The macroeconomics of developing countries : an analysis of the Co-operation Financiere Africaine
The CFA consists several African economies adhering to one of two common currencies, and one of two central banks. The rules of the monetary union provide for the pooling of foreign assets, and the regulation of monetary expansion in each country. The French treasury guarantees the convertibility of CFA Francs into French Francs at a fixed rate. The thesis examines the impact of CFA membership on the macroeconomic performance of member states, assessing the claim that CFA institutions have influenced capital and labour markets, and have modified short run adjustment to external shocks. There are a number of reasons why CFA membership could facilitate higher investment, (i) The rules governing money creation may lead to greater monetary prudence, and so lower inflation and price variability, and less uncertainty for investors, (ii) Guaranteed convertibility means that firms will never be prevented from importing capital goods by a lack of foreign exchange, (iii) Convertibility may encourage a greater degree of integration between French and CFA capital markets, so that domestic investment is not entirely dependant on domestic saving. A model of investment is constructed to incorporate these effects, and tested using time series and cross-sectional data. Support is found for (i) and (ii), but not for (iii). If African labour markets are characterised by nominal wage inertia, the enforced low inflation may lead to excessive real wages, and CFA membership may impair efficient allocation of labour. However, evidence suggests this characterisation is usually inappropriate. The pegged exchange rate may lead to persistent external imbalances: devaluation is not an option in response to a negative trade shock. This will not be a problem as long as an effective substitute for devaluation is found. A CGE model is constructed to examine the viability of various devaluation substitutes, none of which are found to be adequate.