10 - Globalization and Monetary Convergence: Independent Currency Union or Dollarization?

Summary

Introduction

This chapter investigates the prospects of setting up an independent currency union for West Africa. The prospects of such a union in Africa and Europe have been found to be contingent on internal reforms and convergence criteria. Using time series data from the World Bank for the period 2000–2006, this chapter shows that the much more globalized French-speaking countries have comparatively low rates of inflation, though some West African states collectively continue to have higher rates of inflation. The empirical evidence shows lack of beta and sigma convergence of inflation rates in states that are aspiring to form a monetary union when intra-and extragroup comparisons are made. The chapter concludes that some West African countries are already dollarized (using convertible foreign currency rather than local currency) and that dollarization provides greater potential for global economic integration than an independent currency union. As such, globalization is consistent with monetary convergence—that is, the elimination of inconvertible or less competitive currencies in favor of highly competitive and convertible ones. Here, globalization is precisely defined as economic integration of national economies into the international economy through trade, foreign direct investment, capital flows, and mobility of factors of production. This definition is consistent with what is loosely characterized as economic integration.

Although currency selection is normally overshadowed by technological innovation and outsourcing in the explanation of the scope of globalization, the type of currency being used for international transactions is integral to the pace at which nations on the periphery of international economic activity can be integrated into the global economy.

This chapter maintains that de jure (official) dollarization, more than an optimum currency area (OCA) or de facto (unofficial, but expedient) dollarization, enhances the prospects of globalization for the nations of West Africa that aspire to form a monetary union. This argument is premised on the fact that inconvertible currencies or the semblance of them can no longer compete in the changing global economy and that efforts to postpone the embracing of convertible currencies can only prolong the economic decline of states that are having great difficulties with inflation, lack of credibility, capital outflows, and lack of access to international capital markets.