The impact of the strong euro on the real effective exchange rates of the two Francophone African CFA Zones

The author estimates the degree of misalignment of the CFA franc since the introduction of the euro in 1999. Using a relative purchasing power parity-based methodology, he develops a monthly panel time series dataset for both the Economic and Monetary Community of Central Africa (CEMAC) zone and the West African Economic and Monetary Union (UEMOA) zone to compute a trade-weighted real effective exchange rate indexed series from January 1999 to December 2004. The author's main finding is that the real effective exchange rate appreciated by close to 8 percent in UEMOA and 7 percent in CEMAC, influenced by volatility in the euro-dollar bilateral exchange rate and conservative monetary policies in the two zones, resulting in a partial loss of competitiveness in export markets. The lower appreciation in Central Africa can be explained by lower inflation in CEMAC than in UEMOA and by the greater trade with higher inflation East Asian countries, partially offset by the peg to the dollar. However, the inclusion of"unrecorded trade"results in an appreciation of only 6 percent in the UEMOA zone and 6 percent in the CEMAC zone due to higher inflation in the two countries with unmonitored cross-border flows, Ghana and Nigeria. Using time series econometrics, an Engle-Granger two stage procedure for cointegration, and an error correction framework, a single equation modeling of the real exchange rate from 1970 to 2005 as a function of terms of trade, economic openness, aid inflows, and a dummy representing the 1994 devaluation, the author finds little statistical evidence of a long-run equilibrium exchange rate that is a vector of economic fundamentals. The dummy explains most of the real exchange rate behavior in the two zones, while openness in UEMOA has contributed to an appreciation of the real effective exchange rate.Economic Stabilization,Economic Theory&Research,Macroeconomic Management,Fiscal&Monetary Policy,Free Trade

Hedging cotton price risk in Francophone African countries

Cotton exports account for a significant share of total commodity exports in francophone African countries, suggesting that these countries have a large exposure to volatility in cotton prices. An analysis of the cotton marketing systems in these countries revealed that most of the price risk is borne by the parastatals and ultimately by the government. This has led to problems in years of low cotton prices when the government maintained high producer prices. In recent years, these countries introduced some flexibility in their pricing policies to deal with that problem. As a means of managing their cotton price risk, francophone African countries have been using forward sales. Between a quarter and a third of exported cotton has been sold forward before harvesting. Forward sales have provided only limited coverage against price risks. The use of cotton futures and options could increase this risk coverage. Futures and options contracts can also give these countries flexibility in their sales strategies. Countries planning to privatize their cotton marketing sectors should consider the use of futures and options because forward sales are likely to decline significantly in a privatized system. The authors examined the feasibility of using New York cotton futures and options contracts as hedging instruments and found that there were benefits of reduced price volatility. Simulations for 1989, 1990, and 1991 show in every case that hedging was effective in reducing price risk from 30 percent to 60 percent. For every 1 percent reduction in risk, the reduction in income ranged from 0.66 percent to 1.12 percent.Financial Intermediation,Access to Markets,Markets and Market Access,Environmental Economics&Policies,Insurance&Risk Mitigation

Do Currency Unions Deliver More Economic Integration than Fixed Exchange Rates? Evidence from the CFA and the ECCU

In this paper we develop a model to identify determinants of macroeconomic integration in the African CFA Franc Zone and in Dollar-pegging Caribbean countries (including members of the East Caribbean Currency Union). These two groups of countries each comprise states using several different local currencies: on the one hand the BCEAO-CFA Franc and the BEAC-CFA Franc (both pegged to the Euro), on the other the ECCU Dollar and other national Dollar-pegged currencies. The purpose of the analysis is to distinguish the effect of monetary union on macroeconomic integration from the effect of pegging to a common OECD currency.Currency Unions; International Integration

Determinants of Foreign Direct Investment Flows to Francophone African Countries: Panel Data Analysis

This paper used yearly secondary data from 25 African francophone countries covering the period 2004-2012 to examine the factors that deter or attract foreign direct investment (FDI). Strength of minority investor protection in the country, the time required to start a business in terms of days from Doing Business Website are introduced in the model. We use 6 empirical determinants of FDI such as the growth rate of Gross Domestic Product, exports in goods and services, official exchange rate, domestic credit to private sectors, information and communications technology defined by the number of internet users, political stability and absence of violence. A Hausman test was performed and the results from the test suggested the use of fixed effect model. The results from regression with time and country fixed effects show that export in goods and services, internet’s users, official exchange rate, political stability and absence of violence estimate, the time required to start business in the country have greater influence on FDI. Development of the private sector can contribute to take up this challenge of attractiveness of FDI. It is very important for Francophone countries to encourage the development of sustainable private enterprises by granting of credits. Keywords: FDI, Time fixed effects, Countries fixed effects, Francophone African countrie

Economic Integration in West Africa: Does the CFA Make a Difference?

In this paper we use data from 17 African nations in order to investigate the hypothesis that monetary union – represented in this case by the CFA Franc Zone – augments the extent of macroeconomic integration in developing countries. The paper covers a number of dimensions of integration including the volume of bilateral trade, real exchange rate volatility and the magnitude of cross-country business cycle correlation.Monetary Union; Africa; Trade; Business Cycles

The Impact of Monetary Union on Macroeconomic Integration: Evidence from West Africa

monetary union, Africa, trade, business cycles

Employment-output elasticities determinants: case of cross-section from AMEE

Employment to production intensity is used as indicator for employment. The aim of this paper is to provide new estimates of employment-output elasticities and assess the effect of structural and macroeocnomic policies and demographic indicators on the employment-intensity of growth. Having a sample of 44 countries taken from AMEE (Africa and Middel East Erea; 20 francophone et 24 anglophone countries) over the priod 2000-2017, we propose linear and non linear specifications to assess the role of considered variables. Linear models results in majority do not confirm previous empirical results except that of Trade openness saying it contributes to explain cross-country variations in employment elasticities which tend to be higher in more open economies for Francophone countries. While for Anglophone countries, elasticities are effected only by 15 to 24 years old participant in active population (Tx1524). With non linear specifications (Quadratic, Cubic, and/or Augmented Cubic), Structural Policy variables (Labor market policy, Lmp, and Product market policy, Pmp) have increasing effect on elasticities. Structural reforms have to be complemented by macroeconomic stability policies (less GDP volatility) to maximize the effect of structural policies on employment responsiveness. In addition, macroeconomic policies aimed at promoting Foreign direct investment (FDI) have significant and positive impact on employment elasticities

The use of New York cotton futures contracts to hedge cotton price risk in developing countries

Cotton exports account for a significant share of commodity exports for some developing countries, especially in West Africa and Central Asia. In these countries, dependency on cotton for export revenues has increased in the past 20 years. These countries therefore have a high exposure to cotton price volatility. Cotton-producing developing countries and economies in transition make little use of hedging mechanisms to reduce risk from the volatility of cotton export revenues. Countries in Francophone West Africa use forward sales to hedge but only for a small share of the crop. These countries could use cotton futures and options contracts to hedge against short- to medium-term price volatility, making cotton export revenues more predictable. Cotton futures and options contracts could also make cotton-related commercial transactions more flexible. (Futures could be sold when there are no buyers in the physical market, for example.) In West Africa, futures and options could complement the existing system of forward sales. The authors examine the feasibility of using New York cotton futures and options contracts as hedging instruments. They base their analysis on a portfolio selection problem in which the hedger selects the optimal proportions of unhedged and hedged output to minimize risk. The results suggest that despite the existence of relatively high basis risk (that is, a relatively low correlation between spot and future prices), hedging reduces cotton price volatility by 30 to 70 percent. Moreover, for all varieties of cotton examined, the hedge ratio (the percentage of exports hedged) was below one. Using a hedge ratio of one (naive hedge), at times, increases rather than decreases risk. The results also show that hedging, while reducing risk, also reduces expected returns. Attitudes toward risk that is, the degree of risk aversion - determine how much of this risk-return tradeoff is acceptable. For a risk-averse agent, the main benefit of hedging lies in risk reduction rather than in the potential for increased returns.Insurance&Risk Mitigation,Environmental Economics&Policies,Non Bank Financial Institutions,Financial Intermediation,Insurance Law

COMMODITIES UNDER NEOLIBERALISM: THE CASE OF COCOA

The paper examines the case of cocoa as an illustration of the problems faced by primary commodity producers. The impact of market liberalization in cocoa producing countries as well as consuming industrial countries on the cocoa price and cocoa farmers is examined. The paper shows that the market liberalization cannot be held responsible for such improvements in productive efficiency as occurred over time, which was one of the two stated goals of these measure. Nor is there convincing evidence that the producer’s share in the export price increased, which was the other goal. A serious consequence of the preoccupation with market liberalization, however, was that it diverted attention from the main concerns of cocoa producers, viz., the market volatility, low prices, and the declining producers’ share in the value chain. The paper then goes on to explore the kinds of action that might be considered to address these issues. It makes a case for filling the institutional vacuum that has been created as a result of the abolition of state marketing authorities in several cocoa producing countries. The paper attempts to show that the conditions are favourable for cocoa producers to coordinate their production policies in order to maintain satisfactory cocoa prices, which is needed to arrest the erosion of incomes of cocoa producers.

Regional Integration of Equity Markets in Sub-Saharan Africa

Equity markets in developing and emerging economies have grown in number and importance as a result of financial market globalisation. However, their role in economic growth and development is enhanced if nascent markets are integrated with well-established ones. Market integration, measured by the transmission of returns volatility, is identified across a sample of SSA countries, using a unique dataset. Evidence for potential integration between financial markets in Sub-Saharan Africa (SSA) is found. Spillovers are found across markets, some unidirectional and others bi-directional. However, continued illiquidity and incomplete institutions indicate that an integrated financial community remains premature, and considerable regulatory reform and harmonisation will be necessary for this to succeed