With the current situation in the European Monetary Union in mind, a Monetary Union in other parts of the world seems highly inadvisable. Nevertheless, Africa has some of the oldest Monetary arrangements in the world, dating back to the beginning of the 19th century. Is Africa particularly qualified for a Monetary Union? And furthermore, what features are necessary to make Monetary Arrangements between countries endurable? This study evaluates the prospects and the feasibility of a monetary union in the Southern African Development Community (SADC) from an economic point of view. Both the theory of optimum currency areas and the recent example of the European Monetary Union are employed to analyze the pros and cons of monetary unification. The theoretical implications are operationalized, first, by a broad analysis of economic and socio graphic data, and second, by estimating the degree of structural shock synchronization between SADC countries. Results obtained by an Autoregressive and Vector Autoregressive model indicate that a monetary union which includes all SADC members is neither desirable nor feasible in the foreseeable future. However, the study concludes that a small subset of countries, including South Africa, Namibia, Swaziland, Lesotho, Mozambique, Botswana and Zambia, could gain from forming a smaller monetary union.

Text Sample: Chapter 3, Theory and Empirical Evidence in the Southern African Development Community: To recapitulate: The main criteria which have been identified in the optimum currency area theory are (i) the correlation of output shocks, (ii) the extent of regional trade and production diversification, (iii) financial integration, (iv) price flexibility and factor mobility, and (v), inflation differentials and fiscal distortions. It is generally accepted that the formation of a monetary union requires participants to first achieve convergence in a variety of criteria. In this respect, fiscal and institutional convergence and low debt burdens are of special interest since both are a measure of sustainable economic policy. Furthermore, a similar level of per capita income indicates that countries have comparable institutional developments and interests. A monetary union that fails to satisfy these preconditions tends to be instable and may lack credibility from the very beginning. Over the last years however, a number countries in the SADC have experienced an increasing rate of divergence. The transition process in the SADC towards a monetary union is supported by a number of preceding arrangements. The Southern African Customs Union between South Africa, Botswana, Namibia, Lesotho and Swaziland has promoted a certain degree of regional trade. Economic integration has been however limited since the main objective of the customs union was to ease the collection of customs duties rather than industrial cooperation. Regional integration within the SADC advanced in 2008 with the Free Trade Area, which established zero tariffs for 85% of traded goods. However, for goods that have been declared as import-sensitive, most notably food and clothing, liberalization has been deferred. The overall impact on regional trade is therefore uncertain. Despite various efforts for trade liberalization in the past, political commitment has been low so far. Financial relations in the SADC are mainly limited to foreign direct investments. Nevertheless, some recent efforts have been made to harmonize national payment systems. Moreover, the SADC has agreed to work towards full currency convertibility. Since microeconomic data for Africa is scarce, the empirical evidence on optimum currency areas is mainly based on the correlation of output shocks and inflation or exchange rate differentials. Of the other criteria, factor mobility and price flexibility are especially hard to measure and estimates rely on very few observations. Not all of the criteria can therefore be analyzed in similar depth or for the same set of countries. Data was obtained from the World Bank World Development Indicators, the United Nations statistics division, the International Monetary Fund and the African Economic Outlook Database. 3.1, The Economic Situation and Convergence in Southern Africa: The SADC is unique among all regional arrangements in Africa due to the dominant role of South Africa. With a share of over 65% in real GDP (USD at 2000 prices) and 18% of the total population, South Africa is by far the largest and most industrialized economy in the region. In comparison, the remaining countries differ remarkably in size, income and economic structure. The Seychelles, the smallest country with little more than 85,000 residents, is the richest country with a real per capita income (in PPP) of over 19,000 USD in 2008 while Congo and Zimbabwe are among the poorest countries in the world with a real per capita income of approximately 290 USD and 185 USD respectively (see table 1). Life expectancy is low for most countries with an average of 53 years (ranging from 44 years in Zimbabwe to 73 years in the Seychelles) which is an indicator for the high poverty rate among the population. Income inequality as measured by the GINI Index varies considerably across contries, where South Africa (58), Angola (58) and Namibia (70) display one of the highest inequalities worldwide. Economic growth was robust for almost all countries since 1990 except in Congo and Zimbabwe and accelerated in Angola, Mauritius, Tanzania and Mozambique in recent years. Average annual GDP growth from 1990-2008 was highest for Angola (6.2%) due to increasing oil export revenues, but also the most volatile with a standard deviation of 10.5. In the four countries of the CMA, the growth performance was driven by the end of Apartheid in South Africa in 1994 and averaged to 3.7% from 1990-2008. The reeintegration of the South African economy in the world market attracted new foreign investors and trade, and more than tripled growth rates in the post-Apartheid period (from 1980-1992 the average was 1.1. On the other hand, Zimbabwe and until recently Congo experienced a drastic fall in income levels. While Congo still suffers from the aftermath of the civil war and political instability, Zimbabwe was run down by the Mugabe regime. Since at the same time these countries also have the lowest per capita income levels, it appears that the economies in the SADC diverge. Figure (4) illustrates the relationship between average per capita growth rates and relative income for 14 SADC members in the period 1990-2008. The results show that most countries with an initially high income level also had the highest average growth rates, which led to a widening of the income gap (striking examples are Botswana and Mauritius). The ambiguous relationship is a sign that positive developments in individual countries were determined by external factors rather than by improved regional cooperation. Production structure and trade: Production and export structures vary to a large extent among the SADC. While South Africa, Lesotho, Zimbabwe and Swaziland have a relatively advanced manufacturing sector, most other countries depend on primary goods production (except for Mauritius which is specialized in financial services). In the rural countries Malawi, Tanzania, Congo, Mozambique and Madagascar, agriculture still accounts for a large, although declining production share. Raw materials (mining and oil) are a main income source for Angola, Botswana, Zambia, Congo and Namibia and contribute to a large part of foreign reserves. Accordingly, those countries usually exhibit surpluses in their trade and current account (see table 1). Similar to production structures, the composition of merchandise trade reported in table (2) differs considerably across countries. A higher income level is generally associated with high export shares in manufacturing and primary products, while low income countries tend to export food products and import manufactures. As a result of different production and trade structures, the ratio of intra-industry trade are ineffectual small for all countries except South Africa, reflecting the low degree of industrialization. Regional trade in the SADC is dominated by South Africa, which exports high value manufactures in return for small amounts of raw material imports. Especially countries inside the SACU maintain important trade connections to South Africa. Commodity imports from South Africa represent on average over 44% of total imports in other SADC countries and account for approximately 80% of total imports in Lesotho, Swaziland, Namibia and Botswana (see table 3). On the other hand, export shares from the SADC towards South Africa amounts to only 15% on average with Swaziland (38%), Namibia and Lesotho (both 27%) having the strongest trade linkages. As a result, South Africa typically generates substantial regional trade surpluses. In contrast, trade integration among the remaining SADC countries is at very low levels, also because of a shortage in infrastructure. The only substantial trade flows are between neighboring Namibia and Angola (10% of Namibias exports), Zimbabwe and neighboring Zambia (14% of Zimbabwes exports) and landlocked Swaziland and Mozambique (9% of Swazilands exports). Although informal trade is assumed to account for a large proportion of total trade, most of the regional trade flows are negligible. To promote intra-regional trade, various efforts have been started in recent years. Overall trade has been substantially liberalized in the past and import restrictions reduced so that effective tariff protection rates declined in most countries. Accordingly, the average share of regional merchandise exports in percent to total merchandise exports increased from 8% in 1990 to 19% in 2008, and overall merchandise exports have grown on average by 10% per year since 1990.

• European Monetary Union

• Structural Vector Autoregressions

• Southern African Development Community

• Southern Africa

Christian Sorgenfrei, Jahrgang 1984, Dipl.-Volkswirt, studierte Volkswirtschaftslehre an den Universitäten Konstanz und Lund. Über seine Schwerpunkte Internationale Wirtschaftsbeziehungen und Entwicklungsökonomie hinaus war er unter anderem am Zentrum für Europäische Wirtschaftsforschung und an der KfW Entwicklungsbank im Bereich Subsahara Afrika tätig.