Lessons from the Euro-zone debt crisis

The economic integration of the East African Community (EAC) has gained momentum of late, and for good reasons.
Prof. Manasseh Nshuti
Prof. Manasseh Nshuti

The economic integration of the East African Community (EAC) has gained momentum of late, and for good reasons.

For African economies, which were fragmented by colonial architects in the scramble for the continent’s recourses that left most of countries cut into blocks to suit the resource appetite of the colonialists, economic integration is even more apparent. 

Not only for access to mass markets for their goods and services, but also to allow free movement of labour that would intrinsically reunite a separated people and bring about other social benefits.

The benefits of regional integration are widely researched and documented. Empirical evidence points out to immense benefits from economic integration mainly as a catalyst to economies of scale by opening up huge markets, which hitherto were closed by all sorts of unwarranted barriers to trade. 

Initially, economic integration was inter alia aimed at eliminating barriers to trade, investment, financial flows and movement of labour in pursuit of material and economic interests.

 It is further intended to establish a more competitive environment, leading to efficient production through innovation and encouraging cost optimization. Whilst this process entails loss of ‘sovereignty’’, an integrated market yields a positive-sum game for all participating nations.  

In the case of EAC, integration is still at its infancy stage and the drive from one stage to another has rather been a political process without populace support, sometimes void of economic rationale in hope that the latter will emerge as a by product of the former.

Whereas this is possible, our integration process has been haste to say the least. For instance, it took the Euro-zone (in crisis of proportions) 40 years to usher into European Monetary Union (EMU). The EAC Monetary Union had been slated for ‘2012’, exactly 12 years after the birth of the EAC.

Whereas timing of the stages of integration is not time variant, nevertheless there are some critical economic fundamentals to be in place (which will be argued in these series) without which the process is bound to either stall or collapse altogether. 

Each stage of economic integration has basic fundamentals that must be met for the same to be properly structured before the next stage is ushered into. The success of one stage, depends on the successful implementation of the earlier stage from the Customs Union to the Common Market, Monetary Union and ultimately to a ‘Political Federation’.

Whereas it is possible to fast track this process, but in a properly coordinated order never, efficiency of existing structures must measure to the optimality conditions necessary for the stage before another stage is ushered into. Otherwise they all become irrelevant to the underlying economies and in the process negate the very essence of integration.

Given weakness in many national institutions, implementation of various stages is bound to pose serious challenges. Even in the current setup of the two stages of customs union and the common market, delays in harmonising and implementation of national laws and legislation in conformity with underlying protocols has been difficult.

World over, economic integration have been political projects driven by political decisions. As a result political will among policy makers is critical to the success of these integration projects.

However, the sustainability of these projects must outlive the life of founding political groups, party or class, particularly in Africa where such projects are not yet institutionalised.

This therefore means that, public mobilisation and ownership of such projects is not only necessary but also an essential condition for their survival.

This is again conditioned on the higher degree of economic interdependence among integrating economies, without which the project remains political intent and abstract.  It thus becomes subject to failure if the existing political panorama/structures changes fundamentally.

The EAC currency union

A few years now different monetary economists predicted that the number of currencies in the global monetary system would fall from 150 to perhaps three or four. While a domestic currency had traditionally been conceived as part of nation’s sovereignty and tied to its political existence, there were no reasons for that to persist. The consolidation of currencies has been seen as a logical step in the globalisation process, one that followed rationally from the increased globalised pattern of trade for sometime now.

Nonetheless, the aftermath of the subprime crisis in the US and its effect on global financial markets which has resulted in the largest economic downtown since the Great Depression of 1930s, has seriously shaken the school of thought that held the view that, monetary unions was a panacea to global financial problems through currency stability.

This view was premised on the effects of volatility of floating exchange rate systems in operation in many developing/emerging economies and the repercussions of the same to countries heavily exposed to international trade, in form of exchange losses resulting from exchange/ price volatility.

This then led many countries to seek an alternative monetary anchor, one that could provide the stability and credibility that a fixed exchange rate system was intended to provide.

Alternatives available to provide such a monetary anchor were either to surrender sovereign currency of a country and the adoption of another seemingly stable currency through monetary union or through currency replacement altogether.

In case of the former, a classic example is the European Union which adopted the Euro in 1999. In the case of the later, dollarization (a process of replacing a local currency and adoption of US dollar as a unit of exchange) became a natural monetary policy choice for such countries as Panama (1904) Ecuador (2000) and El Salvador (2001), and in Africa, Zimbabwe in 2009.

The search for a stable currency visa avis other international currencies especially the US dollar; which in turn ensures price stability among participating countries has also taken the form of a network of bilateral swap arrangements as well as repurchase agreements, all aimed and ensuring stability of exchange mechanism.

Despite all these measure, there is no stable currency in principal, as world financial markets have for sometime now, subordinated national monetary policies in determining the value and thus the price and stability of a given currency.

In their bid to stabilize their currencies, it is these financial market powers and players whose activities and mechanics which are economic borderless that worry monetary policy makers today than ever.

To be continued…

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