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ECA to undertake a detailed macroeconomic policy convergence study in Africa

By Daniel A. Tanoe, Economic Affairs Officer, ECA

A major objective of ECA is to facilitate and enhance the process of economic cooperation and integration in Africa. To this end, ECA implements programmes on regional integration focusing mainly on policy and institutional issues, infrastructure development, and support to NEPAD as a major development program towards the building of the African Union. In this context, various studies have been undertaken to analyze constraints and other factors affecting the integration process in Africa, and to help member States and their various integration blocs articulate and implement progressive policies and strategies.

The journey towards Africa's continental integration started decades ago with the coming into force of the Abuja Treaty in 1994. Africa's integration process was given a new impetus and urgency with the advent of the African Union. To contribute to the success of this new dispensation, ECA mooted the idea of preparing a series of reports (Assessing Regional Integration in Africa (ARIA)) beyond past studies, to assess progress on Africa's integration in general as well as analyse thematic issues on a continuous basis.

Two ARIA reports have since been published by ECA. The maiden report ( ARIA I ), published in May 2004, provides a comprehensive and holistic picture on the status of Africa's integration. ARIA II , published in May 2006, examines the burning issue of rationalization of the multiplicity of integration groupings in Africa and their attendant overlapping memberships - often jokingly referred to as "spaghetti bowl". ARIA III, due to be completed and published by end 2007 or early 2008, is addressing the issue of macroeconomic policy convergence in Africa. ARIA III promises to provide in-depth and empirical insights into this important subject, much beyond the scope of this article.

Macroeconomic policy convergence: the basics

Regional integration blocs are as strong as the economies that constitute them. Limping economies can hardly constitute a viable economic bloc. Can countries with timid growth, infinitesimal production and manufacturing capability, inadequate and substandard transport systems and networks, and little or insignificant trade between them form a credible economic and trading bloc? Could Africa's struggling regional integration process be attributable to the weak and fragile economic conditions of the constituent nation states? Should Africa concentrate on building strong national economies first and foremost before venturing into the grand designs of regional integration? These are pertinent introspective questions that need to be addressed because it is only when there is national macroeconomic equilibrium that there can be efficient integration among countries. Thus, a climate of economic stability would be created to enable the trade and economic relations among the countries within the community, region or integration arrangement to flourish. Proponents of Africa's integration posit that one can do both: fix the ailing national economies, while pursuing integration at the same time. According to this position, the nation state needs the help of regional integration to grow and become strong. In this regard, Africa's regional integration is expected to help make African economies individually and collectively viable and competitive in global markets. On the other side of the spectrum, regional integration needs nourishment from strong nation states to be effective.

It should however be emphasized that the theory of endogenous growth suggests that the growth rate of an economy is critically affected by the rate of technological progress and knowledge accumulation, the type of economic policies implemented, and the overall quality of institutions and governance. A vast body of econometric literature provides evidence that the correlations between growth and those factors are indeed statistically significant and robust in large cross-section of developing as well as industrialised countries. Regional integration can however potentially contribute to economic growth by magnifying the impact of the above factors. To this end, the pursuit of macro-economic policy convergence in the context of regional integration is expected to help improve the economies of the countries in the integration bloc and thus make the integration process more effective and beneficial. Thus, the policy requirements would be so strong and identical in the different countries as to lessen the impact of external shocks on the group as a whole or reduce contradictions and conflicts with national policies.

Hence, a key objective of the integration process in Africa is to achieve convergence of macro-economic policies among the countries, ultimately leading to the establishment of a common regional currency/monetary union and full economic union. At the stage of economic union, there is a single market for goods, services, capital, and labour, complemented by common policies and coordination in several structural, micro-and macro-economic domains. When a monetary union is achieved, there is either a fixed exchange rate regime or a single currency. While both are possible, a single currency is considered to offer a better benefit in economic terms.

Macro-economic policy convergence, critical for deeper integration

Macro-economic policy convergence ultimately leading to a Monetary Union is critical for integration for several reasons. The success of the integration process will require economies that are less inflationary, but also are subject to less variability of prices and output levels . A single currency and economic union complement the single market and enhances its impact. One market needs one currency. The pursuit of macro-economic policy convergence will also provide the following benefits:

.  Efficiency and growth through the elimination of exchange rate uncertainty and transaction costs.

.  Price stability: The community will have the opportunity of being able to establish monetary stability.

.  Public finance: Member countries will learn to cultivate a discipline to avoid excessive deficits, which in turn can bring valuable gains for national budgets through reductions in interest rates.

Thus, macroeconomic policy convergence can help bring about macroeconomic efficiency, macroeconomic stability, and equity because the least advanced states have a real opportunity for catching up.

To this end, several African Regional Economic Communities (RECs) have adopted formal frameworks to guide the transition process and to promote the harmonization and progressive convergence of national economic structures and macroeconomic policies. The harmonization frameworks define a set of macroeconomic convergence criteria or targets that must be met by member-States within more or less tight deadlines. These targets may include:

.  Price stability and low inflation: the objective being the gradual attainment of single-digit annual rates and reduction in the level and volatility of inflation. 

.  Sustained economic growth and economic efficiency: a target of 7 percent annual growth rate could for instance be established in accordance with the growth requirement for achieving the Millennium Development Goals (MDGs). Economic efficiency parameters could for instance involve balanced national budgets, capacity to adjust to economic shocks, and public sector efficiency.

.  Fiscal discipline manifested by low budget deficits whereby the deficit of the non-financial public sector would not exceed a certain percentage of GDP (e.g. 3%), while maintaining a low balance on the consolidated public debt (both external and internal) at the end of each financial year.    

The adherence to these and other disciplines as may be agreed upon requires that countries agree to submit their domestic policies to the scrutiny of appropriate monitoring and coordination mechanisms within the integration bloc. The coordination mechanism is usually entrusted with the responsibility for supervising and monitoring countries' performance. Effective macroeconomic policy convergence would also require harmonization of the national quantitative statistics, standardization of national methodologies and instruments, and information exchange among countries. Incentives and sanctions are tools that could be considered as part of the convergence package to motivate or enforce compliance to the agreed targets. Countries are normally required to present annual or periodic reports on the steps taken toward aligning their macroeconomic policies with the agreed convergence criteria.     

A peek into macroeconomic policy convergence in Africa

Regional Economic Communities (RECs) such as UEMOA, ECOWAS, COMESA, EAC and CEMAC have established macroeconomic convergence programs, albeit with different targets. For the continent as a whole, progress towards policy convergence by countries indicates moderate performance. The ebbs and flows in the international development environment, the debt situation, and strong pressures for reducing poverty and invest in social sectors impact on countries' ability to meet targets, particularly with respect to budget deficits. However, overall, countries have made tremendous efforts in reducing inflation, with many countries maintaining single digit inflation levels.

Initiatives towards debt cancellation and rescheduling have also contributed a great deal to reducing the debt stock, though external debt ratios as a percentage of GDP still remain as high as 70% in some countries. Budget deficits also remain a key challenge as governments have had no choice but to resort to borrowing to cover gaps between revenues and recurrent and capital expenditures.

Several reasons account for weak national commitments to meeting macroeconomic policy convergence targets. The heavy burden of external debt and largely unsustainable debt service obligations, together with continued difficulties in the external economy, pose a constraint on the growth potential of African countries, limiting their ability to address persistent structural weaknesses. Many countries continue to experience budgetary problems, although in different degrees. Although progress has been made with certain poorer countries benefiting from debt relief and debt cancellation, the overall debt burdens are onerous. Therefore, the fiscal environment tends to be characterized by large debt and high cost of debt servicing, low generation of revenue and high budget deficits.

To help accelerate progress on macroeconomic policy fundamentals, we propose the establishment of economic "swat" teams ("economic doctors"), whose mission would be to help African countries achieve macroeconomic policy convergence targets. The objective of the "swat" teams is to help pool all economic talents from ECA, AU, ADB, AERC, the World Bank, IMF, UNDP, the RECs and other interested foreign partner institutions such as the OECD, to work in unison over an estimated duration to help countries address their specific economic challenges and establish a sound macroeconomic climate.

Views expressed in this article are those of the author, and do not necessarily reflect ECA's official position.