Following in the footsteps of the European Union (EU) and other regions around the world, African countries are seeking to integrate their economies. This is done in the hope of simplifying and increasing trade between African countries and boosting their economic growth.
However, do efforts to bring economies closer together work, at least in the context of Africa? “It worked for Europeans, at least to some extent, but there has been little evidence it could work in Africa,” says Dr Mamello Nchake, an Economics Lecturer at the National University of Lesotho (NUL).
So she and her co-authors wanted to investigate. And the results show that, perhaps, integration could be a good idea after all. They published their work at the International Review of Economics & Finance Journal.
Africa is coming together. We live in an Africa that wants to trade with itself. To show it is serious, the continent has just introduced the African Continental Free Trade Area (AfCFTA). The agreement initially requires members to remove tariffs (tax on imports between countries) from 90% of goods, allowing free access to commodities, goods, and services across the continent.
There is a philosophy behind bringing countries closer, not further apart, economically. “If countries remove barriers to trade,” Dr Nchake said, “the assumption is that flow of goods and services become easy, business is boosted and economies grow.”
Imagine what would happen to Lesotho if our Loti was not pegged to South African Rand. Because of uncertainties and costs due to the ever changing exchange rate between currencies, buying products from South Africa would be a headache. A cost of a car today could as well be different tomorrow.
That is why, according to Dr Nchake, “many countries are going through a permanent trade headache due to existence of different ever-changing currency exchange rates between countries.” Given all the trouble, it’s prudent to ask; do we really need all the trouble?
Apparently, the countries of Europe asked themselves that question long time ago, hence the EU and the common currency called Euro. That is called economic integration.
There are different levels of economic integration.
“We have free trade areas where there is a general agreement to make trade easy between countries without eliminating all trade barriers,” Dr Nchake said. This is followed by a more developed customs union. For instance, Lesotho, South Africa, Botswana, Swaziland and Namibia are in a customs union. “Here, all barriers such as tariffs are eliminated, and the countries within the union charge a common tariff when trading with countries outside the union,” she said.
Then there is the Monetary Union. Here we go as far as using single currency, like the EU’s Euro, or pegging our currencies to the currency of the big brother (like Loti and Emalangeni’s peg with South African Rand in which case the currencies are equal). An even deeper integration comes in the form of an economic and monetary union where the countries can even share a common central bank and common monetary policies.
The question remains. Are these models really working in Africa?
“First, we had to assess situations in Africa where the similar models of integration have been practised,” said Dr Nchake. “We could go no further than our every own Common Monetary Area (CMA).” In CMA, Lesotho, Swaziland and Namibia’s currencies are pegged to the mightier South African Rand. “In theory, this means that because the exchange rate transaction costs and uncertainties are eliminated, trade between these countries should then become easier,” she said. But how would you measure that?
They used retail prices. If trade becomes easy between countries, there would be more competition between the same products in those countries and the prices of the products would not differ that much. If you were the only one in Lesotho selling potatoes at M20 each, an entry of South African potatoes [due to easier trade] at M10 each would force you to lower your own prices to, at least, equal the prices of those imported from South Africa, benefiting the consumer.
So if before CMA, which started in 1974, prices of goods between the four countries were highly different, after CMA, we would expect the prices to be more similar if the CMA was working at all. “But we had a bit of a problem,” Dr Nchake noted. “There is virtually no data pre-1974. No one was doing monthly recording of prices then as it is now a norm.” They had to find an alternative.
Botswana offered a lifeline.
Botswana is not part of CMA. Its currency, Pula, is a bit stronger (of higher value) than the South African Rand. In 2005, Botswana introduced a policy to lower its currency value such that it got closer to the South African Rand (that is called devaluation). Even more, Botswana changed its inflation policy to nearly mirror that of South Africa in 2008, to keep inflation at 3-6 %.
The end result has been that even though Botswana was not part of the CMA, its policies imitated the objectives of CMA. Would that bring the prices of similar goods in South Africa and Botswana closer due to reduced exchange rate costs and uncertainties?
“We found that after 2005, the gap in prices of the same goods between the two countries dropped by 9%!” she exclaimed. “The gap further dropped by 5% after 2008. Statistically, they could show that the two drops were a result of the two new policies that brought Botswana and South Africa much closer.
In as much as regional integration efforts, such as CMA, are critical, other efforts to reduce restrictions of flow of goods between countries are equally important.