
integration.
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A brief history of the International Financial
Architecture
Emergence of financial globalization: 1870–1914
(Panic of 1907 and birth of the U.S. Federal Reserve System
in 1913)
•
•
Interwar period: 1915–1944 (Smoot–Hawley tariff of
1930; abandonment of the Gold Standard and the start of
trade liberalization in the United States)
•
Rise of the Bretton Woods financial order in 1945
(General Agreement on Tariffs and Trade in 1947)
•
Resurgence of financial globalization (Flexible
exchange rate regimes of 1973; the post-Bretton Woods
financial order of 1976; European Monetary System in 1979
and the birth of the World Trade Organization in 1994
Financial integration and systemic crises: 1980-present (Birth
of the European Economic and Monetary Union 1992; Global
financial crisis and Eurozone crisis)
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What does it look like
 Completely lopsided; Africa is either a bystander or
unintegrated meaningfully.
 “Their currency; our problems” (financial
instruments, incl reserves are in foreign currencies.
When the currencies collapse, they create national
problems.)
 Stifles inter-African trade and enables IFFs
 Offers little protection to Africa at times of need
 Opens Africa to vulnerability, volatility and shocks
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Impact on Africa
Shocks lead to:
 Tightening of credit
 Weakening currencies
 Declining stock markets, especially for some of the
major stock exchanges in Africa;
 Decline in African exports, trade credits,
investments, remittances and tourism receipts;
reduction of aid.
 Overall the (2009) crisis reduced growth in Africa by
1.5 percent)
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Rationale for a new
architecture
 It is non-inclusive: (Andrew Sheng): “The system
designed in 1944 is broken. It is a non-system…
Even though G20 accounts for 85% of world GDP,
80% of world trade and two-thirds of world
population … it is essentially self-appointed.
 Poverty and inequality keep increasing.
 It failed, plunging the world into crisis.
 The world is now multi-polar and G7 can no longer
dictate standards or structures.
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Imperatives for a new financial
architecture (Soludo and Rao)
 All countries to converge to an Anglo-American
model of capitalism
 Market is supreme –all ills are due to the intrusive
state.
 Free trade and free movement of financial resources
 Foreign investment is key to growth, employment
and technological progress in developing countries
 Growth will always trickle down
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Imperatives for a new financial
architecture
 Are these imperatives relevant for Africa?
 Will they help fight poverty (IMF says: “…the fight
against poverty is an essential component of the reform of
the international monetary and financial architecture.”
 Will they result in a new order?
 Should Africa stay out or get on the global financial ship?
Does it have a choice?
 Can a common currency help?
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Questions (on the new
architecture):
 Will the architecture work for Africa?
 Should Africa care about a new architecture (if you
were not part of the old; do you care about the
new?)
 Can Africa afford not to care?
 What sort of architecture works for Africa?
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Towards a regional financial
architecture
Rationale: Their currency; your problem. Your
currency; your opportunities.
 UEMOA (300 million people) use CFA
(underwritten by France at the rate of 1 CFA=0.0015
euro—offering some stability).
 By 2020, West African CFA zone to start using the
Eco
 EAC to form a common currency union by 2023
 African Central Bank by 2028
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Resources abound in Africa for Africa’s finance and monetary
institutions
Tax Revenue: US$520bn p.a.
Tax Revenue: US$520bn p.a.
Rapidly Growing Pension Assets
Rapidly Growing Pension Assets
Mineral Earnings: US$168bn p.a.
Mineral Earnings: US$168bn p.a.
International Reserves, US$400bn
International Reserves, US$400bn
Diaspora Remittances: US$40bn
Diaspora Remittances: US$40bn
p.a.
p.a.
Potential savings from Remittance
Diaspora Excess Remittance Costs:
Costs: US$2.884bn
US$2.884bn
Remittances
Remittances Securitization
Securitization
Potential:
Potential: US$5-10bn
US$5-10bn
Stock
Stock Market
Market Capitalization:
Capitalization: US$1.2tr
US$1.2tr
(2007)
(2007)
Bank Revenues:
US$60bn,
etc.
Private
Equity Market:
US$30bn
Private Equity Market: US$30bn
Bank Revenues: US$60bn, etc.
Illicit Financial Flows: US$854bn
over 10 years/ $50 billion pa
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DRM potentials abound for Africa’s
finance institutions
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Towards an African
financial architecture
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Common currency will:
 Enhance Africa’s integration
 Savings on transaction costs.
 Enhance mobility of labour, finance,
 Wage flexibility
 Price flexibility
 Help check IFFs
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On the other hand…
 Some studies say only ECOWAS and COMESA will
benefit from a common African currency (Paul
Masson and Catherine Pattillo, 2004).
 Benin, Burkina Faso, Cote d’Ivoire, Mali, Niger,
Senegal, Togo may lose within ECOWAS (Ghana,
Nigeria, Sierra Leone, Gambia will gain)
 In COMESA, Egypt, Kenya,Madagascar, Mauritius,
Namibia, Swaziland and Uganda may lose; Angola,
Ethiopia, Malawi, Seychelles, Sudan, Zambia and
Zimbabwe will gain.
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On the other hand…
 Others have argued that it took the better resourced,
more physically connected/integrated European
Union to evolve Euro.
 Poor governance, poor institutions, Central Banks
that are usually mis-used, may lead to currency
depreciation and loss of value/appeal
internationally
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On the other hand…
 We must keep studying the factors and institute
corrective measures.
 An African financial architecture embedded with a
common monetary instrument is crucial for Africa’s
integration.
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Thank you
Feedback: [email protected]
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