This paper deals with the question whether a common currency is beneficial for the African Union. In order to assess this question, potential problems will be analysed and highlighted. The topic of a common currency becomes important in terms of economic growth that can facilitate sustainable development.
The African Monetary Union is an economic and monetary union. The plan to introduce a common currency is based on the Abuja Treaty that was signed on 3.6.1991 in Abuja, Nigeria. In this treaty it was decided to set up an African Economic Community, an African Central Bank and an African Economic Community with a single currency by around 2020 (Masson, Milkiewicz, 2003). Up to today most countries have not signed this proposal as some decided to form their own currency unions, some want to delay the starting date and some are already using currencies from other countries.
The paper will start looking at the advantages and disadvantages of a common currency and putting it into context with sustainable development. Here it can be highlighted that a successful and stable common currency can foster economic growth and therefore result in higher sustainable development.
Further on, the paper looks into the theories of an Optimum Currency Area, Economic shocks, Spillover effects, currency adjustments and development traps.
In order to analyze these theories the analysis part is looking into these using inflation rate data, GNI per capita and trade pattern provided by the IMF, the World Bank and UNECA, while contrasting it with the difficulties due to the development traps.
Table of Contents
1. INTRODUCTION
1.1 THEME
1.2 PROBLEM DEFINITION AND RESEARCH QUESTIONS
1.3 BACKGROUND KNOWLEDGE: THE ADVANTAGES OF A COMMON CURRENCY UNION
1.4 BACKGROUND KNOWLEDGE: THE DISADVANTAGE OF A COMMON CURRENCY UNION
1.5 COMMON CURRENCY UNION AND DEVELOPMENT
2. THEORY
2.1 OPTIMUM CURRENCY UNION
2.2 ECONOMIC SHOCKS
2.3 SPILL OVER EFFECTS
2.4 CURRENCY ADJUSTMENTS TO COPE WITH ECONOMIC PERFORMANCE
2.5 DEVELOPMENT TRAPS
3. METHODOLOGY
4. ANALYSIS
5. CONCLUSION
Research Objectives and Key Themes
This paper examines the feasibility and potential economic impact of implementing a common currency within the African Union, evaluating whether such a monetary union would be beneficial for its diverse member states given existing structural and economic challenges.
- Theoretical framework of Optimum Currency Areas (OCA)
- Impact of economic shocks and spillover effects on monetary unions
- Analysis of development traps including conflict, governance, and resource dependency
- Assessment of current economic indicators like GNI, inflation, and trade patterns
Excerpt from the Book
1.1 Theme
This term paper looks at the planned common currency in the African Union. It will put development issues in the context of the optimum currency area in order to find out in how far a common currency is beneficial for the African continent.
The African Monetary Union is an economic and monetary union, which looks to introduce a currency similar to the euro. The agreement, which builds the fundament for the plan, is the Abuja Treaty, which was signed on 3.6.1991 in Abuja, Nigeria (Masson, Milkiewicz, 2003). The treaty includes setting up an African Economic Community, an African Central Bank and an African Economic Community with a single currency by around 2020 (Masson, Milkiewicz, 2003). By now most countries have not signed the contract, some countries have formed their own currency unions (for example East Africa), some are calling for a currency at a later day and some are using currencies from other countries, as for example the South African Rand is currency in several African countries. At the moment it is still a hypothetical plan, it is not clear if it will become reality in the near future. But it provides us with an important insight. It seems like the African countries want to change something on their economic situation and might have seen that they were left out of the gains globalization has to offer.
Collier (2008) states that a reason for the bottom billion to have missed the chances the globalization are the missing export diversification, no private capital inflows and even a private capital outflow, high investment risk and high brain drain (Collier 2008).
These causes show that a stable economic environment foster development. Therefore this paper seeks to clarify it.
Summary of Chapters
1. INTRODUCTION: Outlines the research theme regarding the African Union's potential for a single currency, referencing the Abuja Treaty and identifying fundamental development challenges.
2. THEORY: Establishes the economic foundation of the study, covering Optimum Currency Area criteria, economic shocks, spillover effects, and development traps.
3. METHODOLOGY: Describes the analytical approach, utilizing data on GNI, inflation, and trade patterns to evaluate the feasibility of a common currency.
4. ANALYSIS: Examines the practical application of theories to the African context, highlighting risks such as extreme wealth disparity, diverse inflation rates, and the danger of development traps.
5. CONCLUSION: Synthesizes the findings, concluding that a common currency is currently not feasible for the African Union due to fundamental economic, political, and social disparities.
Keywords
African Union, Common Currency, Optimum Currency Area, Economic Shocks, Spillover Effects, Development Traps, Sustainable Development, GNI per capita, Inflation Rates, Intra-African Trade, Abuja Treaty, Economic Integration, Monetary Policy, Monetary Union, Wealth Distribution.
Frequently Asked Questions
What is the core subject of this paper?
The paper investigates whether it is economically beneficial for the member states of the African Union to adopt a common currency, considering the current structural state of the continent.
What are the central thematic areas?
The study focuses on monetary union theory, the economic prerequisites for such a union, and the specific socio-economic obstacles currently faced by African nations.
What is the primary research goal?
The goal is to determine the feasibility of the Abuja Treaty's vision for a single currency and assess if this would support or hinder sustainable development for the region.
Which scientific methodology is utilized?
The author uses a qualitative analysis approach, contrasting theoretical criteria of an Optimum Currency Area with empirical data (GNI, inflation, trade patterns) provided by international institutions.
What topics are covered in the main body?
The main body covers the theoretical foundations of monetary integration, the risks of economic shocks and spillover effects, and the impact of the four "development traps" identified by Paul Collier.
Which keywords characterize this work?
Key terms include African Union, Common Currency, Optimum Currency Area, Economic Shocks, Spillover Effects, and Development Traps.
How does the author define the "Optimum Currency Area"?
It is defined as a region large enough to benefit from a common currency, but small and integrated enough that it avoids the need for sub-regional currency splits.
What role do "development traps" play in the author's argument?
The author argues that traps like conflict, poor governance, and resource dependency create significant risks, as they can cause uneven shocks that a single monetary policy cannot manage.
Does the paper recommend the introduction of a common currency?
No, the paper concludes that at the current point in time, a common currency is not feasible and could actually threaten the welfare and development of member states.
What is suggested as a priority for the African Union instead?
The author suggests prioritizing the resolution of fundamental issues such as political conflict, trade diversification, and administrative corruption before attempting monetary unification.
- Quote paper
- Katharina Osterholt (Author), 2011, Is it beneficial for the African Union to introduce a Common Currency?, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/193726
